• February 2021
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1) Suppose you are working for the Bureau of Labor Statistics, and are tasked with understanding the labor market of the US. You know that the marginal product of labor in the economy is given by MPN = 0.002(16,000 - N), while the supply of labor is 1000+1000w. (a) Find the market-clearing real wage rate and level of employment for the US. (b) Suppose that the US government ran a huge surplus and decided to give everyone a tax refund in a lump sum transfer. This leads to wealth to rise in the US, and the supply of labor reduces to 500+1000w. What happens to the wage rate and employment under this scenario? (c) Suppose that now (if after wealth has risen as in part b), Microsoft has released a new version of Windows that is free, easy to use, and increases everyone’s productivity in the US. This productivity shock increases the marginal product of labor to MPN = 0.0025(16,000 - N). What happens to the wage rate and employment?

2) In CountryA the economy can be described in a series of multiple equations, where the desired consumption is Cd = 100 + 0.8Y - 500r - 0.5G, and desired investment is Id = 10 500r. Real money demand is Md/P = Y - 2000i. Other variables are πe = 0.05, G = 200, = 1000, and M = 2100. (a) Find the equilibrium values of the real interest rate, consumption, investment, and the price level for CountryA. (b) Suppose that the Central Bank of CountryA decides to increase the money supply to 2800. Find the new equilibrium values of the real interest rate, consumption, investment, and the price level. (Assume that the expected inflation rate is unchanged.) (c) Assume that the government of CountryA is worried that their native-born citizens are losing their jobs to immigrants. Therefore, the government passes tougher immigration laws that reduce the working-age population. Use the IS-LM model to determine the effects on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level. For full credit you must draw the graph and explain in words.

3) In 1987 Wayne Gretzky played for the Edmonton Oilers and was the highest paid player in the NHL earning \$717,250 USD per year. In 2015, the highest paid player in the NHL, Shea Weber, earned \$14,000,000 USD per year. Suppose the CPI index was 111.2 in 1987 and 233.7 in 2015 (base year = 1982-1984). Who had the larger real earnings, Gretzky or Weber (you must show all your work for full credit)?

4) A country has the per-worker production function yt = 6(kt)1/3 where yt is output per worker and kt is the capital-labor ratio. The depreciation rate is 0.1 and the population growth rate is 0.1. The saving function is St = 0.1Yt, where St is total national saving and Yt is total output. (a) What is the steady-state value of capital-labor ratio? (b) What is the steady-state value of output per worker? (c) What is the steady-state value of consumption per worker? (d) Assume government tax policies change to encourage a higher saving rate. How would this affect the steady-state values of the capital-labor ratio, output per worker, and consumption per worker? For full credit you must draw the graph and explain in words.

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