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Unformatted text preview: Economics 202 Name: __________________________ Principles of Macroeconomics Professor Melick Problem Set #7 Due Wednesday March 26, 2008 1. Using the IS/LM/FE graphical framework, as well as graphs for the goods, asset, and labor markets, illustrate and explain the short-run and long-run effect of a reduction in the effective tax rate on capital. There is no change in the tax rate on labor income. In each of the four graphs show only three points, an initial general equilibrium before the tax cut (labeled point A), the short-run equilibrium after the tax cut but before any change in the price level (labeled point B), and the new long-run general equilibrium (labeled point C). Based on your graphs and explanations, fill in the following table using increase (+), decrease (-) or no change (0) beneath each variable to describe the change in the variable from point A to point C. Real Wage Employment Output Real Interest Rate Consumption Investment Price Level Change 2. Using the IS/LM/FE graphical framework, as well as graphs for the goods, asset, and labor markets,...
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- Spring '10