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Unformatted text preview: Intermediate Macroeconomics Bruce Preston February 18, 2010 Today Revie of La or Suply La or market equili rium Determination of prices and quantities Determination of output La or Market Flo s La or Suply Each individual in the economy faces a la or-leisure choice Like rms, eigh up the costs and enets of suplying la or Benet: income earned Cost: forgone leisure Agregate la or suply is the sum of al individual la or suply decisions Important Determinants of La or Suply Real age: The amount of real income that a orker receives in e change for giving up a unit of leisure for ork T o important e ects arising from " w : Su stitution e ect: tendency for orkers to suply more la or Leisure is more costly Income e ect: tendency for orkers to suply les la or Because ealthier and leisure is hat is caled a normal god The La or Suply Curve Relates the amount of la or suplied to the curent age rate, holding al other factors constant. For e ample: Constant e pectations a out future wages La or suply curve maps the set of ( w; L s ) pairs: that is the optimal la or suplied at each posi le curent real age In the short run: primarily concerned ith the e ects of change in the curent real age Asume: su stitution e ect dominates La or suply curve up ard sloping Thinking A out Ta Policy Consider a ta reform that increases the marginal ta rate from zero to t What are the implications for equili rium employment and ages? Do your conclusions depend on hether the ta change is permanent or tem- porary? What Shifts La or Suply Factors a ecting the num er of hours orked Wealth E pected future ages Demographics Participation rate Ta es La or Market Equili rium La or market equili rium requires L d = L s Clasical analysis: asumes that the real age adjusts quickly to ensure equili rium Equili rium values of...
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