Answer b 41 a change in the stock market is a good

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Unformatted text preview: looking at its past behavior. Answer: (b) 41) A change in the stock market is a good indicator of a change in a) current income. b) future income. c) wealth. d) the future growth rate of real GDP. Answer: (c) 9 NAME: _________________________________ Student ID: __________________________ BONUS: SHORT ESSAY QUESTION. 10 points ANSWER IN THE GIVEN SPACE. Can an outbreak of laziness generate a recession? Suppose that the representative consumer’s preferences change, in that his or her marginal rate of substitution of leisure for consumption increases for any quantities of consumption and leisure. a) Explain what this change in preferences means in more intuitive language. b) What effects does this have on the equilibrium real wage, hours worked, output, and consumption? EXPLAIN GRAPHICALLY. c) Do you think that preference shifts like this might explain why economies experience recessions? Explain why or why not. (Hint: can this change in preferences’ behavior generate similar to data key business cycle facts?) SOLUTION a.) At the margin, the consumer decides that leisure is more preferred to consumption. That is, the consumer now requires a bigger increase in consumption to willingly work more (consume less leisure). b.) To work out the effects of this change in tastes, we refer to the following Figure. The production possibility frontier in this example is unchanged. The consumer now picks a new point at which one of the flatter indifference curves is tangent to the production possibilities frontier. That is, equilibrium will shift from point A to point B. Consumption falls and leisure rises. Therefore, the consumer works less and produces less. Because employment has fallen, it also must be the case that the real wage increases. C I2 I1 A B l h -G c.) This disturbance, which some might characterize as a contagious outbreak of laziness, would have the appearance of a recession, as output and employment both fall. The consequent reduction in consumption is also consistent with a typical recession. However, in this case the real wage would rise, which is inconsistent with the business cycle facts. Therefore, this type of preference change is not a cause of recessions. 10...
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This document was uploaded on 03/03/2014.

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