1. In January 1995 the Canadian civilian labour force was 14.932 million people. There were 13.488 million people employed. The adult population was 22.937 million.
(a) Calculate the unemployment rate.
(b) Calculate the participation rate.
(c) Calculate the employment ratio.
2. Suppose that an economy has MPN of:
MPN = (100-0.4N)(1-t)A
where N is aggregate employment,
A is aggregate productivity, and t is a payroll tax.
For example, if t=0.10 then 90% of the marginal product goes
to the firm while the other 10% goes to the government in
employer contributions to unemployment insurance.
Meanwhile, labour supply behaviour can be described by:
N = 80 + 10w
where w is the real wage.
(a) Find the real wage and employment when t=0.10 and A=1.0.
(b) Now suppose there is an oil price shock, and so A falls to 0.9. Find the real wage and employment.
(c) The government is concerned that jobs have been lost because of the oil price shock, and to provide UI benefits to the unemployed it raises t to 0.15. Find the real wage and employment.
3. Sook-wan wants to save $1000 of current income. With an RRSP no taxes are paid on interest or income until the money is withdrawn in five years (when she retires). Without an RRSP, taxes must be paid whenever income or interest is received. Sook-wan's marginal tax rate is 40%, and the nominal interest rate is 8%.
(a) How much money (after-tax) will Sook-wan have if she puts her money in an RRSP and withdraws the money in five years?
(b) How much money will she have if she does not put her money in an RRSP but rather in a regular (taxable) savings account for five years?
(c) How much does she gain in five years by using an RRSP rather than a regular savings account?
4. Use a saving-investment diagram to explain what happens to saving, investment, and the real interest rate in each of the following scenarios.
(a) Current output rises due to a temporary productivity increase.
(b) The tax code changes so that business firms face higher tax rates on their revenue (offset by other lump-sum tax changes so that there is no overall change in tax revenue).
(c) The government increases spending temporarily for a one-year project to turn mercury into gold.
(d) The average educational level rises, inducing an increase in the future marginal productivity of capital.
5. Suppose that government purchases and net exports are zero. Desired consumption depends on income and interest rates as follows:
C = 20 + 0.8Y-1000r.
Desired investment depends on the real interest rate as follows:
I = 130 - 3000r.
Equilibrium output at full employment is 100. Find the values of consumption, investment, and the real interest rate at full-employment equilibrium.
6. In a small open economy,
Sd = 20 + 100rw Id = 30 - 100rw Y = 70 G = 20 rw = 0.04where rw is the world real interest rate.
(a) Calculate the current account balance.
(b) Calculate net exports, assuming NFP = 0.
(c) Calculate desired consumption.
(d) Suppose that G falls to 18 and, as a result, suppose that desired saving rises to 21+100rw. Calculate the current account balance.
7. Canada's merchandise trade balance (D72003) receives considerable attention in the news media. But the current account balance, which describes the growth of our foreign debt, is found by adding the merchandise trade balance, the non-merchandise trade balance (D72005), investment income (D72006), and transfers (D72007). CANSIM numbers are given in parentheses.
To find the CANSIM database on the web, go to the QED home page at http://qed.econ.queensu.ca then click on the bottom entry `selected resources for economists'. The third entry on the list will be the database. Alternately, you can access the CANSIM database directly from the library web pages. If you prefer a printed source, try Table J1 in a recent issue of the Bank of Canada Review [CA1 FN76 B18].
(a) Find the annual values for these four components of the Canadian current account balance, for 1990, 1991, 1992, 1993, and 1994.
(b) Add them to see whether the current account balance rose or fell from 1993 to 1994.
(c) Give a realistic example of a change in capital account transactions which offsets the change in the current account from 1993 to 1994.
1.
(a) 9.67%
(b) 65.1%
(c) 58.8%
2. Note that w = MPN, then substitute to get
N = 80+10A(1-t)(100-0.4N)
(a) N=213.0 w=13.30
(b) N=209.9 w=12.99
(c) N=208.12 w=12.81
Notice that the payroll tax has reduced employment and real wages by reducing the demand for labour. While funding UI for those displaced by the shock is a worthy goal, a payroll tax may not be a wise way to finance this fund.
3. (a) $881.59 = [$1000 x 1.08^5] x 0.60
(b) $758.50 = $600 x [1 + (0.08 x 0.60)]^5
(c) $123.09
4. (a) A rise in output raises desired saving, shifting the Sd curve to the right. In equilibrium this reduces r and so I rises too.
(b) The rise in taxes reduces desired investment, shifting the Id curve to the left. In equilibrium this raises r reducing saving and investment.
(c) The rise in government purchases reduces desired saving shifting the Sd curve to the left; in equilibrium this riases r reducing I as well.
(d) The rise in future MPK raises desired investment, shifting the Id curve to the right; in equilibrium this raises r so S rises too.
5. Y = C + I
100 = 150 + 80 -4000r
r = 0.0325 = 3.25%
C = 67.5
I = 32.5
6. (a) -2 (b) -2 (c) 26 (d) -1.
7. (a)
D72003 D72005 D72006 D72007
1990 8696 -11002 -22844 -74
1991 3604 -12117 -19067 14
1992 6692 -13026 -20266 117
1993 9515 -13802 -26665 248
1994 17111 -11029 -31958 1116
(b) It rose from -30704 to -24760 million dollars.
(c) Canadian's borrowed less from foreign residents, either through firms or governments (for example, provincial government deficits and hence borrowing declined from 1993 to 1994). Other possibilities?