Suppose country Zee is a closed economy. Consider AD, SRAS and LRAS for the economy of...

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Economics

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.

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Increasing tax rates is also called Contractionary Fiscal policy Contractionary fiscal policy is a form of fiscal policy that involves increasing taxes decreasing government expenditures or both in order to fight inflationary pressures This will lead to a budget surplus The revenues from the budget surplus are typically used to reduce any existing national debt Due to an increase in taxes households have less disposable See Answer

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