True/False and Explain 1. An increase in savings implies a decrease in consumption and therefore a decrease in GDP. 2. The exchange rate between two countries can be thought of as unrelated to any economic variables. 3. If the real rate of return on investment is higher in the US than in Canada, capital will tend to flow out of the US and into Canada.
True/False and Explain
1. An increase in savings implies a decrease in consumption and therefore a decrease in
2. The exchange rate between two countries can be thought of as unrelated to any economic variables.
3. If the real
4. When nominal interest rates are zero, the central bank can still lower them by printing money and purchasing bonds from banks. This increases the supply of loanable funds and stimulates lending.
5. A pro-savings policy by the US would likely reduce the US
6. When savings equals investment, reducing savings and increasing consumption is especially effective in stimulating output.
7. In the dynamic AS-AD model, a perfectly inelastic
8. There are an infinite number of combinations of real interest rates and inflation rates consistent with a nominal interest rate of zero.
II. Short Answer
1. Fiscal and Monetary Stimulus
A. Create a graph of equilibrium in the IS-LM model. Show the effect of an expansionary
B. If the central bank’s goal is to maximize output, what interest rate will we expect in equilibrium?
C. Starting from the equilibrium described in (B), suppose investors experience a decrease in “animal spirits.” What happens to output? Can the central bank offset this with expansionary monetary policy?
D. What could fiscal authorities do to offset the shock to animal spirits described in (C)?
2. Political Economy Assume there are three voters: A, B and C. Voter preferences can be ranked along a left-to-right spectrum that ranges from 1-9; 1 being the most left leaning preference and 9 being the most right leaning preference. Suppose these voters will choose between candidates Smith and Jones in an upcoming election. Assuming the following voter preferences: Voter ID Preference (1-9) A 4 B 5 C 6 A.
True/False Explain: If the median voter theorem holds, candidates Smith and Jones will either both adopt preference 5 OR one will adopt preference 4 while the other adopts preference 6.
B. Suppose the electorate becomes more polarized; A moves from 4 to 1 while C moves from 6 to 9. B remains at 4. How does the median voter model predict candidates Smith and Jones will change their preference?
C. Keeping the assumptions from B, how does the election result change if a tax on non-voters doubles the number of voters while preserving the distribution of preferences?
D. If the tax in C induces 100% compliance (everyone votes), did this tax increase total surplus, decrease total surplus or have no effect on total surplus? 3. Wealth Taxes/Mankiw, Saez and Summers Suppose people can consume the income they earn or save and invest it at rate ?.
A. If we tax wealth at a rate greater than ?, how are people likely to adjust their rate of savings?
B. Use the Solow model to comment on how a wealth tax will likely affect the growth rate of the capital stock. How will this policy affect the growth rate of output per worker? How will this policy affect the wage rate for workers?
C. To what extent is this wealth tax likely to reduce the influence of the wealthy in politics?
D. In the Peterson Institute discussion, Greg Mankiw argues that accumulating wealth creates a pecuniary externality. What does Mankiw mean? How would you expect a wealth subsidy to affect the real wage for workers?
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