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Price level and the rate of interest

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1. If the government decides to tighten spending by buying bonds, what are the implications for aggregate demand in the classical case? How does this differ if the government chooses to reduce spending by controlling the printing of money?

2. Within the classical model, analyze the effects of an increase in

(a) lump-sum taxes;

(b) marginal income tax rate.

Consider effects on real output, the price level and the rate of interest. Consider cases when the increased revenue produced by the tax increase results in a decline in bond sales to the public and when it results in lower money creation.

Reference no: EM132506934

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