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Questionnaire on Classical Model-Closed Economy1. Use the neoclassical theory of distribution to predict the impact on the real wage and the
real rental price of capital of a wave of immigration increasing the labour force. (carried over
from Sem. 4)
2. Use the neoclassical theory of distribution to predict the impact on the real wage and the
real rental price of capital of an earthquake destroys some of the capital stock.
(carried over from Sem. 4)
3. Use the neoclassical theory of distribution to predict the impact on the real wage and the
real rental price of capital of a technological advance that improves the production function.
(carried over from Sem. 4)
4. Use the neoclassical theory of distribution to predict the impact on the real wage and the
real rental price of capital of high inflation which doubles the price of all factors and outputs
in the economy. (carried over from Sem. 4)
5. Let’s use the neoclassical theory of distribution to examine the incomes of two groups of
workers: farmers and barbers. (carried over from Sem. 4)
(a) Over the past century the productivity of farmers has risen substantially because of
technological progress. According to the neoclassical theory, what should have
happened to their real wage?
(b) In what units is the real wage in part (a) measured?
(c) Over the same period, the productivity of barbers remained constant. What should
have happened to their real wage?
(d) In what units is the real wage in part (c) measured?
(e) Suppose workers can move freely between sectors, what does this imply for the wages
of the two groups?
(f) What do your previous answers imply for the price of haircuts relative to the price of
food?
6. Suppose that an increase in consumer confidence raises consumers’ expectations about
their future income and thus increases the amount they want to consume today. This might be
interpreted as an upward shift in the consumption function. How does this shift affect
investment and the interest rate?
7. The government raises taxes by €100billion. If the marginal propensity to consume is 0.6,
what happens to the following? Do they rise or fall? By what amount?
(a) Public saving.
(b) Private saving.
(c) National saving.
(d) Investment.
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