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Consider the following information about an economy with a labor force
participation rate of 80%.
Labor force 500
Number of people employed 425
Number of discouraged workers 15
a. What is the population 15 years and older of this economy?
b. How many people are unemployed? What is the unemployment rate? .
c. If the discouraged workers joined the labor force, but total employment did
not change, what would be the new unemployment rate?
1. Compare the following concepts as they relate to Macroeconomic consumption and savings: I. Autonomous Consumption and Induced Consumption II. MPC and MPS III. Linear MPC and Non-Linear MPC IV. Saving and Dis-saving V. Permanent Income and Transitory Income VI. Liquidity constraints and Buffer Stocks
how to come up with the value of multiplier?
Comparing the impact in the IS-LM model for a closed economy of an expansionary monetary policy with an expansionary fiscal policy on investment spending the result is that:
If investment is very interest inelastic most of an income tax rate cut will be crowded out therefore central bank should always supplement a tax cut with an increase in money supply”. Comment on this statement with the help of IS-LM diagram and explain the adjustment process. Would your answer change if the price lend were allowed to change. Explain
Assume the money sector can be described as
money demand=(1/4)Y-10i
money supply=400
IS equation:Y=2000-40i
(a) if multiplier is 2 what is the effect of increase in government purchases by 200 on income and interest rate?
(b) can you determine how much investment is crowded out as a result of this increase in government purchases
(c) if money demand equation were changed to [money demand=(1/4)Y, how would your answer in (a) and (b) change?
Consider low-skilled workers in garment factories receiving guaranteed wage rate by the government. Explain what type of price control the wage rate is and how this would make workers better off?
2. Continue with the same equations,
What is the value of the simple multiplier (with taxes)
By how much does an increase in government spending of ∆G increase the level of income in this model, which includes the money market?
By how much does a change in government spending of ∆G affect the equilibrium interest rate?
3. How does an increase in the tax rate affect the IS curve?
How does the increase affect the equilibrium level of income?
4. Show that a given change in the money stock has a larger effect on output the less interest sensitive is the demand for money.
(b) How does the respond of the interest rate to a change in the money stock depend on the interest sensitivity of money demand?
The following equations describe an economy (think of C, I, G, etc as being measured in billions and i as a percentage; a 5 percent interest rate implies i = 5)
C = 0.8 (1 – t) Y
t = 0.25
I = 900 – 50i
G = 800
L = 0.25Y – 62.5.i
M / P = 500
What is the general definition of the IS curve?
What is the equation that describes the IS curve?
What is the equation that describes the LM curve?
What is the general definition of the LM curve?
What are the equilibrium levels of income and the interest rate?
Q.1 Consider the following information about a hypothetical economy:
1. Y = A(0.025K-0.5N)N
2. A=2/3
3. K=2000
4. N^s=-18+(18/5)w
5. C=200+(2/3)(Y-T)-300r
6. T=-75+(1/4)Y
7. I =100−100r
8. G =100
9. L = 0.5Y − 200i
10. M = 6300
11. π^e= 0.10
Now using this information, answer the following:
(i) Starting from the initial equilibrium position again, suppose that the capital stock increases by 170. What
will be the impact of this expansion on labour market equilibrium and aggregate supply of output?
Calculate values of all endogenous variables and give intuitive explanation of the results.
(j) Compare the equilibrium positions in (d) and (i) indicating all points.
(k) Suppose that Li → ∞ in Equation.9 of the model. How will it affect the shape of the money demand and
the LM curve. Will the monetary policy of part (e) have the same effect as calculated above or any
different? Explain using graphs and multipliers.
