ECON 311 Intermediate Macro
Winter 2008
Prof. Marty Eichenbaum
TA Tim Lin
Assignment 3 Solutions
Question 1
(a)
In equilibrium, national saving
S
=
Y

C

G
= 5000

[250 + 0
.
75(5000

1000)]

1000
= 750
Investment,
I
= 1000

50(5) = 750. Net exports,
NX
= 750

750 = 0. This implies
ε
= 1.
(b)
Carrying out the same calculations, we get
S
= 500,
I
= 750, and
NX
=

250.
Using the net export
function, we can solve for
ε
and get
ε
= 1
.
5.
(c)
If we take the same steps as above, we get the same
S
,
I
, and
NX
. But if we use the new export function
to solve for
ε
, we get
ε
= 0
.
9.
Question 2
(a)
Firms choose the optimal amount of labor by setting the real wage,
w
, to the marginal product of labor.
w
=
MPL
w
= 309

2
L.
Rearrange and we get the labor demand function:
L
D
= 154
.
5

w
2
.
(b)
In equilibrium, labor demand equals labor supply,
L
D
=
L
S
154
.
5

w
2
= 22 + 12
w
+ 2(35)
.
Solve for
w
we get
w
= 5 and
L
= 152.
1
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(c)
With higher taxes,
L
D
=
L
S
154
.
5

w
2
= 22 + 12
w
+ 2(40)
.
Solve for
w
we get
w
= 4
.
2 and
L
= 152
.
4. Under this specification of the labor supply curve, when tax
increases, workers’ takehome wage decreases so they work more to make up the lost income.
Therefore,
labor supply curve shifts to the right which leads to lower equilibrium real wage and higher equilibrium
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 Winter '08
 GORDON
 Macroeconomics, Supply And Demand, labor supply curve, equilibrium real wage, Marty Eichenbaum TA, higher equilibrium labor

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