MACROECONOMICS AND THE GLOBAL ECONOMIC ENVIRONMENT

Assignment #2
Due date: 31
st
October, 2014
(at 12.10pm, before the tutorial)

Section I
Answer the following multiple choice questions.
1. The labor force includes:
a) Those who are employed and unemployed
b) Those who are employed
c) Those who are of working age
d) The entire population

2. Frictional unemployment exists
a) When there is a decrease in real GDP
b) Because it takes time to find a job when one is first entering the labor force
c) As a result of technological change
d) When an individual retires

3. The natural rate of unemployment equals the sum of those who are
a) Frictionally and structurally unemployed
b) Frictionally and cyclically unemployed
c) Structurally and cyclically unemployed
d) Frictionally, structurally and cyclically unemployed

4. The marginal productivity of labor
a) Increases when the price of the good sold increases, ceteris paribus
b) Decreases when there is an adverse supply shock, ceteris paribus
c) Increases when more workers are hired, ceteris paribus
d) Decreases when there is an increase in the quantity of capital, ceteris paribus

5. The demand for labor
a) Increases when there is a technological advance, ceteris paribus
b) Increases when there is an increase in the supply of labor, ceteris paribus
c) Decreases when fewer labor units are hired, ceteris paribus
d) Decreases when there is an increase in the supply of labor, ceteris paribus
Section II

Identify whether the following statements are True or False, and support with reasoning.
Provide graphs where relevant.

1. A country which has cyclical unemployment has an unemployment rate greater than its
natural rate.

2. A college graduate is structurally unemployed when he or she looks for a job upon
graduation from college.

3. Incremental labor units have a diminishing marginal productivity, ceteris paribus

4. An increase in capital increases the marginal productivity of labor

5. An adverse supply shock reduces the marginal productivity of labor


Section III

Solve the following problems.

Q1. Suppose you are given the following production function, y= A(KL)
0.5
, where A=10,
K=9, and L varies from 1 to 6 units.
i. Find the output, y, associated with 1 through 6 units of labor.
ii. Find the marginal productivity of labor for the second through sixth labor unit
iii. Sketch the marginal productivity of labor derived in part (ii) and label the curve
accordingly

Q2.
i. How would an adverse supply shock affect the marginal revenue product of
labor?
ii. ii. Suppose labor receives a fixed wage. What happens to the number of labor
units employed when there is an adverse supply shock?

Q3. What are the causes of unemployment? Define the natural rate of unemployment.