ECN 101 UC Davis Winter 2016 Homework #3

ECN 101 UC Davis Winter 2016 Homework #3 Assignment must be uploaded to SmartSite as a pdf file or MS Word.It is ok to scan a hand-written document, but scan to pdf only (no jpeg or camera photo, etc.)Note: “Briefly explain” means a sentence or two.1) Suppose the government currently collects $3,000 billion ($3 trillion) in tax revenue each year. Suppose a Presidential candidate has declared they would like to see taxes reduced so that the amount of tax revenue collected is cut in half.a) Using the Keynesian Cross and assuming the marginal propensity to consume is 0.75 for all people, how much would GDP change by if taxes are reduced so that tax revenue is cut in half?b) Briefly explain what would happen to consumption if the taxes are reduced so that the tax revenue is cut in half.c) How much would the government have to spend if they want the tax reduction to not affect GDP at all? Show a calculation.2) Suppose the economy can be described by the following equations.(M/P)s = 400 + 2rY = C + I + GI = 250 – 25rC = 50 + 0.75(Y – T)(M/P)d = 0.20Y – 28r T = 300, G = 450P = 1a) Derive the IS curve.b) Derive the LM curve.c) Find the equilibrium real GDP and real interest rate for the economy.d) Find the level of consumption and investment in the economy.e) Suppose the government is worried about a recession and decides to cut taxes by 50. Calculate the effects of this policy.f) Using an IS/LM and AS/AD graph, show the effects of the policy change in part e) in the short- run.g) Briefly explain what happens to the interest rate, output, consumption, and investment in the short-run from the policy change in part e).h) Assuming the policy change in part e) ends up being a permanent change, briefly explain what happens to the interest rate, output, consumption, and investment in the long-run.3) There are some people that believe that the long-run trend of real GDP has permanently decreased as a result of the financial crisis and its aftermath. Let’s explore that issue in the context of the IS/LM and AD/AS model.a) One way to think of this that LRAS has decreased. Briefly explain how that would affect the short-run levels of GDP, interest rate, and price level. [Note: you can draw the IS/LM and AD/AS graph if you want, but a brief written explanation is all that is required.]b) Briefly explain in the context of the IS/LM and AD/AS model, what would happen to the long- run levels of GDP, interest rate, and price level if LRAS does permanently decreased.c) If you were in charge of monetary policy, given the decrease in LRAS, would it be preferable to enact a policy that holds the money supply constant or the interest rate constant (or does it not matter)? Briefly explain using the IS/LM and AD/AS model.4) Suppose the economy has the following Phillips curve.