EC290 Lecture Notes - Lecture 3: Fiscal Multiplier, Gross Domestic Product, Exogeny

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29 Nov 2017

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Do parts a. , b. and c. of question 2 a simple economy on page 56. This is the same economy as the base economy in the spreadsheet. Do parts a. b. and c. of question 3. Do parts a. b and c of question 6 automatic stabilizers . Part d. of this question refers to the fact that if the tax function is. As i falls, then for the same size decline in i, the fall in y is smaller in the situation where taxes net of transfers are endogenous. Multipliers are smaller if taxes net of transfers are endogenous. (e) here is an additional question: We have already said that total tax net of transfers revenue, T is endogenous when t=t0 + t1 y. The conservatives, just prior to the 2015 election (june 23, 2015), did pass a balanced budget law: found at http://laws-lois. justice. gc. ca/eng/acts/f-5. 8/page-1. html. An act respecting the balancing of federal government budgets.

Related Questions

Country A is located on a small island that is isolated from the outside world. The country
has one representative consumer, whose preference is represented by:
U(c, l) = ln(c) + ln(l)
There is one representative fi rm in the economy which is owned by the consumer, it produces
one type of good that can be used for consumption or government expenditure using capital
and labour as inputs. The fi rm owns the capital it uses and it's production technology is
represented by
F(K;N) = zK^aN^1-a
where z is the total factor productivity, and a is the capital share of income. The fi rm pays
all of its profit back to consumer as dividend.
The government of country A spend a predetermined G amount of goods to provide public
services, and it taxes consumer through a lump-sum tax t to finance the expenditure. the
government's budget is balanced:
G = t
Now, suppose that the firm cannot change its capital stock, or improve its production technology in the short period, such that z and K are given.
(a) When describing this economy as an macroeconomic model, what is the set of exogenous
variables? What is the set of endogenous variables that can be determined given the set
of exogenous variables using the concept of Competitive Equilibrium?
(b) Defi ne the competitive equilibrium for this economy, be specific about what it is, what
conditions have to be satisfied who solves what problem and etc.
(c) List the set of equations that will be used to determine all of the endogenous variables.
Which four of these endogenous variables are essentials, such that once you know these
four, all other endogenous variables can be obtained easily?
(d) Write down the four equations that can be used to solve for these four essential endogenous variables, and describe where do they come from. Describe in details the steps of
how would you solve for the competitive equilibrium (without actually solving for it ).
(e) Setup the Social planner's problem for this economy. What is the marginal condition
that pins down the planner's choices.
(f) Now, describe what would happen to c, l, and w if the firm had more capital, such
that Knew > Kold.

Let us have an economy that lives only for 2 periods. The representative household has a utility function that values consumption goods for any period as follows

u(c) = ln(c).

The valuation throughout both periods can be represented as a total utility function that discounts future utility with a Î² discount parameter as follows,

U(c1, c2) = u(c1) + Î²u(c2) = ln(c1) + Î² ln(c2),

where ct represent consumption good in period t for every period t = 1, 2. The budget constraint for this person in every period is expressed as

(1+Ïtc)ct + xt =(1âÏtI)(wtnt +rtkt), t=1,2.

where xt represent investment in period t, wt the wages earned by hours worked, rt the return of capital in period t, nt the hours worked supplied by the household in every period t, kt the stock of capital that the household has in period t, Ïtc the tax rate imposed by the government in consumption goods in every period t, and ÏtI the tax rate imposed by the government to total household income in every period t. In every period, the total amount of hours that the representative household is of H Ì = 1. Investment in every period can be defined by the following law of motion of capital

kt+1 = xt +(1âÎ´)kt, t=1,2.

Acknowledge that k3 = 0 because there is no period 3 in this economy. The household starts with a given amount of capital k Ì1 > 0. The representative firm produces good by the following production function in every period t,

Y_t =z_tK_tÎ±N_t1âÎ±, t=1,2.

There is a government that covers government expenditures in period 1 and period 2 by taxing capital rent and labor. Hence, their budget can be expressed as

Ïtcct +ÏtI(wtnt +rtkt)=gt, t=1,2.

a) Before writing any competitive equilibrium definition or the Social Planner Problem, can we modify the budget constraint in â¨order to get rid a variable in every period? Explain.

b) Define the Social Planner Problem.

c) Solve the Social Planner Problem. This is, find the Euler equation in terms of exogenous variables and the only endogenous variable k2.

d) Define the tax distorted competitive equilibrium of this economy.

e) Solve the representative household problem.

f) Solve the representative firm problem in period 1 and 2.

g) Find the optimal Euler equation in terms of exogenous variables and the only endogenous variable k2.

h) Imagine that the government can only implement income taxes. This is Ïtc = 0 for every period t = 1, 2. Can the government implement a tax plan that achieves the Pareto allocation reached by the Social Planner Problem?

i) Imagine that the government can only implement consumption taxes. This is ÏtI = 0 for every period t = 1,2. Can the government implement a tax plan that achieves the Pareto allocation reached by the Social Planner Problem? â¨

Question 3

According to Joseph Schumpeter, the theory of creative destruction describes a process by which

	A	some new products unleash a gale of destruction that drive other new products out of the market.
B		new products unleash a gale of destruction that drives old products out of the market.
C		new products are created by the destruction of capital.
D		the creation of new products never involves the destruction of old products.

Question 4

Which of the following countries had the highest GDP per capita in 2012?

		A Qatar
B		United States
C		Japan
D		Norway

Question 5

________ save a ________ of their income. This ________ capital in their economy and raises economic growth.

	A	Developing countries; large proportion; decreases
B		Developing countries; small proportion; increases
C		High-income countries; large proportion; increases
D		High-income countries; small proportion; increases

Question 6

The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects.

A		government
B		households
C		banks
D		firms

Question 7

The U.S. economy has been more stable since 1950.

True

False

Question 8

When the economy reaches a trough in a business cycle, which of the following will occur?

A		Income, production, and employment will continue to fall.
B		Income, production, and employment will begin to rise.
C		Income and production will rise, but employment will continue to fall.
D		Employment rises, but income and production will continue to fall.

Question 9

In a closed economy, what is the relationship between saving and investment?

A		Saving is greater than investment.
B		Investment is greater than saving.
C		Investment is equal to saving.
D		Investment may be greater or smaller than saving.

Question 10

The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant.

A		labor; real GDP; technology
B		capital; real GDP; technology
C		labor; capital; real GDP
D		capital; labor; real GDP

Question 11

New growth theory states that increases in ________ capital will result in ________ at the ________ level.

	A	knowledge; increasing returns to scale; firm
	B	physical; decreasing returns to scale; firm
	C	knowledge; decreasing returns to scale; economy
D		knowledge; increasing returns to scale; economy

Question 12

Which of the following is not a reason why the Industrial Revolution occurred when and where it did?

A		The British government was committed to upholding private property rights.
B		The British government was able to eliminate arbitrary increases in taxes.
C		The British government was able to more easily seize wealth.
D		Institutional changes by the British government helped protect wealth.

Question 13

Growth in real GDP per capita for the world economy was greatest during

A		the seventeenth century.
B		the eighteenth century.
C		the nineteenth century.
D		the twentieth century.

Question 14

Which of the following is a normative statement about economic growth?

A		Economic growth is associated with higher labor productivity growth.
B		Economic growth increases GDP per capita.
C		Economic growth hurts developing countries.
D		Foreign direct investment stimulates economic growth.

Question 15

The effect of a recession on a company like Whirlpool Corporation is such that

A		sales decline more sharply for Whirlpool as compared to firms that do not produce durable goods.
B		profits fall less sharply as compared to firms that do not produce durable goods.
C		the decline in sales is more short-lived as compared to firms that do not produce durable goods.
D		there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods.

Question 16

For the recessions in the United States since the 1950s,

A		cyclical unemployment has been non-existent.
B		unemployment rises on average by about 1.2 percentage points 12 months after a recession begins.
C		unemployment falls on average by 2 percentage points 12 months after a recession begins.
D		unemployment rises on average about 5 percentage points 12 months after a recession begins.

Question 17

You are an economic advisor to the president. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose?

A		a reduction in sales taxes
B		an investment tax credit
C		a reduction in taxes on luxury yachts
D		All of these

Question 18

In comparison to a government that runs a balanced budget, when the government runs a budget deficit,

	A	the equilibrium interest rate will fall.
	B	business investment will fall.
	C	household savings will fall.
	D	None of these

Question 19

If labor productivity growth slows down in a country, this means that the growth rate in ________ has declined.

A		labor force participation
B		the quantity of goods or services that can be produced by one hour of work
C		the working-age population
D		nominal GDP

Question 20

Policies to promote growth by increasing saving and investment work through

A		decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.
B		increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital.
C		increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital.
D		increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.

EC290 Lecture Notes - Lecture 3: Fiscal Multiplier, Gross Domestic Product, Exogeny

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