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SIMON FRASER ECON291 tut2 (1)

SIMON FRASER ECON291 tut2 (1) - (a What are the...

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Economics 291: Canadian Macroeconomic Policy Tutorial #2 (week of May 21) 1. Using the concepts of substitution and income effects to show the effect of a decrease in interest rate on the desired savings of a borrower. 2. If Ricardian equivalence holds and government decides to cut tax, indicate whether each of the following statement is true or false. Explain your answer. (a) The private savings will not change. (b) The public savings will not change. (c) The national savings will not change. (d) Both current consumption and future consumption will not change. 3. A consumer lives two periods, called current period and future period. His disposable income is $600 during the current period, $200 during the future period. The consumer has no other assets. The interest rate is zero. The consumer desires perfectly smooth consumption over his lifetime (that is, current consumption = future consumption).
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Unformatted text preview: (a) What are the consumptions in each period? What is the desired saving? (b) Now suppose there is a temporary increase in government spending by $100, and all the current and future tax will be imposed on this consumer. If the government spending is to be financed by current tax, what will happen to his current and future consumption, as well as the desired national savings? (c) Continue from part (b). Now suppose the increase in government spending is going to be financed by future tax, what will happen to his current and future consumption, as well as the desired national savings? 4. What effect does a temporary increase in government spending – for example, to fight a war – have on the desired consumption and desired national savings? Does it matter whether the temporary increase in government spending is financed by current tax or by future tax?...
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