Homework 3-

Question 1: Use the following relationships to fill in the table below:

GDP = C + I + G + (X - M)

KI = M - X

I = Private Saving + Government Saving + (M-X)

I = NS + KI

Government Saving = T - TR - G

where

GDP = gross domestic product

C = Consumer spending

I = Investment spending

G = government spending

X = exports

M = imports

KI = capital inflow

NS = national saving

T = taxes

TR = transfers

Question 2: Suppose that the demand for labor in Fantasyland is given by the equation w = 1000 - 2L while the supply of labor in Fantasyland is given by the equation w = 100 + 2L where w is the wage per year and L is the number of labor units hired per year.

a. What is the equilibrium level of employment per year and the equilibrium wage rate in Fantasyland?

b. According to the Classical view, what will happen if the wage rate in Fantasyland is currently at $500?

c. If the aggregate production function is: Output = 50 - (2500)/(50 + number of Workers). What is the full employment output for this economy?

d. If we define labor productivity for Fantasyland as output divided by the level of labor used in a year, what is the value of labor productivity for Fantasyland if it produces the full employment level of output?

e. What is the value of labor productivity when the economy employs the level of workers that corresponds to an annual wage of $500?

f. Sketch a diagram illustrating the relationship between the level of output in the economy and the level of employment in the economy.  Put output on the vertical axis and employment on the horizontal axis.  Draw in two lines that illustrate labor productivity when the annual wage is $500 and when the economy produces at the full employment level of output.

Question 3: Using a diagram of the labor market and a diagram of an aggregate production function, illustrate and verbally describe what happens for the following cases. Be sure to identify what happens to the level of employment, the wage rate, the level of production, and labor productivity.

a) The supply of labor shifts to the right, holding everything else constant.

b) There is an increase in physical capital holding everything else constant.

c) There is a decrease in human capital holding everything else constant.

d) The demand for labor shifts to the right, holding everything else constant.

Question 4: You have the following information about the closed economy in Macroland for the year 2006:

Private Saving = $1000

Planned Investment = $300

Government Purchases = $900

Taxes = $200

Transfers = $0

a. What is the level of national saving for this economy?

b. What is the level of government saving for this economy?

c. Is there a budget deficit or surplus in this economy? Compute its value.

d. Compute the quantity of funds supplied and the quantity of fund demanded.  Does the loanable funds market clear in this economy?

e. Does Say's Law (total output = total expenditure) hold in this economy?  Why or why not?

Question 5: The country of Badgerland produces only one good: Bucky Badger Pie.  The following information is available:

Output: 300,000,000 units

Employment: 2.5 million people

a. What is the productivity of labor in Badgerland?

b. Suppose the capital stock in Badgerland decreases holding everything else constant.  What will happen to labor productivity assuming employment stays constant at 2.5 million people?

c. Suppose with the decrease in capital stock that the level of output produced falls to 250,000,000 units.  Assuming employment is unchanged, what is the value of labor productivity now?

d. Suppose capital stock was initially equal to 10 million units.  If the level of capital decreases to 7.5 million units, what will the change in capital per worker equal?