Exam 16: Household and Firm Behavior in the Macroeconomy: a Further Look

Draw a graph of labor supply in which the substitution effect dominates at low wages and the income effect eventually dominates at higher wages.

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Question 1

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What is the usual and expected relationship between changes in wealth and the labor supply?

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Question 2

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In general, there would tend to be an inverse relationship between a person's and household's wealth and changes in the labor supply. An unexpected increase in wealth or nonlabor income tends to result in a decrease in labor supply.

Changes in interest rates result in both an income effect and a substitution effect. What does the empirical evidence suggest about their relative strengths? Morever, what is the likely effect on consumption? You may also wish to comment on what is happening to the income effect over time and what is driving this change.

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The data suggest that the substitution effect dominates the income effect, so that the interest rate has a negative net effect on consumption. There is some evidence, however, that the income effect is getting larger over time. This may be due in part by the fact that the size of U.S. government bond holding by the public has increased dramatically in the past twenty five years.

Explain the difference between the unconstrained supply of labor and the constrained supply of labor. Why doesn't a household have control over its constrained supply of labor?

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Question 4

Define the nominal wage rate.

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Question 5

Households make consumption and labor supply decisions simultaneously. Explain why.

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Question 6

Suppose that a factory worker receives an increase in his wage rate of 15 percent over the next year. In addition, suppose that the price of the goods and services he consumes rises by 10 percent. How much has this factory worker's real wage changed by?

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Question 7

Explain how the discouraged worker effect relates to changes in output.

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Question 8

Explain how a decrease in taxes and increase in transfer payments affect consumption and labor supply.

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Question 9

Explain the accelerator effect.

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Question 10

Explain why the presence of significant adjustment costs might induce a firm to hold excess labor. Would you expect adjustments costs to be high or low in a firm whose workers' skills are very specific to the firm? Explain.

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Question 11

Assume that Congress passes a one-year 10% across-the-board tax cut. What would the life-cycle theory suggest about this tax cut's effectiveness on the economy?

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Question 12

Discuss some of the reasons why the relationship between output and the unemployment rate is not as simple as that believed by Arthur Okun.

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Question 13

Explain why productivity figures can be misleading when used to diagnose the health of the economy over the short run?

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Question 14

Explain why it is not unambiguously clear that the labor supply is an upward-sloping function of the wage rate.

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Question 15

Why is a medical student likely to consume more than a high school student?

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Question 16

Refer to the information provided in the table below to answer the questions that follow. -Refer to the above table. Why is that nominal wages have increased between 2007 and 2008 but real wages have fallen? Explain how this is possible.

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Question 17

Assume an individual whose income rises at a decreasing rate up until midlife and then falls at an increasing rate. In addition, assume that her consumption is constant throughout her lifetime. With this information, draw her income and consumption functions as a function of age. Explain what is going on in each part of her life.

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Question 18

What are the adjustment costs to a firm when it increases output?

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Question 19

When the inventory/sales ratio is high what can be said about a firm's estimation of demand and its production decisions? What production response will firms likely make?

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Question 20

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Draw a graph of labor supply in which the substitution effect dominates at low wages and the income effect eventually dominates at higher wages.

What is the usual and expected relationship between changes in wealth and the labor supply?

Explain the difference between the unconstrained supply of labor and the constrained supply of labor. Why doesn't a household have control over its constrained supply of labor?

Define the nominal wage rate.

Households make consumption and labor supply decisions simultaneously. Explain why.

Suppose that a factory worker receives an increase in his wage rate of 15 percent over the next year. In addition, suppose that the price of the goods and services he consumes rises by 10 percent. How much has this factory worker's real wage changed by?

Explain how the discouraged worker effect relates to changes in output.

Explain how a decrease in taxes and increase in transfer payments affect consumption and labor supply.

Explain the accelerator effect.

Explain why the presence of significant adjustment costs might induce a firm to hold excess labor. Would you expect adjustments costs to be high or low in a firm whose workers' skills are very specific to the firm? Explain.

Assume that Congress passes a one-year 10% across-the-board tax cut. What would the life-cycle theory suggest about this tax cut's effectiveness on the economy?

Discuss some of the reasons why the relationship between output and the unemployment rate is not as simple as that believed by Arthur Okun.

Explain why productivity figures can be misleading when used to diagnose the health of the economy over the short run?

Explain why it is not unambiguously clear that the labor supply is an upward-sloping function of the wage rate.

Why is a medical student likely to consume more than a high school student?

Refer to the information provided in the table below to answer the questions that follow. -Refer to the above table. Why is that nominal wages have increased between 2007 and 2008 but real wages have fallen? Explain how this is possible.

What are the adjustment costs to a firm when it increases output?

When the inventory/sales ratio is high what can be said about a firm's estimation of demand and its production decisions? What production response will firms likely make?

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

The Money Supply and the Federal Reserve System

Money Demand and the Equilibrium Interest Rate

The Determination of Aggregate Output, the Price Level, and the Interest Rate

Policy Effects and Costs Shocks in the Asad Model

The Labor Market in the Macroeconomy

Financial Crises, Stabilization, and Deficits

Long-Run Growth

Alternative Views in Macroeconomics

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing and Transitional Economies

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