Question

Consider a Classical model with the following specifications in Q1, 2019:

• Labor Supply: NS = (1 + γ)W/P

• Cobb-Douglas Production Function,

• The Quantity Theory of Money accurately describes aggregate demand,

• The Theory of Distribution holds,

• Parameter values: [γ, α, A, K, M, V ] = [30, 0.3, 130, 500, 2500, 40].

Suppose a reduction in labor law regulations leads to an outward shift in labor supply, represented as an increase in γ from 30 to 32 during Q2, 2019. Assume that everything else stays the same.

Using equilibrium output level in period Q1 and Q2, calculate the annualized growth in output.

A. 14.41% B. 14.91% C. 15.29% D. 15.94%

Answer 1