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ECON 454 Problem Set Keys

# ECON 454 Problem Set Keys - ECON 454 Fall 2007 Department...

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ECON 454, Fall 2007 Department of Economics, University of Maryland Jessica Hennessey Problem Set #1 Question 1 Why does redistribution cause e¢ ciency losses? Why might society choose to redistribute resources from one group to another when doing so may reduce the overall size of the economic pie? Redistribution often results in e¢ ciency losses because government policies that "take from the rich and give to the poor" will cause individual to change their behavior. This moves individuals away from the e¢ ciency-maximizing point, and reduce the size of the economic pie. Government may still choose to do based on their social welfare function; they may care about equity just as much as e¢ ciency. The government (and society) may value giving a dollar to the poor more than the value loss from taking a dollar from the rich. Question 2 In order to make college more a/ordable for students from families with fewer resources, a government has proposed allowing the student of any family with less than \$50,000 in savings to attend a public university for free. Discuss the direct and possible indirect e/ects of such a policy. Direct e/ects: students from families with less than \$50,000 in savings will go to college without having to incur debt or draw down savings Indirect e/ects: families may choose to accumulate less than \$50,000 in savings in order for kid to provide for college through savings to those who choose not to provide through savings. Question 3 How might large federal de±cits a/ect future economic growth? What would happen to private domestic savings and future economic growth if foreign con±dence in the ability of the United States to repay its debts erodes? Large federal de±cits may crowd out private savings, which decrease amount of capital investment, which slows growth of economy. If foreign con±dence erodes, then would have to ±nance de±cit by

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ECON 454 Problem Set Keys - ECON 454 Fall 2007 Department...

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