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macroeconomic theory
Macroeconomics Global Edition 6th Edition Stephen D. Williamson - Solutions
5.17 How can the Laffer curve be used to finance government expenditure through the imposition of a tax?
5.16 How are the incentive effects of income taxation important for the Laffer curve?
5.15 In the case of a distorting tax on labor income, what is the relationship between the position of the Pareto optimum point and the competitive equilibrium point? Explain.
5.14 Explain the impact of an increase in total factor productivity on labor supply in the short run and the long run.
5.13 How do total factor productivity shocks cause business cycles?
5.12 Why does government spending crowd out government purchases?
5.11 How does a government spending shock cause business cycles? Why does this phenomenon take place?
5.10 Give three reasons that an equilibrium might not be Pareto optimal.
5.9 Explain the difference between the first and second welfare theorems. Why is each useful?
5.8 Why is the competitive equilibrium in this model Pareto optimal?
5.7 What is the economic significance of the slope of the production possibilities frontier?
5.6 What are the four conditions that a competitive equilibrium must satisfy for this model?
5.5 What are the exogenous variables in the model?
5.4 Differentiate between exogenous and endogenous variables.
5.3 Can the government run a deficit in the one-period model? Why or why not?
5.2 How does government spending affect the private sector’s production?
5.1 Why is it useful to study a closed-economy model?
2. (a) Plot the annual employment rate (https://data.oecd.org/emp/employment-rate.htm) and corporate investment (https://data.oecd.org/gdp/investment-by-sector.htm) for all OECD countries for the latest available year. Do their trends support the firm’s demand for labor predicted by the model you
1. (a) Download the annual employment rate (https://data.oecd.org/emp/employment-rate.htm) and average wages (https://data.oecd.org/earnwage/average-wages.htm) for any one economy. Plot the data for all available years. Apply the income and substitution effects that you learned from the labor
17. LO 7 Suppose a irm has a production function given by Y = zK0.3N0.7.(a) If z = 1 and K = 1, graph the production function. Is the marginal product of labor positive and diminishing?(b) Now, graph the production function when z = 1 and K = 1. Explain how the production function changed from part
16. LO 7 To control pollution, assume that your government tightens regulations on one hand and provides a lump-sum subsidy (S) to irms that use clean technology on the other. Now, a representative irm decides to use clean technology throughout the production process, thereby improving its total
15. LO 6, 7 Supposing that a single consumer works for a irm, the quantity of labor input for the irm, N, is identical to the quantity of hours worked by the consumer, h - l. Graph the relationship between output produced, Y on the vertical axis and leisure hours of the consumer, l, on the
14. LO 5, 7 Suppose that the irm has a minimum quantity of employment, N*, that is, the irm can produce no output unless the labor input is greater than or equal to N*. Otherwise, the irm produces output according to the same production function as speciied in this chapter. Given these
13. LO 7 Suppose that the government subsidizes employment. That is, the government pays the irm s units of consumption goods for each unit of labor that the irm hires. Determine the efect of the subsidy on the irm’s demand for labor.
12. LO 7 Suppose that the government imposes a lumpsum tax on goods produced by a irm. Determine the efect of this tax on the irm’s demand for labor.
11. LO 2, 4 Suppose a two-person household. Person 1 has h1 units of time available and takes l1 units of leisure time, and person 2 has h2 units of time available and takes l2 units of leisure time. Collectively, the two persons in the household care about their total consumptionc, and their total
10. LO 2, 4 Suppose that a consumer cannot vary hours of work as he or she chooses. In particular, he or she must choose between working q hours and not working at all, where q 7 0. Suppose that dividend income is zero, and that the consumer pays a tax T if he or she works, and receives a beneit b
9. LO 1, 2, 3, 4 Suppose that the government announces a ban on hiring foreign domestic helpers. The representative consumer now has to give up some of her leisure activities to spend more of her time doing housework. Her preference toward the consumption bundle changes and she is now willing to
8. LO 4 Assume a proportional tax is imposed on wage. Given that the amount of tax revenue remains constant, the government plans to stop imposing a proportional tax in favor of a lump-sum tax on wage in order to increase labor supply. Can the government achieve its goal? Use a diagram to show the
7. LO 2, 4 Suppose that a consumer can earn a higher wage rate for working overtime. That is, for the irst q hours the consumer works, he or she receives a real wage rate of w1, and for hours worked more than q he or she receives w2, where w2 7 w1. Suppose that the consumer pays no taxes and
6. LO 4 Typically, older workers reduce their hours of work for a period until they retire. How could we capture such an efect in the consumer model in this chapter? Draw a diagram and illustrate how this works.
5. LO 4 Suppose, as in the federal income tax code for the United States, that the representative consumer faces a wage income tax with a standard deduction. That is, the representative consumer pays no tax on wage income for the irst x units of real wage income, and then pays a proportional tax t
4. LO 4 Suppose that the government imposes a proportional income tax on the representative consumer’s wage income. That is, the consumer’s wage income is w(1 - t)(h - l) where t is the tax rate. What efect does the income tax have on consumption and labor supply? Explain your results in terms
3. LO 1, 3, 4 Consider a situation in which lumpsum tax is higher than dividend income and the consumer prefers an equal proportion of consumption and leisure.(a) Suppose that h = 16, w = 0.5, p = 0.6, and T = 4. Use a diagram to show the consumer’s optimal choice of consumption and leisure.(b)
2. LO 1, 3 In this chapter, we showed an example in which the consumer has preferences for consumption with the perfect complements property.Suppose, alternatively, that leisure and consumption goods are perfect substitutes. In this case, an indiference curve is described by the equation i = al +
1. LO 1 Using a diagram show that if the consumer prefers more to less, then indiference curves cannot cross.
4.13 Explain why the marginal product of labor curve is the firm’s labor demand curve.
4.12 How does an improvement in technology shift the production function?
4.11 Why is the marginal product of labor diminishing?
4.10 What are the goals that determine the choices of a single, representative firm?
4.9 Why might hours worked by the representative consumer decrease when the real wage increases?
4.8 How is labor supply schedule affected by a decrease in real taxes?
4.7 How does a decrease in dividend income affect the representative consumer’s leisure time and his or her labor supply schedule?
4.6 When the consumer chooses his or her optimal consumption bundle while respecting his or her budget constraint, what condition is satisfied?
4.5 How does a rational consumer make his or her choice?
4.4 What two properties do indifference curves have? How are these properties associated with the properties of the consumer’s preferences?
4.3 What three properties do the preferences of the representative consumer have? Explain the importance of each.
4.2 How are a consumer’s preferences over goods represented?
4.1 Which goods make up the consumption bundle in the utility function?
3. Access the OECD database to download the annual employment rate (available at https://data.oecd.org/emp/employment-rate.htm), average wages (available at https://data.oecd.org/earnwage/average-wages.htm), and GDP (available at
2. Use the DataBank database, accessible at http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators, and download the data on GDP growth, inflation, and broad money growth for any one economy from 1960 to present. Is there any correlation between the inflation rate and
1. Use the Penn World Table, accessible at http://febpwt.webhosting.rug.nl/Dmn/AggregateXs/VariableCodeSelect, to study comovements between the components of GDP and real GDP.Pick any economy and download its data on real GDP at constant national prices, capital stock at constant national prices,
5. LO 4 The Great Moderation in part refers to the moderate variability in real GDP that occurred after the 1981–1982 recession and before the 2008–2009 recession. In Figure 3.12, what do you observe about the behavior of the deviations from trend in the inlation rate over the period
4. LO 4 Refer to Figure 3.5 and list the years in which imports are procyclical and countercyclical. Explain why it is important to identify such comovements.
3. LO 3 Consumption of durables is more variable relative to trend than is consumption of nondurables, and consumption of nondurables is more variable relative to trend than is consumption of services. Speculate on why we observe these phenomena, and relate this to the key business cycle facts in
2. LO 2,5 Use Figure 3.2 to answer the following questions:(a) Identify the ive most severe recessions since the mid-1970s. Explain your answer.(b) Do real GDP deviations display persistence?How can this persistence help predict future GDP?(c) What irregularities do the real GDP deviations display?
1. LO 4 In Figure 3.12, what do you observe during the 1970s? Explain the signiicance of this.
3.13 What are the key business cycle regularities in the labor market?
3.12 Does a Phillips curve relationship exist in the data set that was studied in this chapter?
3.11 What are the key business cycle regularities with respect to the price level and inflation?
3.10 Describe the key business cycle regularities in consumption and investment expenditures.
3.9 What are the three features of comovement that macroeconomists are interested in?
3.8 What is the difference between a leading variable and a lagging variable?
3.7 Give a noneconomic example of two variables that are positively correlated and an example of two variables that are negatively correlated.
3.6 How can we discern positive and negative correlation in a time series plot? In a scatter plot?
3.5 What did Robert Lucas say about the comovements among economic variables?
3.4 Why are the comovements in aggregate economic variables important?
3.3 Explain why forecasting GDP over the long term is difficult.
3.2 Plot a graph and explain how real GDP fluctuates from its long-term trend over time.
3.1 What is the primary defining feature of business cycles?
3. In addition to the conventional unemployment rate, the International Labor Organization(ILO) (http://www.ilo.org/ilostat/faces/home/statisticaldata/conceptsdefinitions?_adf.ctrlstate=1d1vbn920j_683&_afrLoop=701211288637866#) provides data on alternative measures, such as time-related
2. The database provides different measures of price indexes—consumer price index, food price index, nonfood price index, producer price index, and implicit GDP deflator. Download these measures for the last 10 years for any Asian economy and calculate inflation rates for each year. Plot the
1. Choose any Asian economy and construct a table showing the structure of expenditure-side GDP at current market price for the last two years. Make sure to include household consumption, government consumption, gross capital formation, net exports of goods and services, and statistical
15. LO 6 Suppose that the participation rate is 8%, the labor force is 100 million, and the number of employed workers is 90 million. Determine (i)the number of unemployed workers; (ii) the unemployment rate; (iii) the employment rate; and(iv) the total working-age population.
14. LO 5 Suppose that the government deicit is 10, interest on the government debt is 5, taxes are 40, government expenditures are 30, consumption expenditures are 80, net factor payments are 10, the current account surplus is -5, and national saving is 20. Calculate the following (not necessarily
13. Suppose at the beginning of year 0 that this country has 80 units of capital. Investment expenditures are 10 units in each of years 0, 1, 2, 3, 4, . . . , 10. The capital stock depreciates by 10% per year.(a) Calculate the quantity of capital at the beginning of years 0, 1, 2, 3, 4, . . . ,
12. LO 5 Let Kt denote the quantity of capital a country has at the beginning of period t. Also, suppose that capital depreciates at a constant rated, so that dKt of the capital stock wears out during period t.If investment during period t is denoted by It, and the country does not trade with the
11. LO 5 Consider the identity Sp - I = CA + D, where Sp is private sector saving, I is investment, CA is the current account surplus, and D is the government deicit.(a) Show that the above identity holds.(b) Explain what the above identity means.
10. LO 4 In an economy, the stock market and the housing market boomed in a given year. The annual stock market turnover reached a record high of $600 million and the transaction value of the second-hand property was about $400 million.All these transaction values were twice the economy’s GDP in
9. LO 4 Part of gross domestic product consists of production in the so-called FIRE sector (inance, insurance, and real estate). Value added is notoriously diicult to measure in the FIRE sector, as it is hard to determine exactly what the inputs and outputs are. For example, banks are included in
8. LO 4 In this chapter, we learned that the quantity of U.S. currency outstanding per U.S. resident was $4,390 in February 2016. Suppose that we were to try to use this number to estimate the amount of output produced in the underground economy in the United States during 2016. Discuss how we
7. LO 4 In 2014, the Thai military took over power from its democratically elected government. The military government then increased iscal spending on infrastructure projects. To preserve purchasing power and stimulate consumption, the military junta asked retailers and wholesalers not to raise
6. LO 1,5 Consider an economy with a corn producer, some consumers, and a government. In a given year, the corn producer grows 30 million bushels of corn and the market price for corn is$5 per bushel. Of the 30 million bushels produced, 20 million are sold to consumers, 5 million are stored in
5. LO 3 Assume an economy in which only broccoli and caulilower are produced. In year 1, 500 million pounds of broccoli are produced and consumed and its price is $0.50 per pound, while 300 million pounds of caulilower are produced and consumed and its price is $0.80 per pound.In year 2, 400
4. LO 3 In year 1 and year 2, there are two products produced in a given economy, smartphones and earphones. Suppose that there are no intermediate goods. In year 1, 4,000 smartphones and 2,000 earphones are produced and sold at$2,000 and $200 each, respectively. However, due to an earthquake in
3. LO 1 Assume an economy where consumers buy all goods from an online store that allows trading irms to sell goods and consumers to sell secondhand goods. All sellers pay 30% of their sales to the store as hosting fees, of which 5% goes to technicians as wages and another 5% goes to a logistics
2. LO 1 Assume an economy with a car manufacturer, a car seller, and some consumers (there is no government).The consumers are workers who earn a wage to inance their consumption. In a given year, the car manufacturer produces 50,000 cars and sells them for $10,000 per car. The workers’ wages
1. LO 1 Assume an economy with two manufacturers:a parts and components manufacturer and a tablet manufacturer. Suppose that parts and components manufacturing does not require any intermediate inputs. In a given year, the parts and components manufacturer produces 50,000 units of parts and
2.15 Give two reasons that the unemployment rate may not measure correctly what we want it to measure.
2.14 Does an increase in investment and improvement of current account balance lead to an increase in wealth? Explain.
2.13 What is the relationship between private saving, government saving, investment, and current account balance?
2.12 Explain three problems in the measurement of real GDP.
2.11 Explain what chain-weighting is.
2.10 Why does the base year matter in calculating real GDP?
2.9 Are government money transfers and social security benefits included in GDP? Why or why not?
2.8 What is investment?
2.7 Which component of U.S. GDP is more variable than consumption and is capable of leading the business cycle?
2.6 Give two instances where GDP may be undervalued.
2.5 Is GDP a good measure of economic welfare? Why or why not?
2.4 What is the difference between GDP and GNP?
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