Question

9. Consider a Classical model with the following specifications in Q1, 2019: . Labor Supply: NS-1%, Cobb-Douglas Production Function . The Quantity Theory of Money accurately describes aggregate demand, The Theory of Distribution holds, Parameter values: [y, a, A, K, M, V] [30,0.3, 130, 500, 2500,40]. Suppose a reduction in labor law regulations leads to an outward shift in labor supply, represented as an increase in y from 30 to 32 during Q2, 2019. Assume that everything else stays the same. Using equilibrium output level in period Q1 and Q2, calculate the annualized growth in output. A. 12.02% B. 14.91% C. 18.77% D. 21.53% 10. Consider a Classical model with the following specifications: . Labor Supply: NS-1%, . Cobb-Douglas Production Function, . The Quantity Theory of Money accurately describes aggregate demand, The Theory of Distribution holds, Parameter values: [7, a, A, K, M, V] 7,0.3, 100, 500, 80,35). Calculate equilibrium real wage in this economy. A. 58.5 B. 59.2 C. 68.4 D. 70.3 11. Consider an economy that abides by the standard classical model specifications. Suppose the economy experiences an earthquake that destroys a large amount of capital in the econ- omy (assume the population in unaffected and thus remains constant). Using graphs and written discussion, examine the economy dynamics in the wake of the shock. Expectations are as follows: . Capture the timing in your written discussion . If a curve shifts, explain why/economic intuition . If a market is in disequilibrium, explain how it returns to equilibrium . Explain, if possible, the final outcome in terms of important variables: Y,N, P, C, w

Answer 1

Theory of distribution holds w/p = Mp_N = partial differential F(k, N)/partial differential N N^3 = r w/p equation (1) N = r(1 - alpha) Ak^alpha N^-alpha To find equilibrium employment, labour supply labour demand N = gamma(1 - alpha) Ak^alpha N^-alpha N^1 + alpha = gamma(1 - alpha) Ak^alpha N = [gamma(1 - alpha) Ak^alpha]^-1/1 + alpha Now plug the values y gamma = 30, alpha = 0.3, A = 130, k = 500 M = 2500, gamma = 40 N = [30(1 - 0.3)130 times 500^10.3)]^1/1 + 0.3 = [30(0.7)130 times 500^(0.3)]^1/1.3 \r\n = [17613.82]^1/1.3 = [17613.82]^0.769 N = 1841.032 Now real wage = w/p w/p = N/gamma = from equation (1) Real wage = w/p = 1841.032/30 = 61.367 for quarter Q_1 2019 for quarter Q_2 gamma = 32, alpha = 0.3, A = 130, k = 500, M = 2500 gamma = 40 N = [32(1 - 0.3)130 times 500^0.3]^1/1.3 = [32(1-0.3)130 times 500^0.3]^1/1.3 = [18788.078]^0.769 = 1934.70 \r\n Annulated growth in output