section3 - Econ 100B Section 101 & 102 Summer 2009 UC...

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Econ 100B Section 101 & 102 Summer 2009 – UC Berkeley Phakawa On Jeasakul July 1, 2009 Practice Problems 1. (Spring 2008) Suppose the economy was initially in equilibrium. A fall in home prices then caused household wealth to decline significantly. In response, Congress recently passed and the President just signed an economic stimulus bill. This bill will temporarily reduce income taxes for many households and reduce the effective corporate tax rate for many businesses. Assume that the wealth effect is twice as large as the income tax effect which in turn is twice as large as the corporate tax effect. a. Based only on this information, use a Saving – Investment diagram to accurately and clearly show: i. The economy’s initial equilibrium position, ii. What effects these changes have on the economy’s level of investment, saving, and the real interest rate, and iii. The economy’s final equilibrium position. b. Provide a brief economic explanation of the changes you showed in your diagram above as well as any adjustment process that occurs as the economy moves from its initial equilibrium position to its final equilibrium position. Be sure to discuss what happens to:
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section3 - Econ 100B Section 101 & 102 Summer 2009 UC...

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