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Final

smpl_final_Ans2013.pdf

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Department
Economics
Course
ECON 2400
Professor
All Professors
Semester
Fall

Description
YorkUniversityDepartmentofEconomicsAPECON2400IntermediateMacroeconomicTheoryIProfessorTassoAdamopoulosAnswerstoSampleFinal1AcompetitiveequilibriumandthesocialplannersproblemaretwodierentarrangementstoallocateresourcesinaneconomyInacompetitiveequilibriumeconomicagentsareselfinterestedandaimtomaximizetheirownwelfaresubjecttosomeconstraintsThepricestheyfacesignalmarketconditionsandthesepricesadjusttoregulateequalityofsupplyanddemandineachmarketForexampleconsumersmaximizeutilitysubjecttotheirbudgetconstrainttakinggoodsandfactorpricesasgivenThesocialplannerisacticiousentitythatdoesnotdealwithmarketsbuthascompleteknowledgeandcompletecommandovertheeconomyfacingthesamepreferencesandproductionconstraintsthatconsumersandrmswouldfaceTheobjectiveoftheplanneristomaximizesocialwelfaresubjecttowhatistechnologicallyfeasibleinthiseconomyTheallocationreachedbytheplanneristhesociallyoptimaloutcomeitisthebestpossibleallocationforthiseconomyIftherearenodistortionsthecompetitiveequilibriummarketsolutionwillreplicatethesociallyoptimaloutcomethisistherstwelfaretheoremThetheoremdoesnotholdinthepresenceofdistortionsForexampleifthereisanexternalityanactivityforwhichaconsumerorrmdonottakeintoaccountallcostsbenetsoftheactivityordistortingtaxesegaproportionaltaxonwageincome2ThestatementisfalseasitisnotalwaystrueYoucanthinkoftaxrevenuefromincometaxesasbeingtheproductofthetaxratetandthetaxbasethequantityoftheobjectsbeingtaxedhereworkNsREVtNsIfNwasconstantthenitwouldbetruethatincreasingtwouldincreaseREVuptot1youcannottaxmorethan100HoweverlaboursupplyisitselfafunctionofthesstaxrateieNNtAslongasthesubstitutioneectdominatestheincomeeectahighertaxratereducesthelaborsupplyThereforeincreasingthetaxratetoomuchscouldresultinasucientlylargedropinNtthatREVdropsinsteadofincreasesInotherwordsyoucanenduponthewrongsideoftheLaercurveThekeypointisthatovertaxingcandisincentivizetheactivityyouaretaxing13SalesfromonebusinesstoanotherareeitheranintermediategoodoraninvestmentgoodAnintermediategoodisproducedandthenusedasaninputinanotherproductionprocessduringthesameyearitispurchasedegtiresonanewcartomatoesintomatopasteAninvestmentgoodisdurableieyouuseitformanyperiodstocomeegafactoryamachineetcAsubtleexampleacarpurchasedbyarmforownuseisaninvestmentgoodbutacarleasedbyarmforitssalesforceisanintermediateserviceIntermediategoodsarenotcountedintheNIEAseparatelybecausetheyarealreadycountedinthevalueofthenalgoodforwhichtheywereusedtoproduceIncludingthemagainwouldbedoublecountingInvestmentgoodsappearunderinvestmentexpendituresIintheexpenditureapproachoftheNIEAietheyaddtotheeconomyscapitalstock4LabourmarkettightnesscaptureshowdicultitisforrmstondworkersforhiringAlowunemploymentrateimpliestightlabourmarketieitisharderforrmstondworkersbecausethereisasmallerpoolofpeoplelookingTherearetworeasonstheunemploymentratemightmismeasurelabourmarkettightnessFirstitdoesnotcountdiscouragedworkersthatisworkerswhowantajobbuthavestoppedlookingbecausetheythoughttheycouldnotndoneRememberthisgroupofindividualsisnotincludedintheunemploymentrateorthelabourforcestatisticsIfforexampleduringaprolongedrecessionsomepeoplewhoareoutofworkforalongtimedecidetodropoutofthelabourforcetheunemploymentratemightgodownbutthisdoesnotmeanthatlabormarkettightnessincreasedSecondtheunemploymentratedoesnotcapturehowintensivelytheunemployedaresearchingforworkIfpeopleactuallysearchlessintensivelywhentheunemploymentrateishighegtheythinktheydonothaveagoodchanceofgettingajobandmoreintensivelywhentheunemploymentrateislowegtheythinkprospectsarebetterthenlabourmarkettightnessmightgointheoppositedirectionitisharderforrmstondworkerswhentheunemployedarenotsearchinghard5aGDPusingproductapproachNeedtocalculateVAforeachrmVA500005000CORNVA450015003000SYRUPGDP500030008000bGDPusingexpenditureapproachHereyouhavetoaddupthecomponentsCI2
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