In July 2012, the government of newly elected
French president François Hollande announced
that it would sharply increase taxes to try to close
a government budget deficit. Use the IS–MP
model to analyze the effect of this tax increase on
the output gap and the inflation rate, assuming
that the real interest rate remains unchanged.
Is the effect of the tax increase greater if you
assume that France is a closed economy or an
open economy? Briefly explain.