First homework, due January 13 in 311 box in Economics Department Office, Andersen Hall: Questions 2, 3, 4, page 62 in textbook.

ECON 311: PROBLEM SET 1: SOLUTIONS

Problems 2,3,4 on p.62

2.a. Y=1000

2.b. YD=900

2.c. C=700

3.a. Y=1000=Z by definition of equilibrium

3.b. Y is now 900, and Z=900 by definition of equilibbrium

3.c. S=Y-T-C=900-100-(160-.6*(900-100))=160; S+(T-G)=150=I. In

equilibrium, S+(T-G)=I (To see this, use the definition of S in the

equilibrium condition Y=C+I+G.

4.a. 1/(1-c1)

4.b. c1/(1-c1)

4.c. Holding Y fixed, consider how one-unit changes in G and T affect

demand. We subsequently call this the 'direct effect'.). G directly

increases demand by one unit. T's direct effect on demand is through its

effect on disposable income on consumption and is hence only c1 units.

The 'indirect' equilibrium effects on Y are the same for both. Hence the

'total', i.e. the equilibrium effect of a unit decrease in T is equal to

c1 times the equilibrium effect of an increase in G.

4.d. The change in Y will be 1/(1-c1)-c1/(1-c1)=1. Balanced budget

changes in G and T are not macroeconomically neutral.

4.e.The value of c1 does not affect the answer. Consider a change in

only G. c1 determines the magnitude of the equilibrium effect on Y

through 'indirect' effects on consumption. The magnitude of these

'indirect' effects of G is exactly offset by the equilibrium effect of a

change in T. Hence only the direct effect of G on demand and hence

equilibrium Y remains.

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Second homework, due January 20 in your TA's box in Economics Department Office, Andersen Hall. Consider the cash-flow diagram I did in class. For each category, write in the relevant number for period 0 (the old equilibrium), period 1 (the period in which the pessimism shock occurs), period 2, period 3 and period infinity. Assume what I called the 'slow disequilibrium dynamics' I defined in class. In addition, please do questions 2, 3, 4 on page 85 in the book.

Answers to homework 2, not (yet) including an answer to the first question.

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Third homework, due January 27 in your TA's box. Questions 2, 3, 4, 6, pages 107-108. Answers.

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Fourth homework, due February 3. Page 108, 5, 7, 8. Answers

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Fifth homework, due February 10. Page 131, 2, 3, 5, 7. Answers.

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Sixth homework, due February 17, Page 158, 2 (careful, there's a typo, the first instance of 'medium run' should be 'short run'), 3, 4, 5. Answers

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7th homework, due February 24, question, and question 2, page 486. Answers

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8th homework, due March 2, questions 3, 4, pp. 307-308; question 1, 2 pp. 526-527. Answers.