MULUNGUSHI UNIVERSITY, IDE, INTERMEDIATE MACROECONOMICS

ASSIGNMENT 3, SUBMIT ONLY QUESTION 5, 8, 9, 11

1. GIVE A BRIEF EXPLANATION ON THE FOLLOWING:
a) How does unemployment affect the wage set for workers in the labor market?
b) Why do wages depend on the expected price level, rather than the actual price level?
c) Other than the unemployment rate and expected price level, explain three factors, (public
policies) that would affect the wage set in the labor market.
d) How does each of the factors above (in c) affect the natural rate of unemployment?
e) How are wages firms pay their workers and prices firms charge for their output related?

2. Explain the following types of unemployment and explain what factors are responsible for their
existence and how the unemployment can be reduced: cyclical unemployment, structural
unemployment and frictional unemployment and natural rate of unemployment.

3. (a) Briefly explain how job search leads to unemployment.

(b) Give 2 examples of policies that would reduce the job search problem and therefore reduce
unemployment
(c) Briefly explain the three factors that would make the real wage to be rigid.
(d) Briefly explain, with the help of a properly labeled diagram, how wage rigidity causes
unemployment
4. The Philips curve offers policy makers a menu of possible economic outcomes.’ Using both AD-AS
model and Philips curve clearly show
(a) What type of monetary and fiscal policies result to lower unemployment and higher inflation?
(b) What type of monetary and fiscal policies result to lower inflation and higher unemployment?
5. Suppose the adult population in a small economy is 10,000; the labor force participation rate is 80%
and the unemployment rate is 25%
(a) Define the following: labor force participation rate; unemployment rate; steady state rate of
unemployment.
(b) Calculate how many people are: In the labor force, Employed ,Unemployed
6. Suppose in country Y, among the employed, 12% experience job loss every month, and among the
unemployed, 20% will find jobs every month.
(a) Calculate the steady state fraction of people who are unemployed
(b) What policies can be suggested that would affect the rate of job separation, and the rate of job
finding so as to reduce unemployment?
7. Suppose the markup of prices over marginal cost is 5%&the wage setting equation is W=P(1-U),
where U is unemployment rate.
(a) What is the real wage, as determined by the price setting equation?
(b) Calculate the natural rate of unemployment.
(c) Present your results for real wage and natural rate of unemployment on a graph.
(d) Explain a factor that would raise the markup of prices over costs, and how that would affect
the real wage and natural rate of unemployment.
(e) If the markup of prices over costs increases to 10%, calculate the new real wage, and natural
rate of unemployment.
8. Suppose the labor market condition was such that the markup of prices over marginal cost is 20%, and
the wage setting relation is W=P(1-U), where W is the nominal wage, P is the price level, and U is the
unemployment rate.

a) Calculate the real wage as determined by the price setting relation, and calculate the natural
rate of unemployment (graph your results )
b) If the markup of prices over marginal cost increased from 20% to 25%, calculate the new
natural rate of unemployment, and explain what has happened and why it is so.

9. Suppose the labor market has the following statistics: Unemployed=1million, Employed=4million,
Adult population= 7million.
(a) Suppose of the 1million unemployed, 80,000 of them find jobs every month; of the 4million
employed,160,000 lose their jobs every month.
(i) Calculate and interpret the steady state rate of unemployment
(ii) Give an example of a policy that would reduce the rate of job separation.
(iii) Suppose this policy reduces the number of people losing their jobs from 160,000 to 120,000.
Calculate and explain how this will affect the steady state unemployment rate.

10. Assume Zambia has the following production function given by: Y  F ( K , L)  K L
1/ 2 1/ 2

(a) Depicted above is a production function with constant returns to scale. What does that mean?
(b) Derive the per worker production function.
(c) Assume Zambia experiences no population growth or technical progress, but has capital
depreciation of 5% each year and saves 10% of output each year.
(i) Explain what the steady state level of capital is.
(ii) Calculate the steady state level of capital per worker, steady state level of output per
worker, steady state level of consumption per worker, steady state level of investment
per worker and steady state level of depreciation per worker.
(iii) Plot the results above
(iv) According to the Solow model, how does the rate of saving affect economic growth?
(v) What is the golden rule level of capital?
(vi) Using appropriate calculations, determine whether this economy’s saving rate gives
the golden rule level of capital, or it gives a steady state level of capital greater or less
than the golden rule level.
(vii) If the steady state level of capital is not the golden rule level, suggest policies that
would be recommended
11. Consider an economy described by the following production function: Y=K 0.2L0.8
Suppose the depreciation rate is 10%.
(a) Explain what the golden rule level of capital is.
(b) For this economy, calculate the golden rule level of capital per worker, output per worker,
depreciation per worker and consumption per worker.
(c) Plot the results obtained in (b) above.
(d) Calculate the saving rate that would give the golden rule level.
(e) Explain what happens to the consumption level if the saving rate departs from the one that
gives the golden rule level.
(f) If the economy was to have a lower saving rate than the one that gives the golden rule level,
what kind of public policy would raise the saving rate to the golden rule level?