1. Suppose the following equations characterize supply and demand in the labor market
model:
Ls = 2w + 30
Ld = 60 - w
Equilibrium occurs at an employment level L* and a wage w*, so that the labor market clears. That is, supply is equal to demand, Ls = Ld.
(a) What are the endogenous variables in the labor market model?
(b) Solve for the equilibrium values of these endogenous variables.
2. Now we add some parameter values to the labor market model:
Ls = a- x w + T
Ld = f - w
The parameters in this setup are a¯ , l¯ , and f¯. The parameter l¯ represents the number of hours workers would supply to the market even if the wage were zero. It, therefore, reflects the inherent amount of time people like to work. The parameter f¯, on the other hand, reflects the amount of labor the firm would like to hire if the wage were zero. It might be thought of as some inherent capacity of the firm (perhaps because the firm owns a given amount of land and capital that cannot be altered).
(a) What is the economic interpretation of a¯ ?
(b) What are the endogenous variables in this model?
(c) Solve for the equilibrium of the labor market. That is, solve for the endogenous variables as a function of the parameters of the model.
(d) If l¯ increases, what happens to the equilibrium wage and employment levels? Does this make sense?
3. By how much does GDP rise in each of the following scenarios? Explain.
(a) A computer company buys parts from a local distributor for $1 million, assembles the parts, and sells the resulting computers for $2 million.
(b) A real estate agent sells a house for $200,000 that the previous owners had bought 10 years earlier for $100,000. The agent earns a commission of $6,000.
(c) During a recession, the government raises unemployment benefits by $100 million.
(d) A new U.S. airline purchases and imports $50 million worth of airplanes from the European company Airbus.
(e) A new European airline purchases $50 million worth of airplanes from the American company Boeing.
(f) A store buys $100,000 of chocolate from Belgium and sells it to consumers in the United States for $125,000.
4. Consider an economy that produces oranges and boomerangs. The prices and quantities of these goods in two different years are reported in the table below.
|
|
2016
|
2017
|
% change,2016-2017
|
|
Quantity of oranges
|
100
|
105
|
|
|
Quantity of boomerangs
|
20
|
22
|
|
Price of oranges ($)
|
1
|
1.10
|
|
Price of boomerangs ($)
|
3
|
3.10
|
|
Nominal GDP
|
|
RealGDP, 2016 prices
|
|
RealGDP, 2017 prices
|
|
RealGDP, chainedprices(2017 benchmark)
|
(a) Fill in the missing entries.
(b) Calculate the inflation rate for the 2016-2017 period using the GDP deflator based on the Laspeyres, Paasche, and chain-weighted indexes of GDP.