ECON2020 Tutorial 5
Semester 1 2022
1 Multiple Choice Questions
1. In the classical model of the labour market, when capital
(
K¯
)
increases:
(a) output increases.
(b) employment increases.
(c) real wage increase.
(d) A, B and C are true.
(e) only A and B are true.
2. In the classical model of the labour market, expansionary monetary policy:
(a) decreases equilibrium interest rate.
(b) increases prices.
(c) does not affect output.
(d) increases employment.
(e) B and C are true.
1
2 Short Answer Questions
1. As people get older, work becomes more onerous and more unpleasant. As a growing awareness
of mortality develops, many will feel that they have a limited amount of time left in their lives,
and that they should devote more of their remaining time to their hobbies, passions and family, as
opposed to work.
(a) Recall that the parameter n measures the disutility of time spent on labour (relative to leisure
time), and as n falls, work becomes even more undesirable relative to leisure. What impact
would an aging population have on the parameter n on average across the population?
(b) Given your answer to part (a), what impact would an aging population have on the labor
market?
(c) What impact would an aging population have on aggregate supply in the classical model
described in Lecture 5?
2. In the early 2000’s, the increasing adoption of personal computers in many workplaces greatly
improved the level of technology employed in production (∆A > 0) .
Analyse the impact of this change in workplace technology.
(a) What is the impact on the labour market?
(b) What is the impact on aggregate demand?
(c) What is the impact on aggregate supply?
(d) What is the impact on the general equilibrium of the overall economy? (In the context of the
AD-AS model.)
(e) Are households better off or worse off as a result of this development?
3. Suppose the government increased lump-sum net taxes.
(
∆T¯ > 0
)
. Analyze the impact of this
contractionary fiscal policy.
(a) What is the impact on the labour market?
(b) What is the impact on aggregate demand?
(c) What is the impact on aggregate supply?
(d) What is the impact on the general equilibrium of the overall economy? (In the context of the
AD-AS model.)
(e) Are households better off or worse off as a result of this development?
4. (Advanced - but still examinable) Suppose net tax is not lump-sum, but a fraction of income,
T¯ = tY . Also suppose households care about after-tax real wage
(
(1− t) WP
)
as opposed to gross
real wage
(
W
P
)
.
Use labour supply function from Lecture 5, which in this case can be restated as.
Ns = (1− t)nW
P
Finally, suppose that the tax rate (t) was initially 0 (t0=0), but was then increased to t1 > 0.
Analyse the impact of an increase in the tax rate (∆t > 0) on equilibrium output (Y ∗),
price level (P ∗), real wage (W/P )∗ and employment (N∗).