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After experimental surgery saved his life, Bill filed suit against St. John’s. He then discovered that the emergency room was not run by the hospital but by a subcontractor, Emergency Physicians, Inc. Bill also found that at the time he was treated there, Dr. Compton was a recovering drug addict and had lost his license to practice in Texas, but he could still practice in Bill’s state. The x-rays Dr. Compton had ordered only showed Bill’s neck from the top of the lump up. St. John’s hospital has petitioned the court to be dismissed as a defendant. It contends that only Dr. Compton and Emergency Physicians, Inc., should be held liable. Write a statement supporting St. John’s position or one advocating it be held liable as well.
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.
a. If investors believed that capital taxes would remain low, how would the government's action affect the level of investment?
b. After investors have responded to the announced tax reduction, does the government have an incentive to renege on its policy? Explain.
c. Given your answer to part (b), would investors believe the government's announcement? What can the government do to increase the credibility of announced policy changes?
d. Explain why this situation is similar to the time inconsistency problem faced by monetary policymakers.