Final exam

Question 1

Given production function Y = AK^.25 * L^0.75, how do you get the demand curve for L.d?

Answer 1

Start with getting the marginal product of labor (deriv wrt L). Set that equal to the W/P. Then solve for the L alone.

Question 2

Given labor supply is [(1-T) * w/p]^2, derive equation for the equil real wage. This is also given we have the L.d equation.

Answer 2

So we set the L.s equal to the L.d, and then pretty much just solve for the w/p again.

Question 3

What are 3 key variables fo rmeasuring the macreconomy?

Answer 3

RGDP, unemployment, and inflation

Question 4

short run fluctuations are callled;

Answer 4

business cycles

Question 5

what is fiscal policy?

Answer 5

government adjusting taxes and spending to affect economy

Question 6

what is monetary policy?

Answer 6

central bank adjusting money supply to affect economy with things like interest rates and bonds.

Question 7

list the 3 functions of money

Answer 7

medium of exchange, a store of value, and a unit of account.

Question 8

if someone receives a one time bonus of X, how would they increase consumption and to what degree (relative to X). maybe toss in how i rates affect it

Answer 8

they would increase consumption, but they would increase consumption strictly less than the amount they got (X). If i rates are higher, they’d save more of it and consume less.

Question 9

if your employer offers you double your wage to work an extra shift what is the income effect of this on your labor supply?

Answer 9

there is no income effect, because this is a once off effect, so your income is not actually increasing or decreasing.

Question 10

what is the income effect?

Answer 10

the income effect says that when your income increases, you have more overall money, so you will ‘buy’ more leisure time as you will increase consumption of every good.

Question 11

what is the substitution effect?

Answer 11

this says that when your wages rise, it becomes more expensive to substitute work time with leisure time, so you do less of that trade-off substituting, so you actually work MORE overall.

Question 12

a higher real wage does what to leisure:

Answer 12

it makes it more expensive

Question 13

in the last 40 years, what is the largest driver of increasing fed govt spending?

Answer 13

welfare for old people (transfers)

Question 14

why might an increase in tax rates on labor lower the capital utilization?

Answer 14

raising taxes would decrease the L.s, so the MPK would decrease, and number of workers who can use the K decreases, so the overall capital utilization decreases.

Question 15

a temporary drop in tax rates on labor income will cause you to work more or less and why?

Answer 15

you will work more, because leisure is more expensive right now but will be cheaper later, so you work a lot now, and save to buy leisure time later.

Question 16

what happens to money demand if inflation rises?

Answer 16

money demand decreases, since you want less of your money in cash if the cash is losing value (i.e. due to inflation)

Question 17

what happens to money demand if real interest rates fall?

Answer 17

money demand increases. look at if interest rates fell to 0, then there’d be no reason to invest and NOT have it be cash/liquid, so demand for money goes up.

Question 18

what happens to money demand if price level increases?

Answer 18

money demand would increase, since you would need more cash on hand in order to buy the stuff

Question 19

what happens to money demand if RGDP falls?

Answer 19

money demand would decrease, since there’s less money per person overall, so less demand for cash.

Question 19

what happens to money demand if transcation costs rise?

Answer 19

money demand increases, since if there’s a flat fee for pulling money out of ATM, you’ll want to pull out more at any given time so that you lower the % of that fee.

Question 20

what does the money market look like before and after increase in supply?

Answer 20

M.s is a vertical line, and M.d is a positive sloping line going through it, where the Price level is the y axis and the Q is the x axis.

Question 21

how does federal reserve decrease the supply of money?

Answer 21

by selling bonds (issuing bonds), that lowers the Money supply

Question 22

in the solow model, how will a lower savings rate affect the steady state of RGDP per capita?

Answer 22

decrease, since savings rate is a large factor in the steady state rgdp per cap

Question 23

in the solow model, how will a higher population growth rate affect the steady state of RGDP per capita?

Answer 23

decrease, since high population growth decreases economic prosperity (look at solow)

Question 24

in the solow model, how will a lower depreciation rate affect the steady state of RGDP per capita?

Answer 24

increase, since depreciation is bad for kapital and bad for pretty much everyone, decrease depreciation and things must get better.

Question 25

in the solow model, how will a high population affect the steady state of RGDP per capita?

Answer 25

no change, since its just the pop growth rate that matters, not the starting (because you're looking at steady state)

Question 26

in the solow model, how will a lower level of kapital affect the steady state of RGDP per capita?

Answer 26

no change, since what matters is the equilibrium kapital, the starting level of kapital has no effect on the steady state result for kapital.

Question 27

in the solow model, how will a higher level of technology affect the steady state of RGDP per capita?

Answer 27

increase, bc thats how our steady state hsa increased so much over all of human time.

Question 28

what is ricardian equivalence?

Answer 28

when you get a tax cut and the gov't spending doesn't change, that means that they had to borrow the money to give you that tax cut, so your PV lifetime income doesn't change, and you should invest/save the tax cut to smooth consumption.

Question 29

who benefits from unexpected inflation

Answer 29

borrowers, because their debt at face value doesn't change, but massive inflation makes it easier to pay off.

Question 30

you live 2 periods, get 100 pre tax income, taxes are 10$, and gov't spending is 10$ in each period. What is the equation setup for PV of consumption and income?

Answer 30

c.1 + c.2/(1+i) = L.1 + L.2/(1+i)

Question 31

What is the PV of lifetime consumption?

Answer 31

C.1 + C.2/(1+i), assuming there are only 2 periods. Same thing for lifetime earnings

Question 32

assume gov't spending is 10 per period, i rates are 10%, and they don't tax you in period 1. How much will you be taxed in period 2?

Answer 32

You will be taxed 21$, 10 for each period, and then the 10% interest on the 10$ borrowed to give you the tax cut in period 1, which is 1$.

Question 33

If a tax increase on wages raises the supply of labor, which effect dominated?

Answer 33

income, since you are making less money, if you're raising the supply of labor that means that since you have les income, you'll buy less of each good (including leisure)

Question 34

If a tax increase on wages raises the supply of labor, what happens to real wages?

Answer 34

real wages decrease, since the supply increased, from supply & demand means that it would decrease prices

Question 35

If a tax increase on wages raises the supply of labor, what happens to kapital utilization?

Answer 35

it would increase, since more people working means more kapital is being used overall.

Question 36

PERMANENT: if lump sum taxes are replaced with higher tax rates on savings, but overall same taxes are collected, what happens to PV of household after tax income?

Answer 36

no change, since you stated overall taxes dont change

Question 37

PERMANENT: if lump sum taxes are replaced with higher tax rates on savings, but overall same taxes are collected, what happens to labor supply?

Answer 37

no change, since this is LS tax to savings taxes, nothing about wages. So no change

Question 38

PERMANENT: if lump sum taxes are replaced with higher tax rates on savings, but overall same taxes are collected, what happens to before tax real wage rate?

Answer 38

no change, since this is lump sum to savings taxes, nothing about wages, so the L.s dont change and neither does the L.s

Question 39

PERMANENT: if lump sum taxes are replaced with higher tax rates on savings, but overall same taxes are collected, what happens to kapital utilization?

Answer 39

no change, since nothing about labor supply or wages is affected, just goes from LS tax to savings tax

Question 40

PERMANENT: if lump sum taxes are replaced with higher tax rates on savings, but overall same taxes are collected, what happens to savings rate

Answer 40

decrease; imagine if savings taxes goes to 100%, nobody would save. so savings rate decreases

Question 41

PERMANENT: if lump sum taxes are replaced with higher tax rates on savings, but overall same taxes are collected, what happens to steady state of RGDP per cap?

Answer 41

decreases, since you're decreasing savings rate, thus decreasing the steady state of RGDP per cap.

Question 42

if lump sum taxes are replaced with higher tax rates on wages (but same overall tax collection), what happens to PV of hhld after tax income?

Answer 42

no change, since tax collection amount is the same.

Question 43

if lump sum taxes are replaced with higher tax rates on wages (but same overall tax collection), what happens to labor supply?

Answer 43

decreases, since w/p decreases, so people want to work less,

Question 44

if lump sum taxes are replaced with higher tax rates on wages (but same overall tax collection), what happens to before tax real wage?

Answer 44

increases, because L.s goes down, so prices would go up.

Question 45

if lump sum taxes are replaced with higher tax rates on wages (but same overall tax collection), what happens to savings rate?

Answer 45

savings rate would not change, since this is only involving wages and labor. maybe they save more bc they have more money but the rate at which they save wouldn't change

Question 46

if lump sum taxes are replaced with higher tax rates on wages (but same overall tax collection), what happens to kapital utilization?

Answer 46

decrease, since the L.s decreases, so you'd have less people working, so less kaptial utilization.

Question 47

if lump sum taxes are replaced with higher tax rates on wages (but same overall tax collection), what happens to steady state of RGDP per capita?

Answer 47

no change, since this jsut depends onthe savings rate, not anything else

Question 48

a PERMANENT increase in tech will cause real wage to:

Answer 48

increase; this is the primary reason why wages have increased so much over history

Question 49

a PERMANENT increase in tech will cause inflation rate to

Answer 49

no change; if it did lead to inflation, we'd be at super high inflation since A has always been increasing.

Question 50

a PERMANENT increase in tech will cause labor demand to

Answer 50

increase, since you need more people working to produce using the new technology; even though it takes some jobs, the overall L.d increases

Question 51

a PERMANENT increase in tech will cause savings rate to:

Answer 51

not change, or else over history we'd see icnrease in savings rate and we'd be at like 90%.

Question 52

what sthe equation for the steady state of kapital per worker? and how to derive?

Answer 52

divide K/L to get little k and y, then sub that into the growth rate of cpaital per worker. equil when growth rate is 0, so then just solve. Will look something like k* = [sA / (s*del)+n]^4