PS14 - Problem Set # 14 Sol utio ns Chapter 13 #7 a) The...

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Problem Set # 14 Solutions Chapter 13 #7 a) The natural rate of output is determined by the production function Y bar = F(K bar ,L bar ). If a tax cut raises work effort, it increases L bar and, thus, increases the natural rate of output. b) The tax cut shifts the aggregate demand curve outward for the normal reason that disposable income and, hence, consumption rise. It shifts the long-run aggregate supply curve outward because the natural rate of output rises. The effect of the tax cut on the short-run aggregate supply (SRAS) curve depends on which model you use. The labor supply curve shifts outward because workers are willing to supply more labor at any given real wage while the labor demand curve is unchanged. In the sticky- wage or sticky-price models the quantity of labor is demand-determined, so the SRAS curve does not move. By contrast, the imperfect-information model assumes that the labor market is always in equilibrium, so the greater supply of labor leads to higher employment
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This note was uploaded on 10/25/2010 for the course MBA GloEco taught by Professor N.m. during the Spring '10 term at Institute of Business Administration.

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PS14 - Problem Set # 14 Sol utio ns Chapter 13 #7 a) The...

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