Question

3) Consider some country whose aggregate production function can be described as Y = AF(K,N). As usual, A is total factor productivity, Y is output, K is capital and N is labor. A bar over each factor indicates that the factor is fixed in the long run. Assume this function has constant returns to scale. On the expenditure side, note that, ĭ = C + I + G + NX.Given this information, answer the following as true, false or uncertain and justify your answer. a) If consumers decide, independent of disposable income, to save more and consume less, NX will rise holding all else constant. (8 points) b) If total factor productivity undergoes a positive, increase, labor demand will increase but real wages will be constant. (8 points) c) Labor and capital will share equally in any income generated by improved total factor productivity. (8 points) d) If part of the country secedes real wages of the remaining workers will be unchanged. (8 points)

Answer 1

a. True. when consumers save more then it acts as leakge for an economy and size of economy will shrink as spending goes down then part C( Consumer spending) will go down from the equation

Y= C+I+G+NX. Net exports will rise assuming that country has sizeable exports and as domestic demand is less then exports will be higher and imports less as people are buying less.

b. Uncertain. As factor productivity is higher then output is more. Assuming that it is due to improved labor skills then as demand for labor increases, demand curve shifts to the right and wages increrase. If this is due to capita then demand for capital will be higher and wages will go down as labor supply may exceed demand.

c.False. Labor share will be higher in this as labor is paid periodically.

d. False. Real wages will increase as labor is lost and existing labor will raise cost of their work.