The problem of time inconsistency applies to fiscal policy, Ask an Expert

Management Studies

The Problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories. if investors believed that capital taxes would remain low, the governments action would cause the level of investments to (increase or decrease)?After investors have responded to the announced tax reduction, the government (does or doesn't) have an incentive to renege on its policy.Given your answer to the previous part investors (would or would not) believe the government's announcement.

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