100b08ps5a

100b08ps5a - Fall 2008 Econ 100B Problem Set 5 1.a The...

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Fall 2008 Econ 100B Problem Set 5 1.a. The administration proposes to stimulate the economy by increasing public spending now and reducing government deficit in the medium run. When there is no change in monetary policy, IS curve shifts out, so there is a positive effect today but an ambiguous effect for future. T’ e goes up, G’ e goes down, Y’ e goes up and r’ e goes down. The Fed changes monetary policy to prevent any change in future output. In response to deficit reduction and the possible adverse effect on output, Fed will increase money supply moving LM curve to the right. Interest rates are expected to go down. Output is likely to go up. The Fed changes monetary policy to prevent any change to future interest rate. Future output will be lower. T’ e goes up and G’ e goes down. So only current changes shift IS to right whereas all future changes work towards shifting IS to the left. It is more likely that output will go down now. 2. Problem 6, Chapter 17 a. In the medium run and in the long run, a budget deficit reduction is likely to be beneficial for the economy. In the medium run, a deficit reduction implies higher saving and higher investment. In the long run, higher investment translates into higher capital accumulation and therefore to higher level of output. b. Backloading the deficit reduction program toward future, with small cuts today and larger cuts in the future is expected to be more likely to lead an increase in output. The reason is that the smaller decrease in current government spending, the smaller the adverse effect on spending
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This note was uploaded on 02/08/2011 for the course ECON 100B taught by Professor Yisun during the Spring '07 term at UCSC.

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100b08ps5a - Fall 2008 Econ 100B Problem Set 5 1.a The...

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