QUIZ 2: Macro Winter 2012 Name: __ANSWERS_________ Section Registered: Morning Evening

Q estion 1 !2 "oints eac# 1$ "oints tota%& For question 1, circ%e the answer that makes the question stem true. When answering the questions, you should only use the models developed in class. For each question stem, there is only one true answer. Note: When answering questions, you should compare the initial position of the economy to the new equilibrium in the economy inclusive of both income and substitution effects!. "hat means, we will assume that the labor market will always clear. #astly, n%ess I te%% 'o ot#er(ise) assume "F$, ta% rates, welfare programs, the capital stock, and the working age population is held fi%ed. W#ic# o* t#e *o%%o(ing are tr e a+o t an ne,"ected "ermanent dec%ine in %a+or income ta,es !tn&- W#en ans(ering t#e . estion) ass me t#at income e**ects on %a+or s ""%' are %arge re%ative to s +stit tion e**ects on %a+or s ""%'/
As ta,es *a%%) t#e %a+or s ""%' c rve (i%% s#i*t rig#t d e to a s +stit tion e**ect !*rom NS 0 to NSSU0S&/ As a res %t) a*ter ta, (ages increase !t#e government ta1es %ess o* 'o r "a'c#ec1 in ta,es& and +e*ore ta, (ages (i%% initia%%' *a%% as a res %t o* t#e s +stit tion e**ect/ Reca%%2o r mode% "%aces t#e %a+or s ""%' and demand c rves in t#e s"ace o* rea% +e*ore3ta, (ages and N: W45 NSIN6 NS0 NSSU0S

N 0eca se t#is is a "ermanent c#ange) t#e increase in a*ter3ta, (ages means (or1ers are "ermanent%' ric#er/ 7#is means t#e %a+or s ""%' c rve (i%% a%so s#i*t to t#e %e*t as a res %t o* t#e income e**ect !as (or1ers *ee% ric#er2t#e' (i%% c#oose to (or1 %ess& to NS IN6/ 8n net) t#e s#i*t o* t#e %a+or s ""%' c rve to t#e %e*t !*rom t#e income e**ect& (i%% o t(eig# t#e rig#t s#i*t !*rom t#e s +stit tion e**ect&/ 7#is means t#at N (i%% decrease !%eis re (i%% increase& and +e*ore ta, (ages !W45& (i%% increase/

a.

&ggregate e%penditure will: i. ii. iii. 'nambiguously fall 'nambiguously increase 'nambiguously stay the same

In macroeconomic e. i%i+ri m) aggregate e,"endit res 9 aggregate o t" t !:9: 3 a 1e' e. ation in o r c%ass&/ ;iven t#at : 9 *!A)<)N&) (e 1no( t#at : *a%%s as N *a%%s/ N *a%%s !as a+ove&) given t#at %a+or s ""%' (i%% s#i*t in/ 7#ere is no e**ect on %a+or demand given A and < are constant !"er t#e ass m"tions&/ 7#e *a%% in : means t#at aggregate e,"endit res (i%% #ave to *a%%/ We do not 1no( (#' 'et/ Aggregate e,"endit res 9 6 = I = ;/ 8ne o* t#ose varia+%es m st +e *a%%ing to ma1e aggregate e,"endit res *a%%/ We (i%% %earn t#at soon eno g#/ 7#e 1e' is t#at : 9 : and aggregate o t" t *a%%s/ !>ores#ado(ing: t#e 1e' (i%% +e I (i%% +e *a%%ing in t#e %ong r n in t#is e,am"%e even t#o g# 6 is rising&/ b. (efore ta% real wages will: i. ii. iii. 'nambiguously fall 'nambiguously increase 'nambiguously stay the same

See a+ove: 0e*ore ta, (ages initia%%' *a%% as a res %t o* t#e s +stit tion e**ect and t#en increase as a res %t o* t#e income e**ect s#i*ting t#e %a+or s ""%' c rve in/ As (e said) t#e income o t(eig#s t#e s +stit tion e**ect) so on net +e*ore ta, (ages !W45& increase/ c. &fter ta% real wages will: i. ii. iii. 'nambiguously fall 'nambiguously increase 'nambiguously stay the same

?a+or income ta,es "ermanent%' decrease (#ic# means (or1ers are a+%e to ta1e #ome more o* t#eir (ages/ 0e*ore ta, (ages (ent " and t#e ta, rate (ent do(n/ It is eas' to see t#at a*ter ta, (ages m st #ave risen/ d. 'nemployment will: i. ii. iii. 'nambiguously fall 'nambiguously increase 'nambiguously stay the same

Unem"%o'ment occ rs (#en t#ere is a *riction in t#e %a+or mar1et !%i1e stic1' (ages& so t#at (e are not at an e. i%i+ri m condition !%a+or demand not e. a%ing %a+or s ""%'&/ In t#is e,am"%e) (e move to a ne( e. i%i+ri m condition !not a dise. i%i+ri m& so t#ere is no nem"%o'ment/ So) des"ite N *a%%ing) nem"%o'ment (i%% not rise/ I to%d 'o I (o %d as1 t#is . estion on t#e . i@/

e.

"he long run aggregate supply curve will:

i. 'nambiguously shift right on net! ii. 'nambiguously shift left on net! iii. 'nambiguously not shift on net! iv. 7#e ?ong R n Aggregate S ""%' c rve is de*ined as :A 9 *!A)<) NA&/ I* A) <) or NA c#ange) :A c#anges/ NA is set in t#e %a+or mar1et so) +asica%%') an't#ing t#at a**ects t#e %a+or mar1et a**ects NA/ As disc ssed a+ove) t#e %a+or s ""%' c rve #as "ermanent%' s#i*ted in !NA #as *a%%en&/ As a res %t) t#e ?RAS c rve s#i*ts in !given A and < are *i,ed +' ass m"tion&/ f. "he marginal product of labor will: i. ii. iii. 'nambiguously fall 'nambiguously increase 'nambiguously stay the same

5ro*it ma,imi@ation ens res t#at M5N 9 W45/ >rom a+ove) (e 1no( t#at W45 !+e*ore3ta,
(ages& increased/ 7#e int ition is t#at as individ a%s (or1 %ess) N *a%%s/ 7#e decreased N increases M5N/ We can a%so "rove t#is to o rse%ves (it# a %itt%e mat#: Reca%% M5N 9 / BA!<4N&/C/ As stated a+ove) NA *a%%s as a res %t o* t#e income e**ect/ 7# s) as N *a%%s !t#e denominator s#rin1s&) M5N increases/

g.

"he labor demand curve will: i. ii. iii. 'nambiguously shift right on net! 'nambiguously shift left on net! 'nambiguously not shift on net!

Not#ing #a""ens/ ?a+or demand is a**ected +' A and </ An increase in eit#er A or < (i%% s#i*t t#e %a+or demand c rve to t#e rig#t/ A is *i,ed !I to%d 'o t#at&/ < is *i,ed !I to%d 'o t#at&/ h. "a% revenues will: i. ii. iii. iv. 'nambiguously fall 'nambiguously increase 'nambiguously stay the same )ould either increase or decrease depending on the si*e of the income effect

7a, reven es are de*ined as t#e ta, rate times aggregate income !:&/ 7#e ta, rate #as *a%%en and : #as *a%%en/ So) nam+ig o s%') ta, reven es #ave *a%%en/ Some "eo"%e t#in1 ta, reven es are a * nction o* (ages/ 7#at is not #o( (e de*ined ta, reven es/ It is on tota% income !(ages A N& "% s ca"ita% income/ We 1no( nam+ig o s%' t#at : *e%%/ So) nam+ig o s%') ta, reven es *e%%/

Q estion 23 D "oints +n the episode of ,"his &merican #ife- episode ./0, &ct 1!, the program primarily focuses on whether a state1s governor or the president of a country! can create 2obs. "he governor in the program promised that he would create 304,444 new 2obs in his state during his first term. What state was the governor from who made the promise that he would create 304,444 new 2obs in his state during his first term that was the focus of &ct 1 of the episode!5 6ou answer should 2ust be the name of a '.7. state. Wisconsin !;overnor Scott Wa%1er& I (i%% give 'o D "oints i* 'o got eit#er t#e state or t#e ;overnorEs name/ No "oints are given *or an' ot#er ans(er/