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

Define and explain Okun's Law. Assume the economy in 1995 grew 4%. Based on Okun's Law, how would the unemployment rate be affected? Is Okun's Law really a law? Is it true all of the time?

Assume that Brenda has positive wealth. As the interest rate decreased, Brenda reduced her current consumption. What can we conclude is true about the relative strength of the income effect and substitution effect for Brenda?

Compare and contrast the labor force participation rates between men and women since 1970.

How does a household respond when it is constrained from working as much as it would like? Explain with the use of an example.

Although the stock of inventories fluctuates over time because production is smoothed relative to sales, at any point in time, inventories may be unexpectedly high or low because sales have been unexpectedly low or high. Explain how this is likely to affect future production.

Explain the life-cycle theory of consumption. How does it differ from the Keynesian theory of consumption?

Define the unconstrained supply of labor.

What is plant-and-equipment investment?

What is the optimal level of inventories? What are the costs of holding inventories? What are the benefits of holding inventories? How will an increase in interest rates affect the optimal level of inventories?

A candidate is running for public office and has made a pledge to cut taxes. His aides have told him that studies have shown that the substitution effect dominates the income 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 increase tax revenue? Explain.

What are adjustment costs?

What is meant by nonlabor or nonwage income? Please give examples.

Using the income effect, explain the likely impact of a decrease in the interest rate on household consumption for an individual with positive wealth.

Consider two households that are at the same stage in their life cycle and have similar expectations about future wage rates, prices, and so on. They expect to live the same length of time, and both plan to leave the same amount to their children. They differ only in their wealth. Because of a past inheritance, household 1 has more wealth than household 2. Which household is likely to have a higher consumption path for the rest of its life?

Assume the unemployment rate does not tend to fall as soon as the economy pulls out of a recession. What would be a good explanation for this?

Define inputs.

What would be the shape of the labor supply curve if the substitution effect was exactly equal to the income effect? Explain. How realistic is a labor supply curve of this shape?

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

What is the approximate size of the multiplier in practice? Explain why the actual multiplier is smaller than the simple multiplier presented earlier in the text.

-Refer to the above figure. Assume the the investment demand curve is currently at I₃. Describe what would happen if there was an increase in GDP due to the accelerator effect.