ProblemSet-6-Summer2020-Solutions-v1.pdf - Econ 100B...

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Econ 100B: Economic Analysis – Macroeconomics Problem Set #6 – Solutions Due Date: August 7, 2020 General Instructions: Please upload a PDF of your problem set to Gradescope by 11:59 p.m. Late homework will not be accepted . Please put your name, student ID & your GSI’s name at the upper right corner of the front page. 1. Some supply-side economists argue that decreasing taxes will result in higher output at current target inflation with no change in the policy rate. (a) What changes in investment and potential output are supposed to follow from a decrease in taxes according to supply-side economics?
(b) If the assumptions of supply-side economics hold, is is possible for a loss-function- optimizing central bank to not raise the policy rate? Refer to the optimal-policy rate equation in your answer.
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(c) Significant increases in Y P have historically happened only a couple of times in the last century. Briefly discuss the practical implications of this for the supply-side view that decreasing taxes will result in higher output at current target inflation with no change in the policy rate.

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