Production function increases plot the new budget

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production function increases). Plot the new budget constraint and describe thenewoptimalchoiceforRobinson. Make sure you explain Robinson’s behavior in terms of wealth and substitution effects.(f)What are the differences between your answers in (d) and (e)? Explain.(g)Imagine now that a government levies an output tax at rateτso that the new budget constraint isLAC)1(τ=. What are the effects on work effort and consumption of an increase inτQuestion 6.- Government and the Cycle (24 pt)Consider the model with government spending discussed in class. Remember that we assumed thatgovernment spending was useless (in the sense of not being productive nor affecting utility) but itnevertheless affected aggregate demand.(a)If the government can borrow and lend and print money, what is the government budget constraint?Discuss each of the elements.(b)If the government does not have access to financial borrowing or printing money, what is the budgetconstraint?Imagine that the only tax available to the government is a lump-sum tax.(c)Why do economists say that the lump-sum tax is non-distortionary? Explain.(d)Imagine that the government increases spending temporarily. What are the effects on GDP, the realinterest rate, the price level, consumption and investment? Explain(e)Imagine that the government increases spending permanently. What are the effects on GDP, thereal interest rate, the price level, consumption and investment? Explain(f)In the light of your answer to (e), when government spending is useless, is it a good idea to expandthe size of government? Why or why not? Why do you think countries all over the world increasegovernment spending continuously?Imagine now that, on top of affecting aggregate demand,government spending affects theproductivity of private capital(more roads make cars more productive). But imagine thatdoes notaffect supply during the period in which the spending is made(maybe because roads take time tobuild). Consider a world in which prices are flexible so they move to clear all the markets all the time.Again, using the classical world, answer the following questions:(g)Imagine that the government increases this type of spendingtemporarily. What are the effects onGDP, the real interest rate, the price level, consumption and investment? Explain(h)Imagine that the government increases spendingpermanently. What are the effects on GDP, thereal interest rate, the price level, consumption and investment? Explain?
NAME AND UNI:___________________________________________________QUESTION 1.- SHORT SPEECHES – ANSWER
NAME AND UNI:___________________________________________________QUESTION 2.- G AND GROWTH - ANSWER
NAME AND UNI:___________________________________________________QUESTION 3.- MORE SHORT SPEECHES – ANSWER
NAME AND UNI:___________________________________________________QUESTION 4.- A TAX ON MPK – ANSWER
NAME AND UNI:___________________________________________________QUESTION 5.- A TAX ON ROBINSON – ANSWER
NAME AND UNI:___________________________________________________QUESTION 6.- GOVERNMENT AND THE CYCLE - ANSWER

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Term
Fall
Professor
XAVIER

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