ECON 1110 Problem Set 03

ECON 1110 Problem Set 03 - 3 Define the term velocity of...

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ECON 1110 Intermediate Macroeconomics Problem Set 3 Spring 2011 1. Within the classical model, analyse the effects of an increase in the marginal income tax rate. Explain how output, unemployment, and the price level are affected. Consider the case when the increased revenue produced by the tax increase results in a decline in government bond sales to the public (i.e. less deficit to finance, so fewer bonds sold). Consider both supply-side and demand-side effects. 2. Explain how aggregate demand is determined within the classical model. What would be the effects on output and the price level of an increase in AD?
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Unformatted text preview: 3. Define the term velocity of money. What factors determine the velocity of money in the classical system? 4. Suppose that there is an exogenous increase in the supply of loanable funds. What happens to equilibrium interest rates, savings, investment, and consumption. Assume that there is no government budget deficit (g=t). 5. Explain the concept of money neutrality. What is the effect of money neutrality in the classical model? 6. What is the crowding out effect? 7. Explain the quantity theory of money. What are the similarities and differences between the Fisher and Cambridge versions?...
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