1.  Labour market model (Unit 9.3-9.6)

Consider an economy where firms are selling differentiated products and can set both the        prices at which they sell and the quantities they produce. Consider as well that there is a large number of equally productive workers in the economy and that the only production input (and cost) is labour. In such an economy, explain why real wages and employment level are            determined jointly at the equilibrium. In doing so, explain a) how wages are set by firms, b)    how individual firms determine the price, quantities to produce, the number of people they     need to hire, c) how are real wages in the whole economy determined, and d) how real wages and the employment level are jointly determined at the equilibrium. Tip: use the diagrams in  the textbook in Units 9.3 to 9.6.

2.  Intertemporal Choice (Unit 10.2, 10.3, 10.4)

Consider an individual who has to decide on their consumption today (call it period t0) and   consumption in one year’s time (t1). Suppose that their income today is $0 and income next  year is $1000. This represents the individual’s endowment point. On a set of axis with next  year’s income/ consumption on the vertical axis, and current year’s income/ consumption on the horizontal axis, show the endowment point.

If it is possible to borrow or lend at an interest rate of 20% per annum, draw the individual’s budget constraint or feasible set. How does the budget set change if the interest rate changes  to 10% per annum? Use a set of indifference curves to show how the optimal choice changes when the interest rate changes. Use the concepts of income and substitution effects to explain the change in consumption today and consumption tomorrow.

3.  Intertemporal Choice (Unit 10.2, 10.3, 10.4, 10.5)

Consider an individual who has to decide on their consumption today (call it period t0) and     consumption in one year’s time (t1). Suppose that their income today is $200 and income next year is $200. This represents the individual’s endowment point. On a set of axis with next       year’s income/ consumption on the vertical axis, and current years income/ consumption on   the horizontal axis, show the endowment point.

If it is possible to borrow or lend at an interest rate of 20% per annum, draw the individual’s budget constraint or feasible set. How does the budget set change if the interest rate changes to 10% per annum?

4.    Bank Money (Unit 10)

Describe the process by which banks create money. What determines how much money is created by banks when a deposit is made in a demand account in a bank?