(d) use the model to make other predictions that may eventually be tested.
DIF: Easy REF: 1.2 TOP: II. MSC: Remembering
3. Describe the differences between the short run and the long run.
ANS:
In the short run, we are concerned with the causes of economic fluctuations, or the business cycle. In the long run, we are concerned with the determinants of economic growth. Thus, the long run is the trend of output and the short run represents the fluctuations around the trend.
DIF: Moderate REF: 1.3 TOP: III.A. | III.B. MSC: Understanding
4. Consider the following model of the labor market from the text:
Labor Supply:
Labor Demand:
(a) Identify the model’s parameters.
(b) Identify the endogenous variables.
(c) Solve the model.
(d) What must the relationship between and be?
(e) If the supply and demand for labor were given as
Ls = 2w 2
and
Ld = 3 3w
then what would be the equilibrium wage and level of labor in the labor market?
ANS:
(a) Using the notation in the text, the parameters are and
(b) They are the wage, w, and the labor in the market, L.
(c) Setting supply equal to demand, we get
Solving this for w* and L*, we get
.
(d) To ensure that the wage is positive, it must be true that
(e) Using the previous equation, we get w* 1/5 and L* 12/5.
DIF: Difficult REF: 1.2 TOP: II. MSC: Applying