Question

Question 1

Consider the employment search model (in Macroeconomics)

If the matching function is given by:

M=5·A^0.25·Q^0.75

And the following values:

a=.5, Z=50, b=20, K =15

Find the unemployment rate.

Find the real wage.

Find GDP.

Question 2

Suppose the government introduces a benefit of $10,000 to be paid to every adult, regardless of whether or not they seek employment.

Using the search model, carefully explain how this will affect the equilibrium wage rate, the unemployment rate, and GDP.

How is this policy different than an increase in unemployment benefits?

Question 3

Suppose the government imposes a 25% tax on a worker’s income. Using the search model, explain how this affects the equilibrium wage rate, the unemployment rate, and GDP.

Answer 1

Ans1. Question Incomplete.

Ans2. Due to the monetary benefit given by the government to public, the wage setting curve will shift towards right and due to this unemployment rate and natural rate of unemployment will increase. Equilibrium wage rate will increase and thus GDP will increase.

Ans.3 Due to the 25% tax policy imposed by the government on workers income, the unemployment rate will increase as people are less willing to work and equilibrium wage rate will also fall and thus will have a decreasing effect on GDP.