# Assignment_1_Solution.pdf - Assignment 1 with Suggested...

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Assignment 1 with Suggested SolutionsECON 303 (L01): Intermediate Economic TheoryMacroeconomics I (Winter 2020)Instructor: Muna EshebaA. [Blanchard and Johnson (2015), p. 57, question 5] For both political and macroeco-nomic reasons, governments are often reluctant to run budget de°cits.Here, we examinewhether policy changes inGandTthat maintain a balanced budget are neutral for themacro economy. Put another way, we examine whether it is possible to a/ect output throughchanges inGandTso that the government budget remains balanced. Start with equation(3.7): (18 marks)Y=11°c1°c0+I+G°c1T±1. By how much doesYincrease whenGincreases by one unit? (3 marks)
2. By how much doesYdecrease whenTinceases by one unit? (3 marks)
3. Why are your answers to (1) and (2) di/erent? (3 marks)
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4. Suppose that bothGandTincrease by exactly one unit. Using your answers to parts(1) and (2), what is the change in equilibriumGDP? (6 marks)
5. How does the value of the marginal propensity to consume a/ect your answer? Why?(3 marks)
B. Consider the following economy: (10 marks)C=c(Y°T);I=I;G=G; andT=tC1. Find an algebraic expression for equilibrium income. (5 marks)
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