Download Exercise 6 (+additional question) in Mankiw:

1: Fill in all numbers where there now are question marks (?) in the table. 5 points
Private consumption (C)
Privat konsumtion (C)
Government purchases= government
consumption and governemnt
investment(G)
Private investment (I)
Offentlig konsumtion och offentliga
investeringar (G)
Privata investeringar,
Inklusive lagerinvesteringar (I)
Trade balance (NX)
Handelsbalansen (NX)
Labor income, net of taxes
Löninkomster efter skatt
Capital income
Kapitalinkomster efter skatt
Depreciation of capital
Kapitalförslitning
Net factor incomes from abroad (NFI)
Faktorinkomster från utlandet, netto
(NFI)
Net transfers from abroad (NFTr)
Transfereringar från utlandet, netto (NFTr)
Government taxes (including indirect
Skatter (inklusive moms och
taxes and social security contributions) arbetsgivaravgifter)
Government transfers to households and Offentliga transfereringar till hushåll och
firms
företag
Government transfers to firms
Offentliga transfereringar till företag
Gross Domestic Product(GDP)
Bruttonationalprodukten till
Marknadspris (BNP)
Gross National Product(GNP)
Bruttonationalinkomst till
Marknadspris (BNI)
National saving
Nationellt finansiellt sparande
Public saving
Offentligt finansiellt sparande =
= government budget surplus
Den offentliga sektorna budgetöverskott
Private saving
Privat finansiellt sparande
A. Calculate GDP and GNP. 1point.
B. Calculate public saving, private and national saving. 3points.
C. Calculate private consumption(C). 1point.
1point
2. In a closed economy, what do we mean by “crowding-out”?
Why might “crowding-out” be a problem?
1point
3. If inflation is 10 percent and the real interest is 12, what is the nominal interest rate?
1 points
4. Explain the expectation-augmented Phillips-curve! State it and explain it!
?
1000
400
200
1100
400
0
0
0
1600
700
0
?
?
?
?
?
If you cannot calculate; you should be able to get some points by answering qualitatively:
6 points
5. Consider a Cobb-Douglas production function with three inputs. K is capital (the number of
machines), L is “unskilled” labor (the number of workers without college degrees), and H is
“skilled” labor (the number of workers with college degrees). Think that H is a measure of
human capital in the economy. The production function is:
Y  K 0.4  L0.3  H 0.3
Assume that K=1, and that there are 100 unskilled workers in the economy, and 20 skilled
workers. Thus, this is the supply of unskilled labor and the supply of skilled labor in the
economy.
Assume that there are many firms in the economy which produces an identical good. That is,
assume perfect competition in the goods market. Also assume perfect competion in the 2 labor
markets, which for example means that there exist no labor unions. There exist 2 labor
markets: one for unskilled workers and one for skilled workers.
A.Calculate the equlibrium real wage for unskilled workers.
(The equilibrium real wage for a particular type of labor is the real wage that equates the
demand for this type of labor with the supply of this type of labor.)
(Hint: you find the equilibrium real wage by evaluating the marginal product of unskilled
labor where L=100 and H=20; that is, where the demand for these 2 types of workers equals
the supply of these types of labor.)
Also calculate the equilibrium real wage for skilled workers.
B. Now assume that L increases to 200 because of immigration.
What happens to the real wage for unskilled workers? (Increases, decreases,stays constant).
What happens to the real wage for skilled workers? (Increases, decreases, stays constant).
Calcule the new real wages for the 2 types of labor!
Also show the effects in a diagram that shows the labor market for “unskilled” workers and in
a diagram that shows the labor market for “skilled” workers (=workers with college degrees).
If you cannot calculate the new real wages you might be able to answer the question
qualitatively (that is, the real wage of “unskilled” increases, decreases or stays constant).
You might also be able to show the effect on the real wages of immigration in the diagrams.
C. If the real wage for “unskilled” labor cannot change because of minimum wage laws when
the number of “unskilled” workers increases (due to immigration), what happens to the real
wage for skilled workers. What happens to employment of “unskilled” workers?
8 points
6. Use the Keynesian model for a small open economy (the Mundell-Flemming model)
To answer the following questions.
Some of the assumptions of this model are:
Equilibrium in the goods market: Y = C(Y-T) + I(r=r*) + G + NX (real exchange rate)
Equilibrium in the money market: M/P = L(r=r*,Y)
Assumption 1: r is the real interest rate and r* is the real interest rate in the rest of the world.
Assumption 2: The domestic price level and the price level in the rest of the world are
constant in the short run.
A. Assume that the foreign demand for the country’s export products fall.
What will happen in the short run (when the domestic price level and the price level in the
rest of the world are constant) to GDP (Y), to the nominal and to the real exchange rate
and to the trade balance? Also describe what the process!
B. Assume that actual GDP is below full-employment GDP. As a result, the government
decides to simulate aggregate demand by lowering taxes (T).
What will happen in the short run (when the domestic price level and the price level in the
rest of the world are constant) to GDP (Y), private consumption, to the nominal and to the
real exchange rate and to the trade balance? Also describe what the process!
C. Assume that actual GDP is below full-employment GDP. As a result, the government
decides to simulate aggregate demand by increasing the nominal money supply (M).
What will happen in the short run (when the domestic price level and the price level in the
rest of the world are constant) to GDP (Y), private consumption, to the nominal and to the
real exchange rate and to the trade balance? Also describe what the process!
D. Consider what will happen in the long run. Assume that the economy’s GDP is below the
full-employment GDP (Y). What will happen to nominal wage and to the price level?
What happens to GDP, private consumption, private investment, to the real exchange rate and
to the trade balance?
3 points
7. Use 2-period consumption model from the book to answer the following questions:
A. If the individual’s utility function is such that he prefers/values current consumption
more than future consumption, do we know for sure that his current consumption will
be higher than his future consumption? Why or why not! Explain!
B. B. If the individual’s utility function is such that he prefers/values current
consumption more than future consumption, do we know for sure that his current
consumption will be higher than his future consumption? Why or why not! Explain!