PSLecture18

# PSLecture18 - Problem Set for Lecture 18 Macro 2 Fiscal...

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Problem Set for Lecture 18: Macro 2: Fiscal Policies: Government Spending and Taxation [with models] [February 23, 2010] Note: Those problems identified with an T are considered for review in the tutorials. T18.1 “Adam notes that the Bank of Canada is contemplating reducing the Bank Rate. Adam understands that a reduction in the Bank Rate would be primarily intended to stimulate the Canadian economy as the Bank of Canada would jointly undertake the prerequisite OMO. However, Adam also understands that if only Canada were to reduce the Bank Rate [i.e., the Federal Reserve System did not make a similar change in the American Bank Rate], then it would be expected that the Canadian dollar would appreciate under a flexible foreign exchange rate regime.” [Monetary Policy: Lecture 17] T18.2 “Anne, who works in Brazil, receives a pay increase of 4 %. Anne is very happy.” Your task is to advise Anne whether she should be happy. T18.2A “Albert wants to know three significant costs of inflation in an industrial economy.” T18.3 “Angus argues that if the marginal propensity to consume, in a simple economy with no government and no trade, were 0.8, then an increase in government spending of \$25 million would generate an increase in GDP of \$200 million when all the extra rounds of spending through the multiplier process had been completed.” T18.4 “Alice reviews the final goods and services equations for a hypothetical economy: C = 8,000 + 6/9 Y; I = 2,000; G = 1,000; X = 4,000; M = 5,000. Alice solves this system of equations and determines that the equilibrium level of real national income [GDP] is 60,000 units and that the multiplier is 4.” [Content of Lecture 19 ] T18.5 “Arthur also looks at the same equations, which are presented in #18.4. Arthur also determines that the initial equilibrium is 9,000 units

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PSLecture18 - Problem Set for Lecture 18 Macro 2 Fiscal...

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