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section+24 - neoclassical model what e/ect will the tax...

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ECON 101B: Section 24 Handout Date: 04/15/2011 Question 1 For each of the following consumption functions C = 1 ; 500 C = 1 ; 500 + 0 : 75 Y C = 1 ; 500 + 100 Y Y 2 C = ln Y 1. Sketch the graph of the consumptions function. Compute MPC and APC . Show, both analytically and graphically, whether each of them is increasing or decreasing with income. Question 2 Use the neoclassical model of investment to explain the impact of each of the following on the rental price of capital, the cost of capital, and investment: 1. Anti-in±ationary monetary policy raises the real interest rate. 2. An earthquake destroys part of the capital stock. 3. Immigration of foreign workers increases the size of the labor force. Question 3 oil reserves. (The government assures the ²rms that the tax is for one time only.) According to the
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Unformatted text preview: neoclassical model, what e/ect will the tax have on business ²xed investment by these ²rms? What if these ²rms face ²nancing constraints? Question 4 Your textbook suggests that one plausible range for an in±ation target might be 1 to 3 percent. There are several reasons why most economists believe that an in±ation target of zero percent, resulting in absolute price stability, might not be optimal. One reason is that some small in±ation rate might make labor markets work better due to rigid nominal wages. Another reason is that disin±ation (negative in±ation) can be very dangerous. A third reason is that zero-percent in±ation prevents central banks from pushing real interest rates below zero, which is something they might want to do in a severe recession. Why does zero-percent in±ation have this e/ect? 1...
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