02 Jun Question Question1 The following equations describe planned spending for a closed economy.
Question
Question1 The following equations describe planned spending for a closed economy.
(a) Write out the equation for the private saving function for this economy.(1 mark)
(b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate equilibrium output for this economy. Show how you obtained your figure.(2 marks)
(c) Calculate the size of the budget surplus at equilibrium output.
(d) What is the size of the balanced budget multiplier for this economy?(1 mark)
Question 2
(a) Write out the equation for the private saving function for this economy.(1 mark)
(b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate equilibrium output for this economy. Show how you obtained your figure.
(2 marks)
(c) Suppose the government introduces an expansionary fiscal policy by increasing government purchases by 40. Calculate the new equilibrium output.(1 mark)
(d) Explain how the actual effect of the expansionary fiscal policy in (c) may be a level of output less than what was calculated?
Question 3
(a) Write out the equation for the private saving function for this economy.(1 mark)
(b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate equilibrium output for this economy. Show how you obtained your figure.
(2 marks)
(c) Show in a diagram and explain the effect of an increase in the marginal tax rate to 0.3. Calculate the new equilibrium output.(2 marks)
(d) Explain how the actual effect of the increase in the marginal tax rate in (c) may be a level of output less than what was calculated?
Question 4
Consider the following model for supply and demand of workers (100,000’s) in the aggregate labour market, wherewis the real hourly wage.
(a) Calculate and state the equilibrium real wage and level of employment and illustrate your answer on a diagram.(2 marks)
(b) Suppose that the labour force increases by 100,000 (potential) workers and that the real wage remains fixed to its level in part (a). Calculate the levels of employment, unemployment and the labour force after the change and illustrate your answer on a separate diagram. Explain.(3 marks)
Full-employment output is the amount of output produced by firms with employment determined by the labor demand curve at the point where the marginal product of labor equals the efficiency wage. A productivity shock does not lead to a change in the efficiency wage, since it does not affect work effort. But it does affect the marginal product of labor, so employment changes. A beneficial productivity shock, for example, leads to an increase in employment. Both the employment increase and the increase in productivity lead to an increase in full-employment output. Labor supply changes have no effect on the efficiency wage or employment; they simply affect the amount of unemployment. So they have no impact on full-employment output. Unemployment will increase as the demand for labour will fall and supply will increase.
Diagram in snapshot
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