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Answer: Given details about a japanese economist telling his government. Based on the given information the critical thinking questions are answered as follows: (1) supposing increase in japan's consumption tax rate affected the nation's equilibrium price level, other things being equal: Consider the given problem. here we can show that a consumption tax can effect “P” through the AD-AS model. Let’s assume that initial the equilibrium was “E1” where the “P=P1” and “Y=Y1”, now as the consumption tax is imposed, => the level of consumption will decreases given that other factors remain same, => as the “C” is part of “AD”, => AD will shift to left side to “AD2”. So, the new equilibrium is “E2” the intersection of “AD2” and “SRA1S”. So, can see that at the new equilibrium “P=P2 < P1 “, and “Y=Y2 < Y1”. So, we can see that the consumption leads to decreases in “Y” and “P”. (2) supposing the number of economists are advising the bank of japan to boost the nation's money supply when the government implements its additional consumption tax increase: Now, if government want to implement consumption tax that will reduce the “C=consumption”, => reduction in AD. Now, if the “bank of Japan” increases the money supply, => “r=rate of interest” will falls that will increase “I=Investment”, => increase in AD. So, if government want to implement consumption tax then the increase in money supply will compensate the recessionary effect on “Y” and deflationary effect on “P” by increasing both “Y” and “P” together. So, that is the reason to increase the money supply to compensate the recessionary effect on “Y” and deflationary effect on “P”.
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