Suppose country Zee is a closed economy. Consider AD,SRAS and LRAS for the economy of Zee. Tye economy begins at pricelevel P0, with output equal potential GDP=Y*, budget isbalanced.
3.1 Suppose the government of Zee increases tax, Twhile keeping government expenditure G unchanged. Are we havingbudget deficit or surplus? What would be the effect of this actionon loanable funds, real interest rate, private savings andinvestment, and levels of debt in country Zee?
3.2 Compare the short-run and the long-run effects ofthe governments policy stated in 3.1. Briefly mention what dilemmadoes the government face in implementing this policy.
