Economics Questions Task

Question 1

1. Explain when there is an increase in the number of working-age immigrants, how equilibrium wages and employment change in the economy. What are the short-run and long-run responses.
2. If some of the immigrants set up businesses rather than become employees, how would you expect this to affect the wage-setting curve? The price setting curve? And the labor market equilibrium?
3. Do you answers in part a and b suggest the immigration is good or bad for the economy?

Question 2

1. Considering a monopolist’s marginal costs shirt up by $1, what will happen to the monopolist’s price? Explain.
2. Consider a firm in a perfectly competitive market in the short run. At current output, Q, price, P, is equal to the average cost, AC, and AC is decreasing. Should the firm change its output? If so why? At the profit maximizing point, would the firm be making abnormal profit? Why? Explain.
3. Explain why and how the upward sloping part of the marginal cost curve depends on the marginal product curve?

Question 3

Consider the AD-AS model. Assume the aggregate demand curve is given by Y= 8 – 0.5π, that the long run aggregate supply curve is given by Yp = 7, that the short run aggregate supply curve is given by π = π_expect + 0.3(Y - Yp), and that the monetary rule is given by r = 1 + 0.3π

1. What is the economic interpretation behind the aggregate demand curve? Why is it negatively sloped? If you consider point A=(π,Y)=(3, 6.5) and point B=(π,Y)=(5, 5.5), is monetary policy more expansionary in point A, in point B, or neither? Are you referring to the exogenous or to the endogenous stance of monetary policy?
2. Suppose the economy is in equilibrium at the potential level of output, with inflation expectations equal to actual inflation, which equals 2%. A financial crisis hits the economy. Use the model to interpret what happens in the short run and in the long run if the central bank does not intervene exogenously with an expansionary monetary policy.
3. According to the AD-AS model, what is more challenging for a central bank: to use active exogenous monetary policy to offset a financial shock, or to use active exogenous monetary policy to offset an exogenous increase in prices due to an oil price shock? Using the model discuss each case separately. Can the central bank avoid a drop in output and a variation in the price level?

Question 4

John and Sarah live on two different islands. They have eight hours of work in a day. John can grow an apple in 1 hour or make a bowl in 2 hours. Sarah can grow an apple in 2 hours or make a bowl in 1 hour. Both John and Sarah consume equal numbers of apples and bowls.

1. Clearly draw and label PPFs for John and Sarah and their consumption bundle in autarky, with bowls on the vertical axis (Showing how you calculated this). Define and find the opportunity cost of an apple on each island and discuss how it can be represented on each PPF. Does John or Sarah have an absolute or comparative advantage in producing either apples or bowls?
2. Now suppose John and Sarah can freely trade at a price of 1 bowl per apple. Explicitly calculate how much of each good John and Sarah will produce and consume. How much better or worse off in percentage terms are John and Sarah? How is this possible?
3. Discuss. If both free trade and free flows of foreign direct investment (FDI) will always make everyone better off in the world economy, providing examples where access to world markets has made people both better and worse off. Explain why the logic of following comparative advantage did or did not work.