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Problem Set 2 SOLUTIONS

# Problem Set 2 SOLUTIONS - 110A Macroeconomics Spring 2011...

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110A – Macroeconomics Spring 2011 Solutions to Problem Set 2 Part I: True, False or Uncertain? 1. Uncertain: The net effect depends on the relative strength of the two forces, because: a. As a result of an increase in the propensity to consume output increases b. A reduction of investment reduces output 2. False: When the interest rate rises the bond price decreases, since their relationship can be described as follows: 3. False: Money is a LIABILITY for the central bank. Instead, the central banks assets are typically constituted by treasury bonds. Part II: Open Questions 1. Endogenous variables are determined by the model. Exogenous variables are taken as given and, for example in this model, do not change as income changes. 2. c0 is the autonomous consumption. It indicates the quantity that would be consumed if disposable income were zero. For this reason it can take only positive values. c1 indicates the propensity to consume (the proportion of an additional unit of income that is translated into consumption). It is positive, because an increase in disposable income is likely to lead to an increase of consumption. It is smaller than one, because people are likely to consume only part of any increase in disposable income and save the rest. 3.

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Problem Set 2 SOLUTIONS - 110A Macroeconomics Spring 2011...

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