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problem set 7

# problem set 7 - e What if the government increased...

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Economics 205: Principles of Macroeconomics Mark Moore Spring 2010 Problem Set 7 Note: There are a number of problems requiring algebraic computation in this problem set. Do the computations, but then make sure you understand the intuition behind your answers. The computations should strengthen your intuition about the way our macroeconomic model works. 1. Suppose the MPC is .8, and the tax rate is 0. There are fixed taxes, however, in the amount of t 0 . a. Suppose the government increases its purchases by 10 units. How much does output change if the price level is fixed? What happens to the budget deficit? b. Suppose the government does not increase its purchases. By how much must fixed taxes decrease to generate the same increase in output as in part a? What happens to the budget deficit? c. How do the policies in parts (a) and (b) compare with respect to their effects on the AD curve? d. Suppose the government enacted the policies in parts (a) and (b) and the same time. What would happen to the AD curve?
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Unformatted text preview: e. What if the government increased purchases by 10 units and increased fixed taxes by 10 units? What would happen to the AD curve? By how much would it shift horizontally? 2. Baumol and Blinder, ch. 11, Discussion Question 2. 3. Baumol and Blinder, ch. 11, Appendix A, Test Yourself Question 2. 4. Baumol and Blinder, ch. 11, Appendix A, Test Yourself Question 3. 5. Baumol and Blinder, ch. 11, Appendix A, Discussion Question 2. 6. Following on question 5, explain why a proportional income tax system is an automatic stabilizer. Explain why a requirement that the government maintain a balanced budget at all times acts as an automatic destabilizer. 7. Baumol and Blinder, ch. 11, Appendix B, Test Yourself Question 1. 8. Baumol and Blinder, ch. 11, Appendix B, Test Yourself Question 2. 9. Baumol and Blinder, ch. 11, Appendix B, Test Yourself Question 3. 10. Baumol and Blinder, ch. 11, Appendix B, Test Yourself Question 4....
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