Economics 200
Macroeconomic Theory
Problem Set 2
Due at the beginning of class on September 20, 2007.
1. Suppose that net taxes are given by
, where
is the tax rate, an exogenous
X œ >]
! > "
variable.
Find the effects on private saving, public saving and the real interest rate of a rise in
the tax rate.
2.
The model of real interest rate determination that we studied in class exhibited a property
known as the classical dichotomy—we could find the values of all of the real variables without
knowing the values of any of the nominal (or monetary) variables.
Now that we have also
studied the monetary side of the economy it is appropriate for us to investigate a perturbation of
the real interest rate model that does not exhibit this property.
Recall that our original model was summarized in two equations—the demand for and
supply
of
loanable
funds
as
functions
of
the
real
interest
rate—
and
M œ MÐ<Ñ
W œ WÐ<Ñ œ ] Ð] X ß <Ñ KÞ
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '08
 Staff
 Economics, Microeconomics, Inflation

Click to edit the document details