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Solutions to Additional Goods Market Problems

# Solutions to Additional Goods Market Problems - 1 Desired...

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1. Desired saving œ ]  G  K œ ]  +  , ]  ÐX  >] Ñ  K œ ] "  ,Ð"  >Ñ  +  ,X  K e f c d c d E E so that the goods market equilibrium condition, implies W œ M ] "  ,Ð"  >Ñ  +  ,X  K œ MÐ<Ñ c d E A rise in implies a fall in and so requires a fall in to maintain goods market equilibrium < M ] Solving for gives as found in class. ] ] œ MÐ<Ñ+,X K ",Ð">Ñ E 2. (a) Recall that the slope of curve is given by . A reduction in MW œ   ! > ? ? < ] . MW ",Ð">Ñ ¹ will decrease the numerator, reducing the absolute value of the slope. That is, it will make the MW curve flatter. The economics of the slope change is that, following a reduction in the interest rate, a lower tax rate increases the rise in disposable income at each round of the multiplier process implying a greater rise in consumption and so adding more to income at each round. The resultant greater rise in the level of GDP needed for spending balance implies a flatter MW curve.

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