Question

3. The government of Canada is contemplating adding a pharmacare program (the government would be paying for all medication for Canadians). a) Explain what will be impacted if anything in the IS-LM model. (this will increase MPC, explain what will take place after that) b) Since funding a program like this could not be done one borrowing alone, an increase in tax is incredibly likely. Explain what would take place if the pharmacare program takes place and taxes increase at the same time. Should we expect higher interest rates, output, and investments? Discuss. c) Illustrate a), b) and the possible changes to the mentioned variables in b) (keeping in mind that prices are fixed)

Answer 1

A-3). If the Government adds a I Pharmacare program, then this mill increase Covernment expenditure in enteil the economy shifting the Is curue of 4 rightwards I to IS' The Interest equilibrium shifts from point to E where beth rate of interest and National Output has increased in the o 1 ₂ National & economy. oufut b) If there is increase in tas along with increase in Government expenditure, then the Is curme will shift right wards but shift in Is will be less as compared to part (a) and Is' will shift back to Isll and a rate of interest and Output in rate of increases. Increase interent reduces investment expenditure in the economy.