Question

Full Employment Model: Consider the long-run model of the economy and answer the following questions:

a. Two politicians are debating the better approach to spur long-run growth. Candidate Simpson suggests cutting taxes on households such that households have more money to spend on goods and services. Candidate Griffin suggests lower taxes on interest income such that households have a greater incentive to save. Assuming both policies would do what the candidates suggest, which is more likely to spur long-term growth? Briefly explain.

b. Suppose the government introduces a new requirement that all people on any form of state aid (such as food stamps or living assistance funding) actively seek work. As a result, the labor force participation rate increases. What effect does that have on (real) wages and labor productivity? (You can assume a vertical labor supply curve.)

c. While we often consider the macro-economic models to cover an entire economy, one could apply such models to regions of a larger economy. For example, consider California and Mississippi as two separate economies. In 2018 California had a state real GDP per capita of $53,987 and Mississippi came in at $31,881. Over the past decade California’s GDP per capita growth rate was roughly 2% per year whereas Mississippi’s growth rate was roughly 0% per year. Assuming this is the long-run and the full employment model holds, what might explain this difference in outcomes? (There may be more than one reason but pick one and explain why that might help explain the difference.)

d. Since this is construction season (also known as summer) work is now being done on roads and other infrastructure. In the US that is often done with large machinery (for example, concrete trucks, pavement spreaders, etc.). In lower income countries these same activities are more likely to be done by hand (i.e., more workers and less machines). Why might that be the case?

Answer 1

Answer for question A

Between these two suggestions, I am completely agreed with suggestion given by Simpson that is cutting taxes on households. Please see the below explanation why I am supporting for Simpson suggests and why not agree with Griffin suggests.

Simpson suggests- Agreeing

If we cutting taxes on household purchases. Money spend on goods increasing through which many companies start producing as there is lot of demand from the public owing to lower price since tax is low. Here growth is not only productivity it’s all about employment, health, education, facility other things.

Because of tax cutting below benefits are as outcome which leads a long term growth

Employment Increase - Because since there is lot of demand from public as tax cutting, many companies start producing and hire more employees. The money left with Public owing to lower tax will spend more on health and education for children and improve their longevity which leads to growth.

But on Griffin” suggestion: why it is not suggestible for good growth: Lower tax on interest earned definitely leads to more saving but excess saving not good for economy because following reasons.    

1. If everyone start doing more savings leads to less consumption if less consumption then companies will stop producing more if companies will stop production then employment will reduced and unemployment will increases which is not good for economy.     

Answer for question B

As simple as if labor force participation is more in the economy defiantly labor productivity is more and real wages increases one stage and stagnant in later stage and then reduced . The income effect becomes stronger than the substitution effect, and the supply curve bends backward.     

Answer for question D

There is always labor and capital intensive concept in the economics and our common knowledge

Labor intensive counties means to do any work in our case (Roads and construction infrastructure) labor hands will use more than capital (technology) and other way for Capital intensive countries technology (capital) will use more than labor. Technically like US and other developed nations will use large machinery since they are economically and technologically sound and low income countries use more worker and less machines

Because there mainly two reasons: they( Low income countries) may not have enough finance to effort machinery and technology and other reason is these countries have more work force and labor intensive counties.