Question

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a. Consider the bathtub model of unemployment. Let L denote the constant labour force, let E denote employment and let U denote unemployment. Assume that the job- finding rate is 1/5 and that the job-separation rate is 1/20. Compute the unemployment rate, i.e. u = U/L. b. Consider a household living for two periods. The intertemporal budget constraint is given by 6+1 tr = y + internet where c is consumption, y is income and r is the interest rate. The household's preferences are characterised by the utility function U(C1,C2) = In cı +0.95 In c2, where 0.95 is the discount factor. Derive the Euler equation and interpret the expression. (5 points) c. Use the national income identity to derive an expression showing how aggregate saving and investment are related in a small open economy. (5 points) d. Explain what the Balassa-Samuelson effect implies for differences in price levels and inflation across rich and poor countries. Describe the mechanism at work. e. Consider an economy where technology is captured by the following production function: Y(K,L) = (1/4L3/4 Show that the production function exhibits constant returns to scale and compute the marginal product of capital.

Answer 1