|Economics 3020: Intermediate Macroeconomic Theory||Fall 2017|
|Dale R. DeBoer||Assignment 2|
- During the 1980s the average rate of unemployment in Europe was high. Some economists claimed that this was the result of real wage rigidity due to union action. Assuming this is true (this is an assertion, but perhaps not the reality), show how real wage rigidity would lead to unemployment. What is the effect of this rigidity on aggregate output? Now suppose that a positive technology shock occurs (A in the production function increases in value). How would this alter employment, unemployment, and aggregate output?
- How would each of the following affect the full employment level of employment and output? Use a diagram (or more than one diagram) to explain.
- A large number of immigrants enter the country
- Energy supplies become depleted
- New teaching techniques improve the productivity of high school and college graduates
- A new law mandates the closure of unsafe physical capital goods
- The article “China Bleeds Foreign Exchange Reserves” discusses the outflow of financial capital from China. Under the assumption that at least a portion of these funds flow into the US, explain the likely impact of these flows on US savings rates. How might this impact growth in the US? Consider the Solow model in your answer.
- Suppose a technological improvement pushes up the value of A in the Solow production function. What is the effect on output and growth in the Solow model? Now suppose that the estimated elasticity of labor supply is 0.0. What is the impact of the increase in ‘A’ on the equilibrium level of employment?
- Suppose that the demand for imports increases. What is the expected effect of this change in demand on the equilibrium exchange rate? What would this change do to the level of domestic savings for an economy with a fixed demand for investment? Assume that the government budget deficit/surplus does not change.
- Suppose Susan has $1,000 in income this period, but no income in the next period (this is only a two period example so nothing happens after that). Demonstrate how Susan determines how much to save and how much to consume in both periods. How would her level of savings change if real interest rates increased?
- Komal has unfortunately contracted a deadly disease so she will only live for two more periods. This year she will earn $10,000 and next year she will earn $12,000. The interest rate on borrowing and savings is 10% per year. What does her budget constraint look like? Assume Komal wants to end her life with no remaining savings (unfortunately, she is alone in the world with no one to pass on an inheritance to) and her preferences are such that she has decided to live it up this year (borrow against her future earnings in the first period); show where her indifference curve must be positioned relative to her budget line. Now suppose that the interest rate rises to 20%. How would her budget line change? Demonstrating the income and substitution effects, show how her savings and consumption pattern is expected to change. Will her savings rate increase or decrease?
- Using a budget line/indifference curve model, show the effect of a tax cut on spending and savings decisions.
Economics 3020: Intermediate Macroeconomic Theory Fall 2017