Two steady states in the case of small lump sum tax

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Now assume that the government imposes a lump-sum tax, T, and just uses the receipts to buy goods (so that g = T). With a lump-sum tax, consumers have an after tax disposable income equal to Y-T. Consequently, saving St = s(Y-T). Show graphically that there are 2 steady states it the lump sum tax is not too big, or 0 steady states if the lump sum tax is large. a. Provide some intuition for why there are two steady states in the case of a small lump sum tax. b. For the case, where there are 2 steady states, show graphically how the transitional dynamics for this economy are. Namely, suppose you start to the left of the low steady state capital stock, what happens? What about to the right?

Reference no: EM131240620

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