MacroeconomicsChapter 5

# MacroeconomicsChapter 5 - ANSWERS TO END-OF-CHAPTER...

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ANSWERS TO END-OF-CHAPTER PROBLEMS CHAPTER 5 Quick Check 1. a. True. b. True. c. False. d. False. The balanced budget multiplier is positive (it equals one), so the IS curve shifts right. e. False. f. Uncertain. An increase in government spending leads to an increase in output (which tends to increase investment), but also to an increase in the interest rate (which tends to reduce investment). g. True. 2. a. Y =[1/(1- c 1 )][ c 0 - c 1 T + I + G ] The multiplier is 1/(1- c 1 ). b. Y =[1/(1- c 1 - b 1 )][ c 0 - c 1 T + b 0 - b 2 i + G ] The multiplier is 1/(1- c 1 - b 1 ). Since the multiplier is larger than the multiplier in part (a), the effect of a change in autonomous spending is bigger than in part (a). An increase in autonomous spending now leads to an increase in investment as well as consumption. c. Substituting for the interest rate in the answer to part (b), Y =[1/(1- c 1 - b 1 + b 2 d 1 / d 2 )][ c 0 - c 1 T + b 0 +( b 2 / d 2 )( M / P )+ G ]. The multiplier is 1/(1-

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## This note was uploaded on 12/22/2011 for the course MACROECON 301 taught by Professor Christinanagy during the Fall '09 term at University of Washington.

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MacroeconomicsChapter 5 - ANSWERS TO END-OF-CHAPTER...

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