Economics 200Macroeconomic TheoryProblem Set 2Due at the beginning of class on September 20, 2007.1. Suppose that net taxes are given by , where is the tax rate, an exogenousX œ >]! > "variable. Find the effects on private saving, public saving and the real interest rate of a rise inthe tax rate.2. The model of real interest rate determination that we studied in class exhibited a propertyknown as the classical dichotomy—we could find the values of all of the real variables withoutknowing the values of any of the nominal (or monetary) variables. Now that we have alsostudied the monetary side of the economy it is appropriate for us to investigate a perturbation ofthe real interest rate model that does not exhibit this property.Recall that our original model was summarized in two equations—the demand for andsupply of loanable funds as functions of the real interest rate—andM œ MÐ<ÑW œ WÐ<Ñ œ ] -Ð] X ß <Ñ KÞ
This is the end of the preview.
access the rest of the document.