ps7 - Economics 205 Principles of Macroeconomics Mark Moore...

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Economics 205: Principles of Macroeconomics Mark Moore Fall 2007 Problem Set 7 1. Suppose the MPC is .8, and the tax rate is 0. There are fixed taxes, however, in the amount of t 0 . a. Suppose the government increases its purchases by 10 units. How much does output change if the price level is fixed? What happens to the budget deficit? b. Suppose the government does not increase its purchases. By how much must fixed taxes decrease to generate the same increase in output as in part a? What happens to the budget deficit? c. How do the policies in parts (a) and (b) compare with respect to their effects on the AD curve? d. Suppose the government enacted the policies in parts (a) and (b) and the same time. What would happen to the AD curve? e. What if the government increased purchases by 10 units and increased fixed taxes by 10 units? What would happen to the AD curve? By how much would it shift horizontally? 2. Baumol and Blinder, ch. 11 (p. 234 in 2007 update), Discussion Question 2. 3. Baumol and Blinder, ch. 11, Appendix A (p. 237 in 2007 update), Test Yourself Question 2. 4. Baumol and Blinder, ch. 11, Appendix A (p. 237 in 2007 update), Test Yourself Question 3.
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