Macroeconomics Answers

Consider two countries in West Africa that have the same quantities of labor (L = 400) and capital 

(K = 400), and the same technology (A = 100). The economies of the countries are described by 

the following Cobb-Douglas production functions: 

Country X: Y = AK^0.3L^0.7

Country Y: Y = AK^0.7L^0.3

a) Looking at the two production functions, which country has larger production? Explain

b) In which country is the Marginal Product of Labor larger? Explain

c) In which country is the real wage larger? Explain

d) In which country is labors share of income larger? Explain

The following equations describe an economy 

C = 200 + 0.25YD

I = 150 + 0.25Y – 1000r

G = 250

T = 200

(M/P)d = 2Y – 8000r

(M/P) = 1600

a) Derive the IS curve

b) Derive the LM curve

c) Solve for equilibrium output

d) Solve for the equilibrium interest rate

e) Solve for the equilibrium values of C and I, and verify the value you obtained for Y by 

adding C, I, and G.

f) Now suppose that the money supply increases to M/P = 1,840. Solve for Y, r, C, and I, and 

summarize the effects of an expansionary monetary policy.

Consider the effects of a government employment subsidy whereby the government paid 10 percent of the wages of newly hired workers. How would employment and output be affected by the program in the classical model? What would be the effect on the position of the aggregate supply schedule in Figure 3-6(Ch 3 Froyen)?

Suppose that, due for example to reconstruction after a war , the capital stock of a nation increases. Use the graphical framework of Figure3-4(CH 3 Froyen) to illustrate the effect that the increase in the capital stock would have an output, employment and the real wage in the classical model.

Provide examples of demand -side factors that would not affect the level of output and employment .

In microeconomics, we expect the supply curve for the firm to slope upward to the right when drawn against price .The classical aggregate supply curve is based on this microeconomic theory of the firm but is vertical .Why?

We termed the classical view of the labor market an auction market. What assumptions underlie this characterization ?

Suppose that the public's taste changes in such a way that leisure comes to be more desirable than commodities. How would you expect such a change to affect output, employment, and the real wage in the classical model ?

Explain the relationship between profit maximization condition and the labor demand as shown by equation MPNi=W/P?(Froyen CH 3 Eq-3.4)

Explain the relationship between inflation and unemployment both in the short run and long run.