ps2_answers

ps2_answers - 14.02 Principles of Macroeconomics Problem...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Problem Set # 2, Answers Part I 1. False . The multiplier is 1/ [1- c 1 (1- t)]. The effect of an increase in autonomous spending is dampened because taxes respond proportionally to any increase in output. 2. False : A decrease in G shifts the IS to the left, Y and i , so C because income has decreased (assuming the income effect dominates the interest effect or no interest effect on consumption), but the effect on I is ambiguous (because, in general, we cannot assume similar assumption regarding the investment). 3. False : GDP will definitely increase, but interest rate change depends on the entity of the shifts and the slopes of the IS and LM. 4. True : the introduction of the ATMs reduces demand for money, which shifts the LM to the right, resulting in lower interest rate and higher GDP. 5. True : While an expansionary fiscal policy shifts the IS to the right, increases Y and the inflationary pressure, the Fed can sell T-bills through open market transactions, which reduces money supply, and in turn, shifts the LM to the left to off-set the increase in Y and the inflationary pressure. The result of the fiscal expansion, in this case, will be an increase in the interest rate. Part II 1. c 0 is the minimum consumption for survival, which represents the sensitivity of the consumption w.r.t. the exogenous variables. c 1 is the marginal propensity to consume (MPC), which represents the sensitivity of the consumption w.r.t. the disposal income. Note, c 1 (1 – t) is the slope of the consumption line in the space Y-C (goods market graph). c 2 is the sensitivity of the consumption w.r.t. the interest rate. c 3 is the sensitivity of the consumption w.r.t. the net wealth. c 0 - c 1 T - c 2 + c 3 = is the intercept of the consumption line in the space Y-C (goods market graph). b 0 represents the sensitivity of the investment w.r.t. the exogenous variables. b 1 is the marginal propensity to invest, which represents the sensitivity of the investment w.r.t. the GDP (
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/29/2009 for the course 14 14.02 taught by Professor Geurrieri during the Fall '09 term at MIT.

Page1 / 8

ps2_answers - 14.02 Principles of Macroeconomics Problem...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online