Textbook_Solutions_chpt3

D the change in y equals 11 c1 c11 c11 balanced

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Unformatted text preview: uals 1/(1-c1) - c1/(1- c1)=1. Balanced budget changes in G and T are not macroeconomically neutral. e. Because of the automatic effect of taxes on the economy, the economy responds less to changes in autonomous spending than in the case where taxes are independent of income. Since output tends to vary less (to be more stable), fiscal policy is called an automatic stabilizer. a. Y=[1/(1-c1+c1t1)][c0-c1t0+I+G] T = t0 + t1[1/(1-c1+c1t1)][c0-c1t0+I+G] c. Both Y and T decrease. d. If G is cut, Y decreases even more. A balanced budget requirement amplifies the effect of the decline in c0. Therefore, such a requirement is destabilizing. a. In the diagram representing goods market equilibrium, the ZZ line shifts up. Output increases. b. There is no effect on the diagram or on output. c. The ZZ line shifts up and output increases. Effectively, the income transfer increases the propensity to consume for the economy as a whole. d. 8. The multiplier=1/(1-c1+c1t1)<1/(1-c1), so the economy responds less to changes in autonomous spending when t1 is positive. After a positive change in autonomous spending, the increase in total taxes (because of the increase in income) tends to lessen the increase in output. After a negative change in autonomous spending, the fall in total taxes tends to lessen the decrease in output. b. 7. Y=c0+c1YD+I+G implies Y=[1/(1-c...
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This note was uploaded on 01/29/2014 for the course ECON 110A taught by Professor Staff during the Winter '08 term at UCSD.

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