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Chap3d - where every variable in the right hand side is...

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A Note on Chapter 3: The effects of a change of a, c, G and T on r Comparative static analysis is a basic method of analysis in economics. It begins by examining the equilibrium of the subject of analysis - the individual consumer, the market, the economy, etc. One of the underlying determinants of this equilibrium is then changed and the resulting new equilibrium examined. The new equilibrium position is then compared to the previous equilibrium position, and from this the effects of the change are deduced. In order to answer Problem 2 (i.e., Problems 8 and 10) in Homework 4, we have to apply comparative statistic analysis to the long-run classical model. For example, the solution for the classical model is (37) r* = (1/d)[c – Y + a + b(Y – T) + G]
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Unformatted text preview: where every variable in the right hand side is exogenous variable. The comparative statistic results will be as ∆r = (1/d)∆a ∆r = (1/d)∆c ∆r = (1/d)∆G ∆r = (-b/d)∆T Based on these, you should be able to answer problems 8 and 10 verbally, mathematically and graphically. Another way to see this is to take total differentiation of Y – a – b(Y – T) – G = c-dr And obtain ∆Y - ∆a – b(∆Y - ∆T) - ∆G = ∆c - r∆d - d∆r To find the effect of a change in T, i.e., ∆T > 0, we set ∆Y = 0, ∆a = 0, ∆G = 0, ∆c = 0, and have b(∆T) = - d∆r → ∆r = (-b/d)∆T. Apply the same approach, we can obtain ∆r = (1/d)∆a; ∆r = (1/d)∆c; ∆r = (1/d)∆G...
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