Question

To answer these questions use the neoclassical model.. For simplicity assume (as Mankiw does) that labor supply is perfectly inelastic with respect to real wage and that private savings does not depend upon the real interest rate.

1. The Labor Market Suppose that an earthquake destroys part of the capital stock. Predict what will happen to

(1) total production,

(2) the real rental rate of capital, and

(3) the real wage.

For simplicity, assume that the size of the population is unaffected.

Answer #1

When the capital is stock is reduced and the population of worker is not changed, then capital per worker will fall. This indicates that the marginal productivity of capital will increase. As capital becomes more productive there will be an increase in the demand for capital and a decrease in the demand for labour.

This will reduce the real wage rate and increase the real rental rate of capital as a result. Total production may or may not change depending upon the number of workers and amount of capital the nation has.

1. Use the neoclassical theory of distribution to predict the
impact on the real wage and the real rental price of capital of
each of the following event:
a. A wave of immigration increases the labor force.
b. An earthquake destroys some of the capital stock.
c. A technological advance improves the production function.
d. High inflation doubles the prices of all factors and outputs
in the economy.

Q2. Use the neoclassical model of investment to explain the
impact of each of the following on the rental price of capital, the
cost of capital, and investment: (15 points) i. Anti-inflationary
monetary policy raises the real interest rate. ii. An earthquake
destroys part of the capital stock [this was a question of Quiz 2].
iii. Immigration of foreign workers increases the size of the
labour force

Labor & Loanable Funds Together
“real” side of the neoclassical model.
Suppose that there is an exogenous increase in productivity.
(For now, that means that given amounts of labor and capital can
produce more output.) Predict what will happen to
(1) real wages,
(2) total production,
(3) employment, and
(4) the real interest rate.

1. A Supply Shock
Mankiw motivates Question 8 in Chapter 14 of the text as
follows: “Some economists believe that taxes have an important
effect on the labor supply. They argue that higher taxes cause
people to want to work less and that lower taxes cause them to want
to work more. Consider how this effect alters the macroeconomic
analysis of taxes.”
Here is my version of the question: Suppose taxes are cut.
Predict what should happen to income, interest...

A) what variables adjust in a neoclassical model to ensure
demand equals supply in the goods market?
(real interest rate, price level, real rental rate of capital,
real wage)
B) If nominal GDP grew at a rate of 7% and deflator rose just 3%
then real GDP increases or decreases by what?
C)computing real GDP uses (quantities, expenditure weights,
prices, both price and quantities, depreciation)
D)if the personal production function is Y=3k^(1/2) and the rate
in which is is saved...

Let us assume a neoclassical economy with two factors of
production: Capital and Labor. Y=AK*2/3L*1/3. a) (5 points) Derive
an equation for the marginal product of labor. b) (5 points)
Suppose that immigration increases the labor force by 20 percent.
How much does the rental price of capital change? c) (5 points)
Given the equilibrium nominal wage and price level, W = 4 and P =
2, and A = 8 and K = 8 find the amount of labor,...

1. Labor Market
Consider an economy with production function given by Y =
AK0.5L0.5 where A is the total factor productivity (TFP), K is the
capital stock and L is the labor input. For simplicity assume
capital is fixed and equal to 1. Assume A=150.
Write the firm’s problem of choosing labor demand. Derive the
demand for labor as a function of the real wage.
Assume labor supply is inelastic and fixed at L̄ = 100. Find the
equilibrium values...

Consider the labor-leisure choice model. Assume that the labor
supply elasticity with respect to after tax wages is 0.15. Assume
that individuals currently pay a 70% marginal tax rate on wage
income. The government plans to increase the marginal tax rate in
order to increase tax revenue. Will this work? Explain.

Assume that all prices are perfectly flexible and there is
complete information. Use an AD/AS diagram to model the goods
market, a labor demand/supply diagram to model the labor market,
and the loanable funds diagram to model the financial market.
Assume that in addition to the real interest, consumption depends
on current disposable income and the present value of future
disposable income. Speculate what would happen in the current time
period to equilibrium output, prices, real interest rates, savings
(and...

For the following 5 questions, use the simple Solow model
where
For all questions assume the rate of depreciation on capital,
δ=0.04. Use the other parameters given to answer the question, with
the noted abbreviations:
Share of income paid to capital, α
Rate of savings, s
Rate of population growth, n
1.
For the following parameter values determine the steady-state
consumption
=.5
=.2
=.02
2.
For the following parameter values determine the steady-state
k*
α=.5
s=.1
n=.03
3.
For the...

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