SECTION B: Basic problems. True or false, explain B2. [10 bonuses] If tax rates never change, fiscal policy cannot stabilize output. SECTION C: Complicated questions C3. For each of these shocks, say it changes the IS schedule and/or the LM schedule. (a) [10 bonuses] An increase in pensions fully financed via proportional taxes paid by working population (b) [10 bonuses] An expected future fiscal expansion (c) [10 bonuses] CB starts adjusting interest rates more aggressively to achieve greater stabilisation effect on output (d) [10 bonuses] Tougher banking competition C4. In 2010, having accumulated substantial government debt owned by foreigners and having a large budget deficit, Greece lost the confidence of its international creditors and was given a loan on condition that it embarked on substantial fiscal tightening. (a) [10 bonuses] Illustrate these changes, using the IS-LM diagram, recognizing that Greece is a Eurozone member (b) [10 bonuses] Suppose Greece left the Eurozone. What if anything would be different? SECTION D: Discussion D5. Recall the article 'India's policy India's currency reform was botched in execution' and problems C5 and D6 from Class #5. Consider a closed economy with sticky prices and wages in the short run, so that inflationary expectations are zero. Assume that consumption C depends positively on income Y and negatively on the interest rate while investment is fully exogenous (it does not depend on interest rates). All wealth is held by households as either bonds (the only interest bearing asset in the economy) or money and all money is cash. The Central Bank introduces a non-conventional policy instrument - a one-off tax on unspent wealth. (a) [10 bonuses] Consider first that a tax of rate t% is levied on any bonds held by households at the end of the year. How woud it affect positions of the IS and the LM schedules? (b) [10 bonuses] Suppose that the old currency can be exchanged into the new one only if a fee of t% is paid. How would this change to the monetary system affect the economy? Illustrate your answer using the IS-LM diagram