Suppose the government introduces a new environmental regulation that significantly reduces productivity in the long run. To support the economy, the government provides a one-year corporate tax relief. Assume no other effects. In each of the following questions, indicate the short-run and long-run effects of these changes: show the original and new curves and use superscripts ’SR’ and ’LR’ to denote short-run and long-run curves, respectively. 

a. Use the capital market diagram (MPK vs user cost) to show the effect on the equilibrium level of capital. 

b. Use the labor market diagram (real wage rate vs employment) to show the effect on the equilibrium level of employment. 

c. Use the goods market equilibrium diagram (real interest rate vs saving and investment) to show the effect on the equilibrium saving, investment, and interest rate. 

d. Use the IS-LM diagram.

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a In the capital market diagram the equilibrium level of capital is determined by the intersection of the marginal product of capital MPK curve and the user cost curve In the short run the oneyear cor... View the full answer