Question

**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.

Answer #1

Real wage rate at the equilibrium is the marginal productivity of labour. An increase in the productivity will increase the real wage rate therefore.

Total production increases because the productivity of both labour and capital have increased.

There might be a increase in the number of workers employed because the productivity of each worker has increased so the firm might be demanding more labour to produce a given amount of output. Real interest rate will increase as the demand for funds by industries will increase.

Using the loanable funds framework, speculate what would
happen to equilibrium real interest rates, national savings,
investment, and consumption if:
a. Households expect a dramatic increase in productivity in
the future (even though current productivity is unchanged) that
will boost future incomes and the future marginal products of
capital.
b. Uncertainty about future taxes and regulations results in
cutting back on firms’ plans to build new production
facilities
c. Government spending (financed with taxes so that the budget
remains balanced)...

To answer these questions use the neoclassical model.. For
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(2) the real rental rate of capital, and
(3) the real wage.
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According to the real
intertemporal model, suppose there is an increase in the current
capital stock. If so, we would expect
A.
real wages to rise and
real interest rates to fall.
B.
real wages to fall and real interest
rates to rise.
C.
real wages and real interest rates to
both rise.
D.
real wages and real interest rates to
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market, a labor demand/supply diagram to model the labor market,
and the loanable funds diagram to model the financial market.
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on current disposable income and the present value of future
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Suppose an economy's production is defined by the following
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2/3. Suppose further that the economy wide supply of
capital and labor are given as 125,000 and 1,000 respectively. If
congress imposes a minimum wage of 11 units of output in this
economy, what will be the likely result of this action?
a. An unemployment rate of 25%
b. An unemployment rate of 10%
c. Full employment, but lower output
d. An unemployment rate of 50%

Suppose the economy's real interest rate is reduced. What
initial effect would this have?
Suppose there is a major increase in federal spending for health
care (with no increase in taxes). What initial effect would this
have?
Suppose personal income taxes are reduced by 10% (with no change
in government spending). What initial effect would this have?
Suppose labor productivity increases (with no change in nominal
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factor productivity
will be
high
. The monetary authority targets the interest rate to the long
run
equilibrium le
vel, and uses money supply to keep the interest rate at the
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What will happen to the labor employment, real wage, output,
consumption,
investment, average labor productivity, and money supply?
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Write the firm’s problem of choosing labor demand. Derive the
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1) The slope of the supply of loanable funds curve represents
the
Select one:
a. positive relation between the real interest rate and
investment.
b. positive relation between the real interest rate and
saving.
c. positive relation between the nominal interest rate and
investment.
d. positive relation between the nominal interest rate and
saving.
2) In Imaginaryland, the supply curve of loanable funds is Qs =
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21. Suppose the economy is an inflationary gap. According to
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Select all that apply:
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AS to shift to the left.
Unemployment will put downward pressure on wages, causing AS to
shift to the right.
The economy will return to its potential levels of output.
The economy will remain in the inflationary gap for a prolonged
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