Eco HW2

Econ 332 Homework 2 2018 Name : _______________________________ 1. An object that is held to trade for goods and services. Is known as a _________ __ ________

Ceterus Paribus: what happens to Money Demand if 2. Inflation falls ____________

3. Real Interest Rates rise ____________

4. Price Level Falls ____________

5. RGDP rises ____________

6. Transaction Costs Fall ____________

Draw the Money Market 7. 8. 9. 10. 11. 12. TRUE / FALSE : Household decisions depend on the real values for wages and rent rather than

the nominal values for wages and rent.

What Controls the supply of Money in a modern economy? And how? 13. 14. 15. 16. The labor market clears when: a. the marginal product of labor is zero. b. the real wage causes LS = LD. c. the real wage causes LS to be minimized. d. the real wage causes LS to be as large as possible.

On the Use of funds side of the household budget constraint what 2 things can a household do with their income

17. _____________________ 18. _____________________

Econ 332 Homework 2 2018

Below is the profit function for a household. Assume technology is 4, the real wage is 10 and the rental price of capital is 1.

� Profit / P = A � (K.25 � L.25) – (w/P �* L) – (R/P *� K)

What is the equation for the MPL

19. 20.

What is the equation for the MPK 21. 22.

Find the profit maximizing amount of capital and labor to hire. 23. 24. 25. 26. 27. 28.

29. A bond that is traded in the bond market in the Barro model is piece of paper that: a. is the lenders claim to ownership in the company. b. is the lenders claim to the amount owed by the borrower. c. is the borrowers claim to the amount owed by the lender. d. assures the person is who they say they are.

Econ 332 Homework 2 2018 30. An investment in the Barro model is: a. the purchase of a bond. b. the purchase of ownership in a firm. c. the purchase of a capital good used for production. d. all of the above.

You live 2 periods. You are born with nothing and you must die with nothing. In period 1 you only have labor income (Linc1) In period 2 you have labor income (Linc2) and any savings from period 1 (S) and the interest on

that savings i*S. In both periods you may consume C1 and C2.

Write out period 1’s budget constraint using the notations above (C1 C2 Linc1 Linc2 S and i) 31. 32. 33. 34. 35.

Write out period 2’s budget constraint using the notations above (C1 C2 Linc1 Linc2 S and i) 36. 37. 38. 39. 40.

Write out the 2 period budget constraint. 41. 42. 43. 44. 45.

46. If a worker receives a one time bonus, we would expect them to: a. save most of it. b. reject it. c. consume most of it. d. consume half of it and save half of it.

Explain the difference between the income effect and substitution effect from an increase in the real wage rate on labor supply.

47. 48. 49. 50. 51.

Econ 332 Homework 2 2018 52. An increase in the level of technology, A, causes: a. a movement along the MPL hiring more labor. b. an increase in the MPL c. a decrease in the MPL d. a movement along the MPL hiring less labor.

The equilibrium business cycle model predicts that the 53. real wage will be procyclical. or countercyclical or independent

54. real interest rate will be procyclical. or countercyclical or independent

55. Price Level will be procyclical. or countercyclical or independent

56. Labor demand will be procyclical. or countercyclical or independent

57. Capital utilization will be procyclical. or countercyclical or independent

58. Labor supply will be procyclical. or countercyclical or independent

59. The model predicts that an economic expansion caused by an increase in technology, A, will: a. drive up the real wage. b. drive down the real wage. c. cause labor supply to be greater than labor demand. d. lead to a relatively low real wage. 60. If technology, A, increases permanently then we would expect: a. consumption to decrease as the substitution effect would be greater than the income effect of the

change. b. consumption to increase as the substitution effect would be greater than the income effect of the

change. c. consumption to increase as the income effect would be greater than the substitution effect of the

change. d. consumption to decrease as the income effect would be greater than the substitution effect of the

change. 61. An example of a temporary change in technology would be: a. a harvest failure. b. a new discovery. c. a new invention. d. all of the above. 62. A higher real wage: a. makes consumption more expensive. b. makes leisure less expensive. c. makes it a worse deal for households to work an extra hour. d. makes leisure more expensive.

Econ 332 Homework 2 2018

Why don’t households use all available capital in the short run if the capital has already been purchased?

63. 64. 65.

66. True / False: Neutrality of money says an inflation rate of 10% will harm the economy.

67. True / False: Super Neutrality of money says an increase in the inflation rate from 10% to 15%

will harm the economy.

Why does a decrease in technology lower the reservation wage? 68. 69. 70.

The unemployment rate = separation rate / (separation rate + finding rate) Consider an economy with a labor force of 100 and labor demand = labor supply = 95. This country has an unemployment rate of 5% [(100-95)/100]. This is made up of a separation rate of 4% and a finding rate of 76% [.04/(.04+.76)]. What all this means is that in any month 5 people are unemployed & 76% of those or about 4 find a job by the next month.

NOW imagine the government makes it more difficult to fire workers cutting the separation rate in half to 2%. However, Equilibrium labor demand and supply is still just 95 people thus 5 are unemployed and the unemployment rate is still 5%. What would the new finding rate be?

71. 72. 73. 74. 75.

What happens to the duration of unemployment? 76. 77. 78.

Which labor market would you prefer to work and live in and WHY? (there is no right answer to this except explaining why.)

79. 80.

Econ 332 Homework 2 2018

We observe that humans prefer to smooth consumption. If the real interest rate was 0% and you lived for 3 periods and your income is period 1 is 25, period 2 150, & period 3 125: how much would you consume in

81. Period 1 __________

82. Period 2 __________

83. Period 3 _____________

If the real interest rate was 5% instead of 0% what would happen to consumption in period 2?

84. 85.

Based on the solow model in which situation 0% or 5% real interest rate would the country in question be richer on a per capita basis and why?

86. 87. 88.

Money Demand = 3*P, Money Supply = 666. What must the price level be? And Why?

89. 90. 91.

Production function Y=2*(K*L)^.5; Kapital K = 64; Labor Demand = 8/real wage^2; Labor Supply = (real wage)^2

What is the equilibrium real wage?

92. 93.

What is the Equilibrium amount of Labor Input? 94. 95.

What is total output? 96. 97.

What is the rental price of capital? 98. 99. 100.