Answer to Question #315473 in Macroeconomics for shefa

Question

Imagine that the government unexpectedly introduces a capital income tax τ;

that is, net capital income becomes r(t) = (1 − τ)fk(k(t)). Also assume that

the tax revenues are used for unproductive government purchases. How does

this policy change the balanced growth path?

Answer 1

when the tax is imposed on capital income that means the cost of production increases reducing the levels of supply hence increasing prices of items to the public,since the revenues collected through this tax is not spend productively, this causes imbalance on the general macroeconomics state represented by Y=C+I+G.This causes inflation