final2007sb

# final2007sb - UNIVERSITY OF TORONTO Faculty of Arts and...

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UNIVERSITY OF TORONTO Faculty of Arts and Science APRIL/MAY 2008 EXAMINATIONS 2008 ECO 325H1 Duration: 2 hours NO AIDS ALLOWED NOTE TO STUDENT: Enter your name and student number on each examination book that you use. There are three questions on this exam for a TOTAL OF 200 POINTS . Read each question carefully and note the number of points allocated to each part. Good Luck. 1. (Total 55 points) Consider a Ramsey-Cass-Koopmans economy that is on its balanced growth path. Suppose at some time, which we will call time t , the government switches to a policy of taxing investment income at rate 1 instead of taxing investment income at rate 0 ,whe re 1 0 . Assume that this change in tax policy is unanticipated. Further assume that the government rebates the revenue that it collects to households. a. (4 points) How does the real interest rate that households face change when the taxes are altered? Justify your answer. b. (6 points) How does the change in taxes affect the c 0 locus and the k 0 locus? c. (8 points) What are the steady state values for k , c and y , and the savings rate prior to time t ? d. (8 points)What are the steady state values for k , c and y and the savings rate after to time t ? e. (4 points) How are k , c , y and the savings rate effected by the tax change? Justify your answer. f. (9 points) What are the dynamics of the variables k , c and y after the tax change?

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## This note was uploaded on 09/11/2011 for the course ECO 325 taught by Professor G. during the Spring '09 term at University of Toronto- Toronto.

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final2007sb - UNIVERSITY OF TORONTO Faculty of Arts and...

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