# Conf4 - Y = C a + I a + G a d) What are the implications...

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McGill University Macroeconomics Professor Paul Dickinson Discussion Questions Sheet 4: Chapter 24 - Moving to the Long Run A. The Long Run: Fiscal Policy and “Crowding Out” a) Consider a closed economy which is in a long-run equilibrium, with Y = Y*. There is then a permanent increase in the annual flow of government purchases of goods and services, G. Explain what happens in the short run (no factor-price adjustment). Show in an AD/AS diagram. b) Following from (a), explain what happens in the long run (full factor-price adjustment). Show in an AD/AS diagram. (Assume that the current value of Y* is constant.) c) In our simple model, still with a closed economy, consumption is a function of disposable income (Y-T). If the increase in G leads to no long-run increase in Y , explain what component of aggregate expenditure must get “crowded out” by the increase in G. Remember your national-income accounting for a closed economy that says:
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Unformatted text preview: Y = C a + I a + G a d) What are the implications for the (closed) economy in the long run of this reduction in this specific type of aggregate expenditure? e) Now repeat this analysis for an open economy. Is there still a cost associated with the permanent increase in G? Explain. f) Explain, in words, why an increase in government purchases may be desirable in the short run, approximately neutral in the long run, and possibly undesirable for the economy in the very long run. g) For (e) and (f), does it matter what the increase in government spending is for? For example, are the long-run costs of an increase in government spending on education likely to be the same as an increase in government spending on the construction of buildings? Explain. B. Chapter 24, Study Exercises 3 and 7 C: Chapter 24, Discussion Questions 2 to 6...
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## This note was uploaded on 02/14/2011 for the course ECON 209 taught by Professor Mattieuprovencher during the Spring '09 term at McGill.

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