ECON301 Economics Homework 4 - Suppose that a large number

ECON 301 American University Economics Questions

Homework 4

Question 1 (20 points) Suppose that a large number of couples have children.

A. (10 pts.) Why might having young children make parents more willing to work? Express your answer in terms of the marginal utility of consumption.

B. (10 pts.) Why might having young children make parents less willing to work? Express your answer in terms of the marginal utility of leisure.

Question 2 (40 points) Based on Classical model of labor market, how would each of the following events affect full employment and the equilibrium real wage in the U.S.? Your answer should include graphs.

A. (8 pts.) A large number of working-age immigrants enter the U.S.

B. (8 pts.) Tighter environmental laws temporarily reduce the capital stock. (Assume that the effect on the MPN is the standard one.)

C. (8 pts.) Workers start attending night school, which makes their expected future income increase. (Assume that their current productivity is unchanged.)

D. (8 pts.) A stock market crash drastically reduces household wealth. E. (8 pts.) The government lowers its spending, but does not change the tax rate on labor income. (If you like, you can assume that all taxes are lump-sum.)

 Question 3 (40 points) Under the liquidity preference (money market) framework, how will the following events affect real interest rates? Show your answer using graphs.

A. (10 pts.) The economy enters a recession.

B. (10 pts.) The Federal Reserve decreases the nominal money supply.

C. (10 pts.) The price level decreases.

 D. (10 pts.) The price level and the nominal money supply both decrease by 17 percent. 1