ps1 - Name: _ SID: _ Economics 101B Problem Set #1 Due...

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Problem Set #1 (Fall 2007) 1/3 Name: _______________________ SID: _______________________ Economics 101B Problem Set #1 Due Tuesday, September 18, 2007 Problem Sets MUST be word-processed except for graphs and equations. QUESTIONS 1. Suppose that the economy is in equilibrium at its potential output level with a big government budget deficit and a big current account deficit. On a single IS-LM diagram, clearly show the effects on equilibrium income and interest rates of the following 2 scenarios. Be sure to provide a brief economic explanation for the different results of these 2 scenarios. a. Scenario #1: A large increase in tax rates (in red). b. Scenario #2: A large increase in government spending (in blue). Now, assume that the central bank follows a stabilizing policy, i.e., it uses monetary policy to keep the economy at its potential output level. On your IS-LM diagram, clearly show how this would affect equilibrium income and interest rates for the change in tax rates (in green) and the change in government spending (in orange or brown). Finally, after both the fiscal and monetary policy changes have taken place, indicate whether each of the following variables is higher under Scenario #1 (increase in tax rates) or Scenario #2 (increase in government spending) or whether it is the same under both scenarios. Also provide a brief explanation of
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ps1 - Name: _ SID: _ Economics 101B Problem Set #1 Due...

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