Download ECNS 251 Spring 2013 Homework 9 Answer Key 1. The labor force

ECNS 251
Spring 2013
Homework 9 Answer Key
1. The labor force consists of the number of employed (139,445,000) plus the number of
unemployed (15,260,000), which equals 154,705,000.
To find the labor-force participation rate, we need to know the size of the adult population.
Adding the labor force (154,705,000) to the number of people not in the labor force
(82,614,000) gives the adult population of 237,319,000. The labor-force participation rate is
the labor force (154,705,000) divided by the adult population (237,319,000) times 100%,
which equals 65.2%.
The unemployment rate is the number of unemployed (15,260,000) divided by the labor
force (154,705,000) times 100%, which equals 9.9%.
2. a. If an auto company goes bankrupt and its workers immediate begin looking for work, the
unemployment rate will rise and the employment-population ratio will fall.
b. If some of the unemployed auto workers give up looking for a job, the unemployment
rate will fall and the employment-population ratio will remain the same.
c.
If numerous students graduate from college and cannot find work, the unemployment
rate will rise and the employment-population ratio will remain unchanged.
d. If numerous students graduate from college and immediately begin new jobs, the
unemployment rate will fall and the employment-population ratio will rise.
e. If a stock market boom induces earlier retirement, the unemployment rate will rise and
the employment-population ratio will fall.
f.
Advances in health care that prolong the life of retirees will not affect the unemployment
rate and will lower the employment-population ratio.
3. a. Figure 3 illustrates the effect of a union being established in the manufacturing labor
market. In the figure on the left, the wage rises from w1U to w2U and the quantity of
labor demanded declines from U1 to U2D. Because the wage is higher, the quantity
supplied of labor increases to U2S, so there are U2S – U2D unemployed workers in the
unionized manufacturing sector.
b. When those workers who become unemployed in the manufacturing sector seek
employment in the service labor market, shown in the figure on the right, the supply of
labor shifts to the right from S1 to S2. The result is a decline in the wage in the
nonunionized service sector from w1N to w2N and an increase in employment in the
nonunionized service sector from N1 to N2.
ECNS 251
Spring 2013
4. a. If a firm was not providing such benefits prior to the legislation, the curve showing the
demand for labor would shift down by exactly $4 at each quantity of labor, because the
firm would not be willing to pay as high a wage given the increased cost of the benefits.
b. If employees value the benefit by exactly $4 per hour, they would be willing to work the
same amount for a wage that's $4 less per hour, so the supply curve of labor shifts down
by exactly $4.
Figure 4
c.
Figure 4 shows the equilibrium in the labor market. Because the demand and supply
curves of labor both shift down by $4, the equilibrium quantity of labor is unchanged and
the wage rate declines by $4. Both employees and employers are just as well off as
before.
d. If the minimum wage prevents the wage from falling, the result will be increased
unemployment, as Figure 5 shows. Initially, the equilibrium quantity of labor is L1 and the
equilibrium wage is w1, which is $3 lower than the minimum wage wm. After the law is
passed, demand falls to D2 and supply rises to S2. Because of the minimum wage, the
ECNS 251
Spring 2013
quantity of labor demanded (L2D) will be smaller than the quantity supplied ( L2S). Thus,
there will be unemployment equal to L2S – L2D.
Figure 5
Figure 6
e. If the workers do not value the mandated benefit at all, the supply curve of labor does
not shift down. As a result, the wage rate will decline by less than $4 and the equilibrium
quantity of labor will decline, as shown in Figure 6. Employers are worse off, because
they now pay a greater total wage plus benefits for fewer workers. Employees are worse
off, because they get a lower wage and fewer are employed.
5. a.
Happy Bank
Assets
Reserves
Loans
$100
$900
Liabilities
Deposits
Bank Capital
b. The leverage ratio = $1,000/$200 = 5.
$800
$200
ECNS 251
Spring 2013
c.
Happy Bank
Assets
Reserves
Loans
$100
$810
Liabilities
Deposits
Bank Capital
$800
$110
Assets decline by 0.9%. Bank capital declines by 4.5%. Bank capital is smaller than
assets.
6. In this problem, all amounts are shown in billions.
a. Nominal GDP = P × Y = $10,000 and Y = real GDP = $5,000, so P = (P × Y )/Y =
$10,000/$5,000 = 2.
Because M × V = P × Y, then V = (P × Y )/M = $10,000/$500 = 20.
b. If M and V are unchanged and Y rises by 5%, then because M × V = P × Y, P must fall
by 5%. As a result, nominal GDP is unchanged.
c.
To keep the price level stable, the Fed must increase the money supply by 5%, matching
the increase in real GDP. Then, because velocity is unchanged, the price level will be
stable.
d. If the Fed wants inflation to be 10%, it will need to increase the money supply 15%.
Thus M × V will rise 15%, causing P × Y to rise 15%, with a 10% increase in prices and
a 5% rise in real GDP.
7. With constant velocity, reducing the inflation rate to zero would require the money growth
rate to equal the growth rate of output, according to the quantity theory of money ( M × V =
P × Y ).
8. The following table shows the relevant calculations:
(1)
(2)
(3)
(4)
(5)
(6)
Nominal interest rate
Inflation rate
Before-tax real interest rate
Reduction in nominal interest rate due to 40% tax
After-tax nominal interest rate
After-tax real interest rate
(a)
10.0
5.0
5.0
4.0
6.0
1.0
(b)
6.0
2.0
4.0
2.4
3.6
1.6
(c)
4.0
1.0
3.0
1.6
2.4
1.4
Row (3) is row (1) minus row (2). Row (4) is 0.40 × row (1). Row (5) is (1 – .40) × row (1),
which equals row (1) minus row (4). Row (6) is row (5) minus row (2). Note that even
though part (a) has the highest before-tax real interest rate, it has the lowest after-tax real
interest rate. Note also that the after-tax real interest rate is much lower than the before-tax
real interest rate.
9. a. Unexpectedly high inflation helps the government by providing higher tax revenue and
reducing the real value of outstanding government debt.
ECNS 251
Spring 2013
b. Unexpectedly high inflation helps a homeowner with a fixed-rate mortgage because he
pays a fixed nominal interest rate that was based on expected inflation, and thus pays a
lower real interest rate than was expected.
c.
Unexpectedly high inflation hurts a union worker in the second year of a labor contract
because the contract probably based the worker's nominal wage on the expected
inflation rate. As a result, the worker receives a lower-than-expected real wage.
d. Unexpectedly high inflation hurts a college that has invested some of its endowment in
government bonds because the higher inflation rate means the college is receiving a
lower real interest rate than it had planned. (This assumes that the college did not
purchase indexed Treasury bonds.)