Econ 100B: Economic Analysis – Macroeconomics
Problem Set #6 – Solutions
Due Date: August 7, 2020
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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.