econ hw #16 - Bochi Liu Section 112 Problem Set #16 2. The...

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Bochi Liu Section 112 Problem Set #16 2. The first graph is IS-LM model, presenting a general equilibrium in all labor, goods, and assets markets. Output Y is on horizontal axis, and interest rate r is on vertical axis. FE line is vertical since it is not relate with interest rate. IS curve slopes downward, while LM curve slopes upward. The second graph shows the balance budget. The budget balance line describes the expected federal budget balance at a level of output. Economic input is on horizontal axis. If income was zero, the budget balance would be –G. This is as big as deficit can be.
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As income grows, tax revenues will also rise, so the budget balance will also improve. The slope of this line equals the tax rate. The higher the tax rate, the steeper that budget balance line will be. At any income level below the horizontal axis, we have a budget deficit. If our income level is above the horizontal axis, we have a budget surplus.
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econ hw #16 - Bochi Liu Section 112 Problem Set #16 2. The...

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