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ECON311HW3Solutions - ECON 311 Intermediate Macro Winter...

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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’ take-home 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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