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ECON 200 Problem Set 2 Fall 2007

ECON 200 Problem Set 2 Fall 2007 - Economics 200...

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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
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