1.

The employment-population ratio is a measure that might correspond to the concept of

employment in the model.
a) Find the respective time series for your country (as long as possible), and plot it.
b) Find the time series of the real wage (over the same time span), and plot it.
c) Scatter plot the two (on the same graph), and draw the regression line (trend line fitted).
d) How would you tell a story about the income and substitution effects in labor supply
decisions that would be consistent with this data?
2. Plot the ratio of aggregate consumption to GDP. Comment on the features of your time series
plot. What principle of consumption behavior helps to explain what you see?
3. Assume U(c1,c2)=lnc1 + βlnc2, β > 0, and that the consumer can lend at the rate of r1, or
borrow at the rate of r2 (r1 < r2). Under what conditions she is: a) a borrower, b) a lender, c)
neither the borrower, nor the lender?
4. Suppose that the government imposes a proportional income tax on the representative
consumer’s wage. That is, the consumer’s wage income is w(1 - t)(h - l) where t is the tax rate.
What effect does the income tax have on consumption and labor supply? Explain your results
in terms of income and substitution effects.
5. Assume an economy with 1,000 consumers. Each consumer has income in the current period
of 50 units and future income of 60 units and pays a lump-sum tax of 10 units in the current and
20 units in the future period. The market real interest rate is 8%. Of the 1000 consumers, 500
consume 60 units in the future, while 500 consume 20 units in the future.
a) Determine each consumer’s current consumption and current saving.
b) Determine aggregate private saving, aggregate consumption in each period, government
spending in the current and future periods, the current-period government deficit, and
the quantity of debt issued by the government in the current period.
c) Suppose that current taxes increase to 15 units for each consumer. Repeat parts a) and
b) and explain your results.
6. Suppose that the government imposes a producer tax. That is, the firm pays t units of
consumption goods to the government for each unit of output it produces. Determine the effect
of this tax on the firm’s demand for labor.
7. Suppose that the government subsidizes employment. That is, the government pays the firm
s units of consumption goods for each unit of labor that the firm hires. Determine the effect of
the subsidy on the firm’s demand for labor.
8. Suppose that the firm’s production technology is given by Y = zF(K, N) = zKαN1-α, where 0
< α < 1. Determine the firm’s demand for labor as a function of z, K, α, and w, and interpret.
9. Calculate the ratio of real investment expenditures to GDP, quarterly, and calculate the real
interest rate as a three-month Treasury bill rate minus the inflation rate, then plot both of these
variables as time series. The theory of investment predicts an optimal investment schedule that
is a negative relationship between investment and the real interest rate. Is this what you observe
in the data? Explain.