Suppose that total factor productivity, z, affects

QUESTION

Suppose that total factor productivity, z, affects the productivity of government production just as it affects private production. That is, suppose that when the government collects taxes, it acquires goods that are then turned into government- produced goods according to G = zT so that z units of government goods are produced for each unit of tax collected. With the government setting G, an increase in z implies that smaller quantity of taxes are required to finance the given quantity of government purchases G. Under these circumstances, using a diagram determine the effects of an increase in z on output, consumption, employment, and the real wage, treating G as given (i.e. G does not change, only the amount of T changes) Explain your results.

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