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 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. y Exogenous shocks can cause IS (and AD) MP (and 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 t t i th l 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 economic fluctuations model in the short run economic fluctuations model, in the short run, A) net exports decrease. B) net exports increase net exports increase. C) net exports remain constant. D) the effect on net exports is ambiguous the effect on net exports is ambiguous. 4
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L id i i h k Let’s consider a negative price shock (exogenous shift up in SRAS or IA) IS/MP Curves AD/AS Curves r B π B MP( ) π 1 SRAS 1 LRAS SR impact ambiguous A A π 0 MP( π 0 ) π 1 r 0 r 1 SRAS 0 C C π 5 = r 5 = Y Y AD Y * Y * IS Y 1 Y 1 5 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 consumption tax (that both bring in the same amount of tax revenue each year) on investment spending in the short run ? A) it ld it would go up. B) it would go down. C) it would be unaffected 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 consumption tax (that both bring in the same amount of tax revenue each year) on investment spending in the long run ? A) it ld it would go up. B) it would go down. C) it would be unaffected it would be unaffected. D) the impact on investment is ambiguous. Answer: A 7
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Question 16.3 Using the economic fluctuations model, what would be the impact of a change from an income tax to a consumption tax (that both bring in the same amount of tax revenue each year) on the inflation rate in the long run ?
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