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 xed investment by these rms? What if these rms face nancing constraints? Question 4 Your textbook suggests that one plausible range for an ination target might be 1 to 3 percent. There are several reasons why most economists believe that an ination target of zero percent, resulting in absolute price stability, might not be optimal. One reason is that some small ination rate might make labor markets work better due to rigid nominal wages. Another reason is that disination (negative ination) can be very dangerous. A third reason is that zero-percent ination 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 ination have this e/ect? 1...
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This note was uploaded on 10/04/2011 for the course ECON 101b taught by Professor Staff during the Spring '08 term at University of California, Berkeley.

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