Econ 302 Exercise Set 3

THIRD TAKE-HOME EXERCISE SET [13 Points Total]      L. Tesfatsion
DUE DATE: Thursday, Feb 29, 9:30 A.M.          Econ 302/Spring 96

**PLEASE NOTE:  Exercise answers are to be turned in at the #beginning#
of class on the due date.  Late assignments will not be accepted---no
exceptions!  Students are encouraged to work #together# on these and
all future exercise questions.  However, each student is required
#separately# to pass in an answer sheet to minimize the danger of
"free-riding" and consequent disasters on the midterm and final exams!

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EXERCISE 3.1 [3 Points]:   Hall and Taylor, Chapter 4,
NUMERICAL Exercise Number 1, page 118. Be sure to justify your
assertions and to label graphs carefully.

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EXERCISE 3.2 [2 Points]:   Hall and Taylor, Chapter 4,
NUMERICAL Exercise Number 2, page 118. Be sure to justify your
assertions.

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EXERCISE 3.3 [3 Points]: Hall and Taylor, Chapter 6, NUMERICAL
Exercise Number 1, page 173. Be sure to justify your assertions
and to label graphs carefully if you make use of them.

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EXERCISE 3.4 [5 Points Total---1 point for Part (a) and 2 points
each for Parts (b) and (c)]: [Compare Hall and Taylor, Chapter 6,
ANALYTICAL Exercise Number 6, page 175.] Consider an economy
described by the following equations:

 (1)  Y  =  C  +  I   +  G  +  NE;
 (2)  C  =  a  +   b[1-t]Y ;
 (3)  NE =  g - mY ;
 (4)  G  =  tY   (balanced budget restriction on government)

Exogenous Variables:  I,  a,  b,  t,  where I,a,b,t are all
                      strictly positive and b and t are also
                      strictly less than 1.

Endogenous Variables: Y, C, NE, G

Please answer each of the following questions, being sure to justify your
assertions and to label graphs carefully.

(a) Explain carefully why G is #endogenous# in model (1)-(4).

(b) Determine an analytical expression for the #investment# multiplier
    for model (1)-(4).  Is this investment multiplier larger or smaller
    than in the case (covered in HT6) where G is exogenous? Provide
    a careful explanation for your finding.

(c) Suppose t increases.  Determine carefully whether the solution
    value for Y determined by model (1)-(4) increases, decreases,
    or stays the same in response to this increase in t.  Provide
    a careful explanation for your finding.