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Unformatted text preview: Economics 1011b Problem Set 4 Professor Aleh Tsyvinski The problem set is due next Tuesday, March 20, by 5 pm in your TFs mailbox in Littauer. Late problem sets will not be accepted. You can work in groups (discuss the solutions, etc). However, you must write the solutions by yourself. Please write down all derivations/explanations. For clarifications (not answers) please contact Leon Berkelmans (email@example.com). Exercise 1. Growth (Taken from Acemoglus new book, found on his website. Question 4.4 on page 211. Limit answers to about a page in length.) In his paper Tropical Un- derdevelopment, Jeff Sachs notes that differences in income per capita between tropical and temperate zones have widened over the past 150 years. He inter- prets this pattern as evidence indicating that the geographical burden of the tropical areas has been getting worse over the process of recent development. Discuss this thesis. If you wish, offer alternative explanations. How would you go about testing different approaches? (If possible, suggest original ways, rather than approaches that were already tried). Exercise 2. The Laffer Curve Arthur Betz Laffer, Sr. (born August 14, 1940) is a supply side economist who became influential during the Reagan administration as a member of Rea- gans Economic Policy Advisory Board (1981-1989). Laffer is best known for the Laffer curve, which demonstrates that in certain situations, a decrease in tax rates could result in an increase in tax revenues. Although he does not claim to have invented this concept (Laffer, 2004), it was popularized with policy-makers following an afternoon meeting with Dick Cheney in which he re- portedly sketched the curve on a napkin to illustrate his argument (Wanninski, 2005). The term Laffer curve was coined by Jude Wanniski (a writer for the Wall Street Journal), who was also present. The basic concept was not new: Laffer himself says he learned it from John Maynard Keynes. The gist of the theory is that tax revenues would be zero if tax rates were either 0% or 100%, and somewhere in between 0% and 100% is a tax rate which maximizes total revenue. Laffers innovation was to state that the inflection point in the curverevenue....
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