Economics 1B Lecture 16 S2011

Economics 1B Lecture 16 S2011 - Economics 1B UC Davis...

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Economics 1B UC Davis Professor Siegler Spring 2011
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I. Recap y We can summarize the economic fluctuations model as: 2
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I. Recap y When we conduct experiments using the economic fluctuations model, begin at potential output unless ld otherwise. told otherwise. y Compare the short run equilibrium to the economy prior to the exogenous shock. y Compare the long run equilibrium to the economy prior to the exogenous shock. xogenous shocks can cause IS (and AD) MP (and y Exogenous shocks can cause IS (and AD), MP (and AD), and/or IA (SRAS) to shift first. Then, we examine how the economy adjusts back to potential output in the long run. 3
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Question 15.4 Suppose that there is an adverse price shock, such as a dramatic increase in the price of oil. Using the conomic fluctuations model in the short n economic fluctuations model, in the short run, A) net exports decrease. ) et exports increase B) net exports increase. C) net exports remain constant. ) e effect on net exports is ambiguous D) the effect on net exports is ambiguous. 4
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Let’s consider a negative price shock (exogenous shift up in SRAS or IA) IS/MP Curves AD/AS Curves r B π B π 1 SRAS 1 LRAS SR impact ambiguous A A π 0 MP( π 0 ) MP( π 1 ) r 0 r 1 SRAS 0 C C π 5 = r 5 = AD * * IS 5 Y Y Y Y Y 1 Y 1 Recessionary gap Recessionary gap
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Question 16.1 Using the economic fluctuations model, what would be the impact of a change from an income tax to a nsumption tax (that both bring in the same consumption tax (that both bring in the same amount of tax revenue each year) on investment spending in the short run ? A) it would go up. B) it would go down. ) would be unaffected C) it would be unaffected. D) the impact on investment is ambiguous. Answer: C 6
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Question 16.2 Using the economic fluctuations model, what would be the impact of a change from an income tax to a nsumption tax (that both bring in the same consumption tax (that both bring in the same amount of tax revenue each year) on investment spending in the long run ? A) it would go up. B) it would go down. ) would be unaffected C) it would be unaffected. D) the impact on investment is ambiguous.
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Economics 1B Lecture 16 S2011 - Economics 1B UC Davis...

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