SOLUTIONS MANUAL MACROECONOMICS THEORIES AND POLICIES 10TH EDITION FROYEN Full Doawnload: https://solutionsmanualbank.com/download/solution-manual-formacroeconomics-theories-and-policies-10-e-richard-t-froyen/
PART TWO: CLASSICAL ECONOMICS AND THE KEYNESIAN REVOLUTION CHAPTER 3: CLASSICAL MACROECONOMICS (I): OUTPUT AND EMPLOYMENT CHAPTER OVERVIEW The chapters in Part II analyze the major macroeconomic models. Chapter 3 is the first of two chapters on the classical macroeconomic model and deals with the classical theory of output and employment. After an introductory section that explains the background for the development of classical economics as an attack on the mercantilist position, the classical equilibrium model is presented. The building blocks of the classical system are derived, including the aggregate production function, the labor demand schedule, and the labor supply schedule. With these relationships, the classical aggregate supply schedule is derived. The vertical aggregate supply schedule is used to illustrate the supply-determined nature of output and employment in the classical system. The effects in the labor market of an increase in the aggregate price level are analyzed to show how the money wage must rise proportionately to restore equilibrium (Figure 3-5). The real wage and, as a consequence, the level of employment are unchanged. Given the supply-determined nature of output in the classical system, factors such as changes in the quantity of money do not affect output. Two assumptions in this classical theory of output are: 1. Perfectly flexible prices and wages. 2. Perfect information on the part of all market participants about market prices, in this case the relevant market price being the real wage. We return to the discussion of these assumptions when other macroeconomic systems are discussed.
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ANSWERS TO QUESTIONS IN CHAPTER 3 1. First, the classical economists attacked the mercantilist notion of bullionism, the belief that the wealth of a nation was closely tied to its stock of precious metals. The classical economists argued that real factors, the productive resources in the economy, were the important determinants of the wealth of a nation. This led them to the view that money had no intrinsic utility; it was useful only in facilitating transactions. In their theory, therefore, they confined money to this transaction function and
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neglected, for the most part, other roles for money, including possible monetary effects on the shortrun level of economic activity. Second, the classical economists attacked the mercantilist belief in the need for state action to direct the capitalist system. They stressed the optimizing tendencies of the free market. This view led them to noninterventionist conclusions in the area of macroeconomic policy as well. 2. An aggregate production function gives the level of output that will be produced for given levels of the factor inputs, capital, and labor. In the short run, the stock of capital (K) is fixed. Output (y) varies, as shown in Figure 3.1, as we change the labor input. An increase in the average and marginal productivity of labor, due to increased education of the labor force, would shift the F (K, N) schedule upward in Figure 3.1. Because the slope of this curve is the marginal productivity of labor (MPN), the curve would become steeper at each point. 3. On the demand side of the labor market, firms maximize profits by moving output to the point where marginal cost (W/MPN) equals price (P), or equivalently the real wage (W/P) is equated with the marginal product of labor (MPN). For a given real wage, the firm moves to the point along the marginal product of labor schedule at which this latter equality holds. If the equality does not hold, the firm can increase profits by changing the amount of labor demanded. Because the marginal product of labor declines as employment increases, this implies that the quantity of labor demanded varies inversely with the level of the real wage. The classical theory of labor supply assumed that individuals maximize utility, which depends positively on leisure and consumption of goods. There is, then, a labor leisure trade-off because the individual must work (give up leisure) in order to earn income, with which to buy goods. The real wage represents the terms by which the individual can trade off leisure for income. With the assumptions made in the text, as the real wage rises, making this trade-off more favorable, the individual increases labor supply. 4. A change in taste with leisure becoming more valuable would cause indifference curves in Figure 3.3a to rotate such that they are steeper at a given level of labor supplied. This reflects the fact that with a higher value placed on leisure, to maintain a given level of utility as employment increases (and leisure declines), the individual requires a greater income payment. With steeper indifference curves, a given real wage line will be tangent to an indifference curve at a lower employment level; less labor will be supplied at each level of the real wage. In terms of Figure 3.4, the labor supply (Ns) schedule will shift to the left. Employment, and therefore output, will fall; the real wage will rise. 5. The key assumptions underlying the classical auction market characterization are: a. Perfectly flexible prices and wages. b. Perfect information on the part of all market participants about market prices. 6. At the level of the firm we are able to assume that the money wage is given. An increase in the price level lowers the real wage. The firm then hires more workers until the marginal product of labor declines sufficiently to again equal the real wage. In the aggregate we cannot, in general, assume that the money wage is fixed. In the classical system, to clear the labor market the money wage must rise proportionately with increases in the price level. There is, as a consequence, no decline in the real wage and output does not increase; the aggregate supply schedule is vertical.
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7. The major determinants of output and employment in the equilibrium version of the classical system are the factors that determine the level of aggregate supply. These include factor supplies (labor and capital) and the state of technology in the economy. Aggregate demand is not a determinant of output and employment in the classical system. 8. An increase in the capital stock leads to an upward shift in the labor demand curve, which increases the equilibrium real wage and quantity of labor. The production function shifts upward, and in addition there is a movement along the new production function as labor increases. The aggregate supply curve shifts to the right. 9. A reduction in the money wage would necessitate a reduction in the marginal product of labor by increasing the quantity of labor. The aggregate supply schedule in Figure 3-6 would shift to the right.
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CHAPTER 3
CASE STUDY 3: CLASSICAL OUTPUT AND EMPLOYMENT Opening Discussion
Output
Real Wage
Chapter 3 looks at the interaction between the labor market and the production function to determine the level of real wages, employment, and output in an economy. The analysis here highlights the view of classical economists that believed markets could not be out of equilibrium because prices and wages adjust to clear any excess supply or demand. The case examines the supply and demand for labor and how different economic conditions should affect real wages, employment, and output according to classical economists. The figure shows how the classical system determines real wages, employment, and output. The interaction between labor demand (Nd) and labor supply (Ns) determine the level of Ns employment and real wages. Although the level of employment determines the level of output based on the production function. In this case, you will look at the relative situations in Europe and the United States to see what classical economists Nd would predict would be the relative real wage, employment, and output between the two regions. Employment According to Theodore Pelagidis, official statistics showed that unemployment in the European Union was around 12 percent in 1998.1 Many reasons have been put forth as to why the European Union experiences higher unemployment than the United States: more generous unemployment benefits that replace a higher proportion of lost income, longer durations for Employment unemployment benefits, and a higher percentage of the labor force being unionized. A generally higher level of both individual and business taxes funds the higher level of benefits. Also, businesses in Europe generally have a more difficult and costly time terminating employees. In this case you will determine how these labor market differences affect real wages, employment, and the level of output according to the classical system. Exercises 1. Generally, European countries tend to have a higher level of unemployment benefits that last longer than those in the United States. How does the higher level of unemployment benefits affect labor supply? What does the classical system say would be the effect on real wages, employment, and output of higher unemployment benefits? 2. Businesses in European countries generally have to pay higher business taxes related to hiring labor. How does an increase in the cost of labor that is not a change in the real wage rate affect labor demand? How does an increase in the cost of labor affect real wages, employment, and output? 3. What is the effect of combining higher unemployment benefits and higher business taxes on real wages, employment, and output according to the classical system?
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Source: Pelagidis, Theodore, “European Unemployment: Myths and Realities.” Challenge, July-August 1998.
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Questions 1. Is it surprising that European countries have had higher average unemployment rates for the last 20 years? 2. In which region, the United States or Europe, is it better to be unemployed? Be sure to consider both the unemployment benefits received while unemployed and the likelihood of finding a new job. 3. Is it clear which system is better?
SOLUTIONS MANUAL MACROECONOMICS THEORIES AND POLICIES 10TH EDITION FROYEN Full Doawnload: https://solutionsmanualbank.com/download/solution-manual-formacroeconomics-theories-and-policies-10-e-richard-t-froyen/ richard froyen macroeconomics solutions froyen macroeconomics answers richard t froyen macroeconomics solutions
