2.Assume that a society consists of two types of workers. For type A, 3 million workers lose their
jobs each year, and each one takes a year to find a new one. For type B, 36 million workers lose
their jobs each year (3 million per month), and each takes one month to find a new job. Thus, at any
given time, 6 million are unemployed in this economy. (10%, each 2.5 %)
a.
How many spells of unemployment occur each year in this economy?
b.
What percentage of the spells are only one month long?
c.
What is the average duration of each unemployment spell in this economy?
d.
Of all the months of unemployment, what fraction of total unemployment time is accounted
for by the workers unemployed for a year?
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3.Explain how each of the following events affects the monetary base, the money multiplier, and the
money supply
(
20%, each part 4%)
a.
The Federal Reserve purchase longterm government bond during a quantitative easing.
b.
The Fed increases the interest rate it pays banks for holding reserves.
c.
Rumors about a bank run increase the amount of money people hold as currency rather
than demand deposits.
d.
The Fed increases its lending to banks through its Term Auction Facility.
e.
The Fed increases the discount rate.
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4.Assume that GDP (
Y
) is 5,000. Consumption (
C
)
.
is given by the equation
C
= 1,000 + 0.3(
Y

T
).
Investment (
I
) is given by the equation
I
= 2000 50
r
, where
r
is the real interest rate in percent.
Taxes (
T
) are 1,000 and government spending (
G
) is 1,500. (20%, each part 5%)
a.
What are the equilibrium values of
C
,
I
, and
b.
What are the values of private saving, public saving, and national saving?
c.
Now assume that the government has a tax cut to reduce Taxes (
T
) to 500. What are the new
equilibrium values of
C
,
I
, and
d.
Graphically illustrate how the above change in government policy would affect the loanable
funds market. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv.
the direction curves shift; and v. the terminal equilibrium values.
r
?
r
?
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5.Consider two competitive economies that have the same quantities of labor (
L
= 400) and
capital (
K
= 400), and the same technology (
A
= 100). The economies of the countries are
described by the following Cobb–Douglas production functions:
North Economy:
Y
=
A L
.3
K
.7
South Economy:
Y
=
A L
.7
K
.3
a.
Compute the output of the two economies. Which economy has the larger total production?
Explain. (3%)
b.
Compute the marginal product of labor in each economy. In which economy is the marginal
product of labor larger? Explain. (3%)
c.
In which economy is the real wage larger? Explain. (2%)
d.
In which economy is labor's share of income larger? Explain. (2%)
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