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Unformatted text preview: Economics 101 Marek Kapi cka Intermediate Macroeconomic Theory Spring 2010 Problem Set 4 Solution Please write your name and your section on the top of your problem set. 1 Productive Government Spending 1. Solve Question 5.7 in Williamson. (a) The increase in government spending in this example has two separate effects on the production possibilities frontier. First, the increase in gov- ernment spending from G 1 to G 2 implies a parallel downward shift in the production possibilities frontier. Second, the productive nature of gov- ernment spending is equivalent to an increase in total factor productivity that shifts the production possibilities frontier upward and increases its slope. The figure below draws the original production possibilities frontier as PPF 1 and the new production possibilities frontier as PPF 2 . If the production-enhancing aspects of the increase in government spending are large enough, representative consumer utility could rise, as in this figure....
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- Spring '08