Ps9-1 - ECON 205 PRINCIPLES OF MACROECONOMICS FALL 2008 MARK MOORE PROBLEM SET 9 1 Consider an economy with output below potential GDP Compare the

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ECON 205: PRINCIPLES OF MACROECONOMICS FALL 2008 MARK MOORE PROBLEM SET 9 1. Consider an economy with output below potential GDP. Compare the values of consumption and investment (when output returns to potential GDP) under the following three scenarios: i) the government does nothing (so the economy adjusts on its own); ii) the fiscal authority increases government purchases sufficiently to return the economy to an equilibrium output level equal to potential GDP; iii) the fiscal authority reduces fixed taxes sufficiently to return the economy to an equilibrium output level equal to potential GDP; or iv) the central bank undertakes expansionary monetary policy of a magnitude sufficient to return the economy to an equilibrium output level equal to potential GDP. Make sure to explain the effect on interest rates in each case. 2. Suppose the economy starts at an equilibrium with output equal to potential GDP. Describe a change in the macroeconomic policy mix that would result in higher
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This note was uploaded on 06/17/2009 for the course ECON 20091_ECO taught by Professor Mohammadsafarzadeh during the Fall '09 term at USC.

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