Explain the importance of the variability of labor to wages for competing theories of the business cycle

What are the two methods we had for measuring output in the financial sector? How do they match our accounting definitions of value added? If the value of the financial sector is in terms of reducing the individual risk in the economy, how do you measure the effectiveness of the financial sector? In addition to the effectiveness, how do you measure the value of the risk management services the financial sector provides?

Describe the behavior of consumption, investment, labor, productivity, wages, the price level and the money supply over the business cycle both in terms of correlation, magnitude and lead vs lag. Give the economic intuition behind the results on consumption, productivity, wages and price levels. For some of these rather than the intuition you should explain the importance of this evidence in terms of supporting/rejecting various theories.

Explain how inventory investment affects the product method of na- tional income accounting. Why might you want to split intended in- ventory accumulation from accidental inventory accumulation? If such inventories were not considered part of demand, how would our ac- counting identities change if at all? In some economic models, income and subsequent output fall when unanticipated inventories increase. How might such a mechanism amplify falls in consumption? Which Explain how national income accounting is affected by intermediate goods. How do national product accounts record research and devel- opment spending?

Suppose an economy has two years worth of data, years 1 and 2. Sup- pose there are also two goods, bread and corn. Suppose in year one fifty units of corn are sold at a price of 1 $ and 20 units of bread are sold at a price of 2 $. Suppose in year two, 60 units of corn are sold at a price of 1.5 $ and 80 units of bread are sold at a price of 2.05 $. Compute nominal GDP in both periods. Compute real GDP under both defini- tions of a base year. Compute also chain weighted real GDP. Compute the CPI’s with each base year. What are the implications for these measures for the amount of inflation in this economy. What about the amount of economic growth? What if corn in year 2 is twice as valuable as corn in year 1.

Why in your opinion does the US government measure both a GDP deflator and a CPI? Historically how have the two behaved. If you had to measure a nominal amount of spending to see how it changed over time in real terms, which would you use?

How would you distinguish price increases from productivity increases in the cell phone industry if you were a statistician? Why might you be asked to do this? Be as specific as possible about the method you would employ.

Suppose an individual has 40 hours to work. Suppose also the individ-

ual has a net wealth outside the labor market of 200$. Suppose the

wage rate is equal to 200 $ per hour. Graph the budget constraint.

Suppose the marginal rate of substitution between consumption (C)

and leisure (l) is equal to 50 C . What will the consumer’s choice of la- 1l

bor versus consumption be. Suppose the wage falls to 100 $ per hour. What is the new choice of labor vs. consumption. Interpret this in terms of substitution and income effects. Use a graph to do this.

How will the following events/policies affect labor supply if at all? Be specific as possible about income and substitution effects:

(a) An increase in productivity.

(b) A raise in wage rate

(c) A labor income tax on all income.

(d) A labor income tax on all labor income beyond the first 20 hours.

How will the above policies effect labor demand? What about a price control which limits what can be charged for output.

Show how the destruction of some of the nation’s capital stock (say through a hurricane is destroyed). How should this effect equilibrium, consumption, output and labor supply? Let’s say the government tries to offset some of the effects of the decline in capital by increasing gov- ernment spending. What is the likely outcome of this policy interven- tion as opposed to where the economy would be without any fall in the capital stock?

Consider an economy with a straight line PPF. Show how an increase in labor taxes affects outcomes. Do the same for an increase in government spending. [Hint assume in the background that an increase in labor supply taxes offsets a fall in lump sum taxes.]

Explain the importance of the variability of labor to wages for com- peting theories of the business cycle. How do the data and historical experiences provide evidence about that relationship and the underly- ing theories? You may also want to reflect on the variance of wages and output as well.

Suppose a production function is associated with a Marginal Product of Labor given by by MPN = zN−0.333. Let z = 1. Graph the labor demand curve. Suppose z were to increase to 2. How would this affect the labor demand curve? Suppose in addition to z = 1, firms had to borrow capital at an interest rate of 6 % to pay workers in advance of production. How would that effect the marginal product of capital. What if there was a limit on the capital firms could borrow? Suppose instead that 20% of workers pocketed the paycheck but didn’t perform the work assigned. How would this affect the MPL? Suppose the firm was run by a manager who could with a 10% probability pocket the entire income of the firm including the wage bill. How would this affect the labor demand curve?

Show via a mathematical derivation why an increase in dividend income leads to a fall in labor supply. How would this result change if leisure and consumption were perfect compliments? (This question should lead you to think about the possible competitive equilibria with perfect compliments.

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