tut3 (Jan29) - (a) Consumers become more future-oriented,...

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Economics 291: Canadian Macroeconomic Policy Tutorial #3 (week of Jan 29) 1. Assume that prices and wages adjust rapidly so that the labor market, goods market and asset market are always in equilibrium. What are the effects of each of the following on output, real interest rate and the current price level? (a) A temporary increase in government purchases (b) A reduction in expected inflation (c) A large number of immigrants enter the country 2. What are the three characteristics of assets that are most important to holder s of wealth? How does money compare with other assets for each characteristic? 3. Use the saving-investment diagram to analyze the effects of following on national saving, investment, and the real interest arte.
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Unformatted text preview: (a) Consumers become more future-oriented, and thus decide to save more (b) Government decides to cut tax (c) The country loses much of its capital stock to a war 4. Consider a firm that faces the following expected future marginal product of capital: 1000 2 f MPK K =-, where f MPK is the expected future marginal product of capital and K is the capital stock. The price of capital p K is 1000, the real interest rate r is 10%, and the depreciation rate d is 15%. (a) What is the user cost of capital? (b) What is the firms desired capital stock? (c) Now suppose that the firm must pay a 50% tax on its revenue. What is the desired capital stock as a result of this tax?...
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