Exam 16: Household and Firm Behavior in the Macroeconomy: a Further Look

Assume a firm finds that its adjustment costs are large enough tht it decides not to decrease its workforce and capital stock when production falls. What is the consequence of this action to the firm?

Explain how an increase in the wage rate might cause the people to work less. Make use of the income effect in explaining your answer.

Assume that the substitution effect dominates. Explain the impact of an increase in income taxes on labor supply.

Explain why a firm may choose not to lay off workers during a decline in sales.

Why is it that housing investment fell sharply during the three recessionary periods since 1970?

Consider a household that has a sudden unexpected increase in wealth, perhaps an inheritance from a distant relative. How will the household's consumption pattern be affected?

Explain why a higher wage rate might lead to a larger labor supply. Make sure to use opportunity costs and the substitution effect to demonstrate your point.

A candidate is running for public office and is against making any tax cuts because of a concern that this will lead to lower tax revenue and a higher budget deficit. His aides have told him that studies have shown that the income effect dominates the substitution effect along the labor supply curve. If this is true does this support the candidate's position on cutting taxes if his goal is to insure that tax revenue does not fall? Explain.

When forming their expectations, firms gather information about several factors. Name three of those factors that would be important.

Define and explain the difference between the income and substitution effects in relation to changes in income tax rates.

Assume firms have inventories that they can draw down to meet an increase in demand. What impact will this have on the size of the multiplier and why?

Under what condition is a change in tax rates likely to affect individuals' behavior regarding consumption and saving?

Explain the life-cycle theory of consumption.

What did Keynes mean by the phrase "animal spirits of entrepreneurs"? Why do these "spirits" make investment a volatile component of GDP?

Investment decisions require looking into the future and forming expectations about it. In forming their expectations, firms consider numerous factors. Discuss these factors.

What does the empirical evidence suggest about the shape of the labor supply curve?

-Refer to the figure above. What could cause a movement from Point B to Point C?

Assume that you are an aide to a politician. Explain to your boss what would happen to the shape of the labor supply curve if the income effect is dominating the substitution effect.

What is permanent income?

Using the income effect, explain the likely impact of a decrease in the interest rate on household consumption for an individual who is a debtor.