First Practice Exam – B Intermediate Macroeconomics

1. Show and explain how an increase in the nominal wage affects the amount of labor hired by the firm.

2. Using the indifference curve model, show and explain how an increase in the tax rate on labor income will affect the labor supply curve when the substitution effect dominates the income effect.

3. From the Financial Times February 20, 2006

"The European Central Bank appealed to national governments to force the development of simpler, cheaper, and more effective systems for Euro-bank transfers of funds. The euro was introduced in 1999 but cashless payment systems remain largely national, making it difficult and costly for customers to make cashless transfers across borders."

From a classical point of view what would this change in the payment technology due to aggregate output, employment and prices?

4. Suppose the substitution effect was equal to the income effect regarding leisure/labor. Given the labor supply curve associated with this case, how would an increase in technology affect the equilibrium level of employment, output and wages?