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QUESTION
Assume that the economy is at full employment. a) If the government offers a generous tax subsidy for new investments by the private sector, what
Assume that the economy is at full employment.
a) If the government offers a generous tax subsidy for new investments by the private sector, what happens to output? Assume that prices are fixed.
b) Now if prices can change, what would be the impact of this tax break for new investments on the economy?
c) Explain how the central bank can counter this change in prices.
