If you need to make any assumptions, state them clearly. President Alcazar announced an increase in the labor subsidy given to firms to try to boost employment and GDP. The subsidies received by a firm are in proportion to the number of workers it employs, that is equal to s N, where s is the subsidy rate and N the number of workers employed. The government pays subsidies to firms, whose post-subsidy profits are distributed to households as income. However, the subsidies are financed by a lump-sum tax on households. The lump-sum tax is such that the government budget is balanced. Show that, for any given level of real wages, the net direct effect of this policy, subsidies and corresponding lump-sum taxes, on householdâs disposable income is negative.
If you need to make any assumptions, state them clearly. President Alcazar announced an increase in the labor subsidy given to firms to try to boost employment and GDP. The subsidies received by a firm are in proportion to the number of workers it employs, that is equal to s N, where s is the subsidy rate and N the number of workers employed. The government pays subsidies to firms, whose post-subsidy profits are distributed to households as income. However, the subsidies are financed by a lump-sum tax on households. The lump-sum tax is such that the government budget is balanced. Show that, for any given level of real wages, the net direct effect of this policy, subsidies and corresponding lump-sum taxes, on householdâs disposable income is negative.
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