Question #2 [75 points) Use a graph of the goods market to show how the equilibrium changes in response to the following situations. For each situation, explain briefly what you show on the graph. Part 2a. (15 points) Suppose there is a tax cut for individual consumers in the current period, and that consumers are "myopic" so that they ignore any possible increases in future taxes. Assume there is no change in government spending and assume that consumers do not face borrowing constraints. Draw a graph of the goods market to show how this tax cut will affect the equilibrium. Briefly explain your graph. Part 2b. [15 points) Suppose there is a boom in the stock market and households feel wealthier. Assume the boom in the stock market does not affect firms' perceptions about the future marginal product of capital and assume that consumes do not face borrowing constraints. Notice also that the boom in the stock market does not affect current income (GDP), but it does increase wealth. Draw a graph of the goods market to show how this stock market boom will affect the equilibrium. Briefly explain your graph. 1 Part 2c. [15 points] Suppose there is an increase in depreciation allowances. In other words, firms can discount a higher depreciation rate from profits, with results in lower corporate profits and lower corporate taxes. Draw a graph of the goods market to show how this increase in depreciation allowances will affect the equilibrium. Briefly explain your graph. Part 2d. [15 points) Suppose the country discovers large natural gas deposits. As a result, households expect having larger future income (y), and firms expect a higher future marginal product of capital (MPK). Assume consumes do not face borrowing constraints. Assume current income is not affected. Draw a graph of the goods market to show how this discovery of natural gas reserves will affect the equilibrium. Briefly explain your graph. Part 2e. [15 points) Suppose that there is change in the age structure of the population of a country, with people in ages 40 to 65 representing a higher fraction than before. People ages 40 to 65 tend to save more than those in other ages because they are saving for retirement. Assume current income and future income are unchanged. Draw a graph of the goods market to show how the higher share of people ages 40 to 65 will affect the equilibrium. Briefly explain your graph. Question #2 [75 points) Use a graph of the goods market to show how the equilibrium changes in response to the following situations. For each situation, explain briefly what you show on the graph. Part 2a. (15 points) Suppose there is a tax cut for individual consumers in the current period, and that consumers are "myopic" so that they ignore any possible increases in future taxes. Assume there is no change in government spending and assume that consumers do not face borrowing constraints. Draw a graph of the goods market to show how this tax cut will affect the equilibrium. Briefly explain your graph. Part 2b. [15 points) Suppose there is a boom in the stock market and households feel wealthier. Assume the boom in the stock market does not affect firms' perceptions about the future marginal product of capital and assume that consumes do not face borrowing constraints. Notice also that the boom in the stock market does not affect current income (GDP), but it does increase wealth. Draw a graph of the goods market to show how this stock market boom will affect the equilibrium. Briefly explain your graph. 1 Part 2c. [15 points] Suppose there is an increase in depreciation allowances. In other words, firms can discount a higher depreciation rate from profits, with results in lower corporate profits and lower corporate taxes. Draw a graph of the goods market to show how this increase in depreciation allowances will affect the equilibrium. Briefly explain your graph. Part 2d. [15 points) Suppose the country discovers large natural gas deposits. As a result, households expect having larger future income (y), and firms expect a higher future marginal product of capital (MPK). Assume consumes do not face borrowing constraints. Assume current income is not affected. Draw a graph of the goods market to show how this discovery of natural gas reserves will affect the equilibrium. Briefly explain your graph. Part 2e. [15 points) Suppose that there is change in the age structure of the population of a country, with people in ages 40 to 65 representing a higher fraction than before. People ages 40 to 65 tend to save more than those in other ages because they are saving for retirement. Assume current income and future income are unchanged. Draw a graph of the goods market to show how the higher share of people ages 40 to 65 will affect the equilibrium. Briefly explain your graph