ECON 1102 Tutorial Test S1 2014 Solution

Question1 The following equations describe planned spending for a closed economy.

(a) Write out the equation for the private saving function for this economy.(1 mark)

(b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate equilibrium output for this economy. Show how you obtained your figure.(2 marks)

(c) Calculate the size of the budget surplus at equilibrium output.

(d) What is the size of the balanced budget multiplier for this economy?(1 mark)

Question 2

(a) Write out the equation for the private saving function for this economy.(1 mark)

(b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate equilibrium output for this economy. Show how you obtained your figure.

(2 marks)

(c) Suppose the government introduces an expansionary fiscal policy by increasing government purchases by 40. Calculate the new equilibrium output.(1 mark)

(d) Explain how the actual effect of the expansionary fiscal policy in (c) may be a level of output less than what was calculated?

Question 3

(a) Write out the equation for the private saving function for this economy.(1 mark)

(b) What is exogenous (autonomous) expenditure and what is the value of the multiplier? Calculate equilibrium output for this economy. Show how you obtained your figure.

(2 marks)

(c) Show in a diagram and explain the effect of an increase in the marginal tax rate to 0.3. Calculate the new equilibrium output.(2 marks)

(d) Explain how the actual effect of the increase in the marginal tax rate in (c) may be a level of output less than what was calculated?

Question 4

Consider the following model for supply and demand of workers (100,000’s) in the aggregate labour market, wherewis the real hourly wage.

(a) Calculate and state the equilibrium real wage and level of employment and illustrate your answer on a diagram.(2 marks)

(b) Suppose that the labour force increases by 100,000 (potential) workers and that the real wage remains fixed to its level in part (a). Calculate the levels of employment, unemployment and the labour force after the change and illustrate your answer on a separate diagram. Explain.(3 marks)

Full-employment output is the amount of output produced by firms with employment determined by the labor demand curve at the point where the marginal product of labor equals the efficiency wage. A productivity shock does not lead to a change in the efficiency wage, since it does not affect work effort. But it does affect the marginal product of labor, so employment changes. A beneficial productivity shock, for example, leads to an increase in employment. Both the employment increase and the increase in productivity lead to an increase in full-employment output. Labor supply changes have no effect on the efficiency wage or employment; they simply affect the amount of unemployment. So they have no impact on full-employment output. Unemployment will increase as the demand for labour will fall and supply will increase.

Diagram in snapshot

Question5:

Consider the following model for supply and demand of worker hours (1,000,000’s) in the aggregate labour market, wherewis the real hourly wage.

(a) Calculate and state the equilibrium real wage and level of employment and illustrate your answer on a diagram. Explain.(2 marks)

(b) Suppose a tax of $2 is levied on every hour worked. State the level of employment and the real wage after the imposition of this tax and illustrate your answer on a diagram. Explain who pays the tax.

Question 6

The country of New West Dubbo is experiencing lower energy costs due to new technology in extracting energy sources such as gas and oil. Use the supply and demand model (and a diagram) of the labour market to explain the effect on labour demand and supply and the levels of employment and unemployment, and the real wage.

Question 7

The country of Kingsland is considering the introduction of a compulsory retirement saving scheme. Under this scheme all workers are required to save ten per cent of their annual wages and salaries until they retire. Use the supply and demand model (and a diagram) for saving and investment to explain the likely effects of this scheme on national saving, investment and the real interest rate in New Holland. Explain the effects on employment of the saving scheme. (You can assume that New Holland is a closed economy).(5 marks)

Question 8

The government of Old Flanders is planning to borrow heavily to finance spending on scientific research and development, education and defence. Use the supply and demand model (and a diagram) for saving and investment to explain the likely effects of this scheme on national saving, investment and the real interest rate in New Holland when its economy is closed. Explain the effects

Question 9

The country of New Holland is experiencing lower energy costs due to new technology in extracting energy sources such as gas and oil. Use the supply and demand model (and a diagram) for saving and investment to explain the likely effect on national saving, investment and the real interest rate in New Holland when its economy is closed. Explain the effects of the new technology on employment.