Due Friday, 8 October 1999, 4pm

1. Consider the East Asian Miracle as described in the text pg 185. Use a production function diagram to illustrate and explain this account of the high growth rates discussed. Also note the effect on labour productivity as each effect is described. (10)

2. Examine the impacts on labour market equilibrium of the following:
   a) A spring and summer of too much rain ruins crops and reduces construction activity. (3)
   b) An existing income tax on labour income is reduced by 10%. (4)
   c) New offshore sources of cheaper capital equipment open up. (3)

3. a) Explain the short run and long run response of consumption to an increase in expected wealth. (3)
   b) Suppose government announces a policy to increase expenditures by $10 billion a year for two years to purchase new road construction. How would this affect national savings? Suppose that the policy became permanent (forever spending $10 billion each year). Would this have any different effect on savings behavior. (7)

4. a) Use the Statcan website to find 1998 estimates of Canadian participation, employment and unemployment. Calculate (show how) the unemployment rate, the participation rate, and the employment ratio. Report the full name of the web page used.(5)
   b) Search the same site to find and report male and female unrmployment rate, participation rate and employment ratios. Report the full name of the site used. (5)

5. Consider the following economy:
   C^d = 1200 - 1200 r + .15 Y
   
   I^d =  400 - 800 r
   
   G = 400

   a) Find the equation which relates desired savings to Y and r. Suppose full employment Y is 2000. Find the equilibrium interest rate. (3)
   b) Draw a rough diagram of the desired savings and desired investment equilibrium. What would you predict would happen to desired savings in government expenditures were to rise? Illustrate this in your diagram. (4)
   c) Suppose G rises to 500. Calculate the new interest rate. (3)

   Suppose we are given the following production function for a closed economy:

   Y=AK^b N^1-b

   Assume that b=0.3, A=10, real interest rates r=0.1, real price of capital is $15.30, real wage is $5.83, labour employment is 120 and depreciation is 0.15

   a) Use the marginal product condition for the labour demand equilibrium and  find Y. (3)
   b) Find the capital stock by using the marginal product condition for a firm. (3)
   c) Suppose capital grows by 3%, labour by 1.5%, and output by 2.5%. What part of output growth is due to technological change? (4)
   

1. There are three effects mentioned: labour growth, capital growth, and technological change. Use a production function diagram to show the decreasing marginal product of labour as more labour is added to fixed capital (ie. the slope of the production function). Note also that average labour productivity is the slope of the line between the origin and the relevant point on the production curve.

   The increase in labour decreases average and marginal productivity. The increase in capital rotates the curve up so that a given amount of labour produces more output. Both average and marginal products of labour increase. The production curve also rotates up with technological improvements and this also increases marginal and average labour productivity.

   The Asian miracle was often touted as being generated by technological improvements. The empirical analysis attributes most of the increases in output to increases in labour and capital inputs.

2. a) This can be considered as an adverse supply shock, but a temporary shock. Aggregate output will decrease; the production function rotates down. The MPL falls at every level of employment so the Ld curve shifts left; less labour is demanded. Employment and the real wage are predicted to fall. This effect lasts only as long as the "shockingly" poor weather.

   b) If income taxes are reduced, the difference between the real wage received by labour and the net wage increases even though the gross real wage paid by the firm is unchanged. Labour demand is unchanged and labour supply increases; Ls shifts down by the amount of the tax change. The result is a decrease in the gross wage and an increase in employment.

   c) Since cheaper capital is available we expect more capital to be purchased. Increased capital implies a higher marginal product of labour and hence a shift to the right in Labour demand. We predict an increase in the real wage and an increase in employment.

3. a) If expected wealth increased, this would allow more consumption and savings in the long run. To the extent that long run smoothing of consumption takes place, current consumption can only increase if current savings fall, or borrowing increases. The savings decrease can be made up when the expected additions to wealth actually occur.

   b) To the extent that future tax increases are expected to pay for the expenditures, both consumption and national savings would fall, but by a small amount since the cost of taxes can be amortized over a long period of time. If the increase in expenditures were permanent, then the effect on savings and consumption would be more severe since the entire $10B would have to come from reduced S and C each year.

4. a) Using the site http://www.statcan.ca/english/Pgdb/People/Labour/labor20a.htm,

   
   1998 in thousands:
   

   Population=23,993.9
   
   Labour Force= 15,631.5
   
   Employment= 14,326.4
   
   Unemployment=1,205.1
   
   Unemployment Rate = 1,205.1/15,631.5 = 8.3%
   
   Employment Ratio = 14,326.4/23,993.9 = 59.7%
   
   Participation Rate = 15,631.5/23,993.9 = 65.1%

   
   b) Using http://www.statcan.ca/english/Pgdb/People/Labour/labor20b.htm,

   
   

   	Men	Women
   Unemployment Rate	8.5%	8.1%
   Participation Rate	72.4%	58.1%
   Employment Ratio	66.2%	53.4%

   
   

   Consider the following economy:

   C^d = 1200 - 1200 r + .15 Y
   I^d =  400 - 800 r
   G = 400

   a) S^d = 0.85Y - 1600 +1200r = Y-C-G
   

   Y=2000
   

   r=0.15

   
   b) Draw S and I curves sloping up and down respectively with r on the vertical axis. (Increasing r increases the opportunity cost of capital and reduces I, but increases the return to savers so S increases). If G rises, then T will eventually have to rise and both C and S will fall. This means that the S curve shifts left (or up) which would imply a new equilibrium with a higher interest rate and less S and I.

   
   c) 0.85Y - 1700 +1200r = 400 - 800 r

   
   If Y=2000, then r must be 0.20. Why?
   

   1700-1700-400 = -2000r
   

   -400 = -2000r
   

   r = 4/20 = 0.20

   Suppose we are given the following production function for a closed economy: Y=AK^b N^1-b Assume that b=0.3, A=10, real interest rates r=0.1, real price of capital is $15.30, real wage is $5.83, labour employment is 120 and depreciation is 0.15

   a) MPL = (1-b)Y/L = w/p
   Y = 5.83*120/0.7 = 1000

   b) MPK = bY/K = (r+d)Pk
   bY/(r+d)Pk = K = 0.7*1000/(0.25)*15.3 = 183.0

   c) (% change in Y) = (% change in A) + b(% change in K) + (1-b)(% change in L)
   (% change in A) = 0.025 - 0.3*0.03 - 0.7*0.015 = 0.0146 = 1.46%