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problem 1: Suppose the government’s goal is to reduce the unemployment rate. Some legislators propose that the government should give a subsidy s to any firm that hires a worker. Some other legislators argue that it would be more effective to simply pay consumers to stay home rather than searching for work, that is, anyone who chooses not to participate in the labor force should receive a payment q. Which policy is more effective in achieving the government’s goal? describe using the DMP model, with the aid of diagrams. [In your answer, do not concern yourself with how the subsidies from the government are financed].

problem 2: Adapt the DMP model to include government activity as follows. Suppose that the government can operate firms, subject to the same constraints as private firms. In particular, the government must incur a cost k to post a vacancy. Supposing that the government operates G firms, then the number of matches in the economy as a whole is M = em(Q, A+G), where A is the number of private firms that choose to post vacancies. Assume that the government pays the same wages as do private sector firms. Determine the effects of G on the unemployment rate, the vacancy rate, the labor force, the number of private firms, the total number of firms (private and government-run), aggregate output, and labor market tightness. describe your results.

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M94642

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