Question

1. Consider an economy that institutes a minimum wage that is above the equilibrium wage.

1. Draw a (well-labeled) graph of the market for labor in such an economy. (6 points)

2. Explain in one to two sentences how the minimum wage has affected the quantity demanded and quantity supplied of labor, as well as unemployment. (3 points).

2.     a. Explain the key role of a central bank (such as the Federal Reserve) in the monetary system. (4 points).

Answer 1

(a) See attached
(b) Minimum wage, higher than equilibrium wage often leads to some unemployment, as demand for labor decreases and is lesser than supply of labour.

(b) (a) Key role of the Central Bank is to control the Money supply level in the economy, in a way such that the aggregate Price level is maintained, and does not fluctuate. The level of real money supply (M/P) determines the Real wage level in the economy.

Let me know if any queries.