tut4 (feb5) - Economics 291: Canadian Macroeconomic Policy...

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Economics 291: Canadian Macroeconomic Policy Tutorial #4 (week of Feb 5) 1. Define general equilibrium in the IS-LM diagram. If the economy is not in general equilibrium, what determines output and the real interest rate? What economic forces act to bring the economy back to general equilibrium? 2. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level. (a) A reduction in the effective tax rate on the capital that increases desired investment (b) The expected rate of inflation decreases (c) The introduction of automatic teller machines reduces the demand for money (d) The federal government offers parents a subsidy in order to encourage them to stay at home with their children 3. Give one reason why Ricardian equivalence fails. 4. Use the concepts of income effect and substitution effect to explain why a daily lump- sum allowance to a poor worker will lead to a decrease in the amount of labor
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tut4 (feb5) - Economics 291: Canadian Macroeconomic Policy...

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