Macroeconomics Questions

1) Consider an hypothetical "Classical" market-clearing economy characterized by the following equations (all variables as defined in class). W N° = 10+2 P (labour supply) W N° 500 P (labour demand) Y (production function) M P 0.3Y (Qty theory) a) What will the real wage and the level of employment be for this economy? b) Assume K = K = 36. What would the "natural" rate of output be for this economy? c) If the money supply in this economy was M = 500, what would the price-level be? What would the nominal wage, W. be? d) What would happen to the level of output, the price-level, and nominal wages in this economy if the money supply decreased to M = 250? e) Illustrate the so-called Aggregate Demand and Aggregate Supply curves for this economy. 2) Consider an hypothetical "Keynesian" economy characterized by the following equations (all variables as defined in class). 1 Z=C+I+G C 100+0.9(Y T) I 10. T 10, G 10 a) Solve for the equilibrium level of output for this economy. (2 marks) b) Suppose that autonomous investment spending increased by 5 in this econ- omy. What would the effect on equilibrium income be? (2 marks) c) Now set I - 10 again. What change in taxes (T) would have to take place so as to result in the same equilibrium as you found for part b) above? (2 marks) 3) It is often noted that, in addition to many fixed expenditures, government spending also tends to be negatively related to the level of GDP or income in the economy. This is because government programs like employment insurance and job-retraining tend to be in higher demand during recessions and in lower demand during booms. a) Write down a government expenditure relationship or function that would reflect this argument about the endogeneity of G. (2 marks) b) For the model economy in Question #2 above, how wouldsuch a government expenditure relationship affect the multiplier? Would the multiplier be larger, smaller, or stay the same? Explain. (4 marks) c) Would such a government expenditure relationship tend to make the economy more or less stable in response to changes in autonomous spending? Explain. (4 marks)