f07 ec51 exam 2 practice

f07 ec51 exam 2 practice - Economics 51D 17 October 2007...

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Economics 51D 17 October 2007 Some Practice Problems for Exam 2 1. When Ronald Reagan took office in 1981, he pushed through a massive increase in defense spending and a cut in tax rates. Suppose that the increase in defense spending was $300 billion and that the aggregate tax rate was .3 to .22. Let the marginal propensity to consume be .9 and the marginal propensity to import be .08. A. Show and explain the effects of this policy on the medium-run and long-run equilibrium price level and GDP. Be as specific as you can about how much curves shift (if any) and what happens during the transition from the medium run to the long run. 1B. Compare the impact of the above policy on the medium- and long-run equilibrium price level and GDP to an increase of spending of $300 billion without the cut in taxes. 2. In the 1950s, the U.S. government began the construction of the interstate highway system. This called for the expenditure of the equivalent (in today’s dollars) of hundreds of billions of dollars on steel, concrete, and construction services.
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