Economics 2152A/B Chapter Notes - Chapter 5: Real Wages, Lump Sum, Budget Constraint

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17 Oct 2013

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One-period economy (borrowing and lending is not possible) Ns = nd at an equilibrium wage rate w* and equilibrium labour amount n* T: lump sum tax: government determines how much of the consumption good it wants and takes from the production (y, exogenous (determined outside the model); amount is not determined by the consumer. As opposed to endogenous (determined by the model) A variable that appears on the x or y axis is endogenous. Surplus or deficit is not possible because this is a one-period economy. All agents are price takers (no one is large enough to affect the market price: the only price is the real wage rate. Both firms and consumers face this price, and clears the labour market. Production possibility frontier (ppf: technical relationship between c and l, determined by shifting the mirrored production function down by g, g is below the origin because government takes away consumption goods from consumer.

Related Questions

Country A is located on a small island that is isolated from the outside world. The country
has one representative consumer, whose preference is represented by:
U(c, l) = ln(c) + ln(l)
There is one representative fi rm in the economy which is owned by the consumer, it produces
one type of good that can be used for consumption or government expenditure using capital
and labour as inputs. The fi rm owns the capital it uses and it's production technology is
represented by
F(K;N) = zK^aN^1-a
where z is the total factor productivity, and a is the capital share of income. The fi rm pays
all of its profit back to consumer as dividend.
The government of country A spend a predetermined G amount of goods to provide public
services, and it taxes consumer through a lump-sum tax t to finance the expenditure. the
government's budget is balanced:
G = t
Now, suppose that the firm cannot change its capital stock, or improve its production technology in the short period, such that z and K are given.
(a) When describing this economy as an macroeconomic model, what is the set of exogenous
variables? What is the set of endogenous variables that can be determined given the set
of exogenous variables using the concept of Competitive Equilibrium?
(b) Defi ne the competitive equilibrium for this economy, be specific about what it is, what
conditions have to be satisfied who solves what problem and etc.
(c) List the set of equations that will be used to determine all of the endogenous variables.
Which four of these endogenous variables are essentials, such that once you know these
four, all other endogenous variables can be obtained easily?
(d) Write down the four equations that can be used to solve for these four essential endogenous variables, and describe where do they come from. Describe in details the steps of
how would you solve for the competitive equilibrium (without actually solving for it ).
(e) Setup the Social planner's problem for this economy. What is the marginal condition
that pins down the planner's choices.
(f) Now, describe what would happen to c, l, and w if the firm had more capital, such
that Knew > Kold.

Assume production in an economy takes place according to Y = 200-L

and that labor is supplied according to L* = (W/P)^2 where W is the nominal wage and P is the price level meaning that W/P is the real wage.

There is no government in this economy and so G = T = 0. Consumption is given by: C = 600 + 0.5Y - 500r and investment by: I = 500 - 500r

Finally, money demand is even by Md P = Y - 2000r In this question we solve for equilibrium in period one. Assume that in this period the economy is in long-run equilibrium.

(a) Find the equilibrium real wage, level of employment, and output for this economy.

(b) Assume that the money supply is given by M = 1800 and find the equilibrium real interest rate, levels of consumption and investment, the equilibrium price level, and the nominal wage.

cerisesnake518

Short answer: Answer each of the questions in Section B. Answers should typically be no more than 2-3 sentences in length.

1. In the Mundell-Fleming model, what are the two endogenous variables that appear in the goods-market equilibrium condition (after substituting in all relevant functions, e.g., C = C(Y ? T), etc.)? How does this compare to the case in the (closed economy) IS-LM model? Be sure to explain the reason for any differences

2. Briefly describe how âdebt deflationâ works; that is, how this mechanism might cause an unexpected fall in the price level to produce a large fall in output (e.g., in the Great Depression).

3. Consider the IS-LM model, and suppose G increases by ?G units. In general equilibrium, does output increase by more, less, or the same amount as ÂµG Ã ?G (where ÂµG is the government spending multiplier)? Be sure to explain why this is the answer.

Economics 2152A/B Chapter Notes - Chapter 5: Real Wages, Lump Sum, Budget Constraint

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