midterm2_Fall2007

# midterm2_Fall2007 - ECON 103 A MACROECONOMIC THEORY Fall...

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ECON 103 A: MACROECONOMIC THEORY – Fall 2007 Professor: Marcelle Chauvet Midterm Exam 2 Name: ID: Please circle your TA’s name: Teaching Assistants: Bradley Franklin W a n e r G u Masanori Kuroki Instructions: 1) The exam has 3 questions and five pages. Make sure you have all of them. 2) You have 1h20 minutes to answer the questions. 3) Make sure you show all your work. When it is the case, show the formula used to calculate your answers. Partial answers get partial credit. Good Luck.

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2 Question 1 - (30 points): Suppose that the next President of the U.S. decides to control the government deficit by increasing taxes as soon as his/her term starts in January 2009. Using the long run model learned in Chapter 3 : (a) Show graphically the impact of this policy in the market for loanable funds . Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv the final equilibrium values. (10 points) (b) Explain in words what would be the impact of an increase in taxes on government saving, national saving, real interest rate, investment, and real output in the long run. (10 points) (c) Explain why real output is not affected by this policy in the long run. Which variables offset each other so that output remains at its long run natural rate? (10 points)
3 Question 2 (30 points) Long Run: Suppose an economy that produces only pizza. 1,000 pizzas are

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midterm2_Fall2007 - ECON 103 A MACROECONOMIC THEORY Fall...

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