Problem 1
The government decreases current taxes, while holding government spending in the present and
the future constant.
(a) Using diagrams, determine the equilibrium effects on consumption, investment, the real
interest rate, aggregate output, employment, and the real wage. What is the multiplier,
and how does it differ from the government expenditure multiplier?
(b) Now, suppose that there are credit market imperfections in the market for consumer
credit, for example due to asymmetric information in the credit market. Repeat part (a),
and explain any differences in your answers in parts (a) and (b).


Problem 2
Suppose that the unemployment rate is 5%, the total working age population is 100 million, and
the number of unemployed is 2.5 million. Determine (a) the participation rate; (b) the labor force;
(c) the number of employed workers; (d) the employment/population ratio