ps5 - Economics 102 Introductory Macroeconomics Spring...

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1. Consider the super simple linear frugal governed open economy with the marginal propensity to consume being the only non-zero marginal propensity. Ralph understands why the multiplier for G’ is opposite in sign of the multiplier for T’, but he can’t seem to intuitively figure out why its value would be smaller. That is, why would a change in G’ work “better” or be “stronger” than an equivalent and opposite change in T’? Help Ralph out. 2. The Merriam-Webster Online Dictionary defines a spendthrift as, “a person who spends improvidently or wastefully.” Suppose this actually means a person who never saves. Suppose we had a linear spendthrift UNgoverned closed economy with no investment. What is the value of the aggregate desired expenditure multiplier in this world? 3. In a governed model, if taxes are not lump-sum, but depend on income, what happens to the size of the government spending multiplier, and why? 4. Explain what will happen to the size of both M1 and M2 in each of the following situations. Assume that all transactions take place in the U.S. and in commercial banks in the U.S. Federal Reserve system. a. Jane, a millionaire, withdraws $500,000 from her money market account and gets cash to buy a famous painting from Vincent. Vincent takes the cash and puts it under his bed. b. Paul transfers $10,000 from his NOW account to his savings account. c. Sarah takes $5,000 out of her checking account to buy IBM stock. IBM deposits the money they got from Sarah into a short term Certificate of Deposit. 5.
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This note was uploaded on 03/10/2009 for the course ECON 102 taught by Professor Kyle during the Spring '08 term at Cornell University (Engineering School).

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ps5 - Economics 102 Introductory Macroeconomics Spring...

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