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Homework answers / question archive / 1)Suppose the government decides to decrease taxes in an effort to increase consumer spending and investment in the economy

1)Suppose the government decides to decrease taxes in an effort to increase consumer spending and investment in the economy

Economics

1)Suppose the government decides to decrease taxes in an effort to increase consumer spending and investment in the economy.

a. Will this plan succeed in accomplishing both goals?

b. In equilibrium, what happens to interest rates as a result of this action?

c. Would you characterize this as a case of fiscal crowding out? Explain.

3. If the government wants to increase the amount of savings in the economy, how should it alter government spending? What effect will this action have on the interest rate in the economy? (Use the appropriate graph to help demonstrate the effect.)

4. Suppose the production function of a company exhibits increasing returns to scale. Both capital and labor are required for production, and each factor is subject to diminishing marginal productivity.

a. Explain how it is possible for a company to have increasing returns to scale and yet have diminishing marginal productivity for both factors of production.

b. If the firm increases its labor force and keeps the capital stock constant, how will this effect the real wage and the real rental price of capital?

c. If the firm increases both factors by the same percentage, what will be the effect on the real wage and real rental price?

5. Let the following equations characterize an economy: (note the addition of a tax rate on output)

Y = C + I + G

Y = 200

C = 23 + 0.8(Y – T)

I = 50 – 9r

G = 60

T = 40 + 0.1Y

a. Calculate national saving, private saving, and public saving.

b. Determine the equilibrium interest rate.

c. Suppose that output increases to 209. Redo the calculations in (a) and (b). Explain (in terms of savings and investment) the reason for the interest rate change.

d. What caused the change in private savings? Why did public savings change?

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