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SIMON FRASER ECON291 tut4a (2)

SIMON FRASER ECON291 tut4a (2) - Economics 291 Canadian...

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Economics 291: Canadian Macroeconomic Policy Additional problems 1. 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 Answer: (a) The increase in desired investment shifts the IS curve to the right. The price level rises, shifting the LM curve up to restore equilibrium. There is no change in the real wage, employment, or output; there is a rise in the real interest rate, the price level, and investment; and there is a decline in consumption.
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