Tutorial 5 Answers - University of British Columbia Econ...

University of British Columbia
Econ 302
Tutorial 5
11 th July 2012
Question 1
Suppose that in the flexible-price full-employment model, the government increases taxes and
government purchases by equal amounts. The tax increase reduces consumption spending. What
happens--qualitatively (tell the direction of change only) to investment, net exports, the exchange
rate, the real interest rate, and potential output?
Government spending rises by more than consumption falls, so there is a net reduction in
total saving. The equilibrium interest rate rises. Investment spending falls. The value of the
exchange rate falls. And net exports fall. Potential output is unchanged.
Question 2
Give three examples of changes in economic policy or in the economic environment that would
shift the total savings curve on the flow-of-funds diagram to the left.