Final Exam Essay Solutions

Final Exam Essay Solutions - Sd1 (Ya) The user cost...

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Unformatted text preview: Sd1 (Ya) The user cost decreases because there is a lower tax rate. This means its cheaper to purchase capital so more people will do so. This causes the UC of the graph to shift down, while the K demanded increases. UCb UCa PA,B Y1 Y2 rA rB rA Y2 B A LRA SRA P Y Y1 A S,I 2 S,I 1 K r Y Savings/I nvestment User Cost of Capit al B B A K1 K2 r S, I MPK A UC Sd2 (Yb) rB I d2 (tb) I d1 (ta) apit al is a shift var iable). At the same time, savings will also shift as people spend more money and save less, since they are demanding more. Fir ms FE LM (MS/Pa) B AD2 (Tb) I S2 (Tb) AD1 (Ta) I S1 (Ta) Yb I S will increase due t o this increase in investment, causing rates t o r ise and output t o increase. is f lat. I nvestment and output is increasing, so AD is increasing as well. I n this situation, we have more output and the same pr ice. Policy Non- Policy Pf2 (A) C is pr oductivity shock. hock, spur r ing investment and stimulating AD. pensive and causing an increase in investment which also stimulat ed AD and increases Y. (We hired more people) Y N Pf1 (A) B A N2 N1 Ns W/P N W2 C w1 B ?A? MPN2 (A) MPN1 (A) N2 N1 Savings/I nvestment Sd1 (Ya) r S, I PK has increased because there was an increase in productivity since A in the production function increased. This means that fir ms will buy more K UCb UCa PA,B Y1 Y2 rA, rB rB rA B A A LM r Y User Cost of Capit al B A K1 K2 MPK1 A UC Sd1 (Yb) Sd1 (Yc) C C UCc B I d3 (MPK) MPK2 I d2 (Tb) I d1 (Ta) S,I 2 S,I 1 K K3 Since fir ms are buying more K, there is more investment demanded and people are saving less. LRA3 FE2 FE1 LRA2 LRA1 P C B SRA AD3 (MPK) I S3 (MPK) AD2 (Tb) I S2 (Tb) AD1 (Ta) I S1 (Ta) Y3 Y2 Y1 Y3 s as the increase in MPK and MPN and productivity increases investment. People are demanding more. pward again t o ref lect this increase in investment, and in the long r un, the FE line will shift to meet where LM=I S. LM1 (MS/Pa) MS2 P MS1 P C B A P Y SRA A, C L r Y FE r Ms B A,C I S LM2 (MS/Pa) B L2 The money supply is increased, and because of this change, int erest rat es fall. This is because there is a higher supply o The money supply is increased, and because of this change, int erest rat es fall. This is because there is a higher supply o Cf C B A, C w N P Q MC MR D2 D1 I nvoluntar y unemployment Ns w N E W w1 E1 Nd w1 N*s N*d ns prefer to do this through increasing gover nment spending, or by increasing consumption through var ious methods like...
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Final Exam Essay Solutions - Sd1 (Ya) The user cost...

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