Economics 311 Spring 2002 Third Homework
04/16/2002
Suppose the general educational level of a population increases. Using the Market Clearing Model, show what will happen to output, interest rates, work effort and prices. If you were a bond trader what would you do make money?
Step 1: Show how education will change the person's decision to work, i.e. his production function. Will it create a wealth or a substitution effect?
Step
2: How will the change in work effort effect the supply of commodities (
)?
Step 3: How will the change in the
production function effect the demand of commodities (
) today and in the future.
Step 4: Show the effect of the
change in and on the interest rate. Is there a change in the incentive to
shift consumption over time? How will the change in interest rates affect bond
prices?
Step 5: Use the inter-temporal budget constrain to analyze inter-temporal shifts in consumption and income over time. Does the position and/or slope of the inter-temporal budget constraint change. Depict and explain.
Step 6: Show how the change in the
interest rate and commodity production affects the Demand for Money (
). If the Money Supply stays the same, what will happen to the
price level? If you were the FED, what would you do to the money supply to keep
the price level constant. Depict and explain.
Print and use the Basic Market Clearing Graphic for your answer.