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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
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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.
- Winter '08