econ 16 - Econ 100B: Macroeconomic Analysis Fall 2008...

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Econ 100B: Macroeconomic Analysis Fall 2008 Problem Set #16 ANSWERS (Due November 3 – 4, 2008) 1. Clearly and accurately draw and label a diagram of the IS—LM—BB Model. Y LM IS Y 0 r 0 BB Y T – G 0 ABB 0 SBB 0 r
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2. Provide an economic explanation of the shape of the budget balance curve in your diagram in #1. The Budget Balance (BB) line represents the positive relationship between economic output (and income) and tax revenues as well as the positive relationship between economic income and the budget balance. It indicates that as economic income rises, tax revenues also increase as does the budget balance. The slope of the budget balance line is the economy’s tax rate. 3. List the new endogenous and exogenous variables that are not already included in the IS—LM— FE model. New endogenous variables: tax revenues (which were previously exogenous), the absolute budget balance, and the structural budget balance. New exogenous variables:
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econ 16 - Econ 100B: Macroeconomic Analysis Fall 2008...

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