Assume that prices and wages adjust rapidly so that the markets for labor, goods, and assets are always in equilibrium
What are the effects of each of the following on output, the expected real interest rate, and the current price level? (a) a temporary increase in taxes (b) a reduction in the effective tax rate on capital (c) an increase in expected inflation
(a) Under Ricardian equivalence, no effect on output, real interest rate, or price level. Without Ricardian equivalence, higher national saving means a lower expected real interest rate. Output is unchanged because of no change in labor supply or demand. The lower expected real interest rate increases real money demand, thus reducing the price level.
(b) The lower tax rate on capital increases desired investment, thus raising the expected real interest rate. No effect on the labor market, so output is not changed. The higher expected real interest rate reduces real money demand, thus increasing the price level.
(c) The increase in the expected inflation rate has no effect on the labor market or goods market, so output and the expected real interest rate do not change. The higher expected inflation rate reduces real money demand, thus increasing the price level.
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Assume the long-term real interest rate is 4% and the expected inflation rate is 5%
If the Fed decreases the money supply and as a result, the expected inflation rate decreases to 2%, then based on the Fisher effect, the long-term real interest rate will ________ and the long-term nominal interest rate will ________. A) fall to 4%; rise to 7% B) remain at 4%; fall to 6% C) fall to 1%; fall to 6% D) fall to 6%; remain at -1%
The opportunity cost of going to college includes the costs of tuition, books, fees, and
a. nothing else b. housing c. housing and food d. earnings forgone by not working full-time e. housing, food, and earnings forgone by not working full-time