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Economics/MacroEcon, realwage, capital savings

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Question
Hello,

So I'm having issues with a problem that was given to us regarding labor, capital and output. My professors wording of the problem is quite confusing.

Suppose Congress passes legislation to reduce personal income tax rates [we are looking at a case of an income tax where tax revenues depend on income]. Assume that workers respond by increasing the amount of labor supplied at each real wage rate. [This is the supply-side effect. Hold tax revenues (T) in the saving equation constant this can happen with low tax rate and more people working]

a) What is the impact on real GDP (Y)?

b) What is the impact on the real wage (W/P) and the real rental price of capital (R/P)?

c) What is the impact on private saving, public saving, national saving (S), and consumption (C)?

d) What is the impact on investment and the real interest rate?

e) What is the impact on government spending (G).

I have that Y would increase Real wage would decrease and real rental price of capital would increase? Would this make private savings increase, and public decrease and then G wouldn't increase?

Thank you,

Answer
Hi Rachel,

I am sorry I was busy in some other research work and so could not attend to your question promptly.

Thank you for seeking my help in connection with your attempt to answer your professor's questions which you think are confusing. The questions are actually quite tough for those who do not have good macroeconomics and monetary economics background. Otherwise, these are not that difficult. This also require some elementary mathematics with some calculus.

The background required are:

(1) the concept of multiplier and types of multiplier (such as Keynesian multiplier, government-expenditure multiplier, etc.)

(2) the concept of Y=C+S [which may be confusing without background]

(3) MPS, MPC, marginal tax rate

(4) basic knowledge of differential calculus

(5) elementary knowledge about transformations of equations in general equilibrium


Without the above, or at least some knowledge of the above, it would be difficult, if not almost impossible,  to answer these questions. These 5 questions require lots of work.

So please let me know if you are able to handle the answers if given technically, as I have found students with technical answers don't appreciate that because they don't understand that. My point is  to make you understand the topic and help you solve your own problems. First, see if you are thorough about all the above (5) prerequisites. If OK, choose and ask me a couple of the questions first. If you don't seem to be comfortable with the 5 prerequisites I have mentioned, please don't worry: I am here to help you. Let us then do it this way. Write to me about any of the prerequisites you want to have a clear conception about, one by one. Then finally we can tackle the questions you have posed.

I am writing this just to help you, not to confuse you like your professor. Think about it, and write to me. I shall try to help you out.

I look forward to receiving your feedback. Best of luck.

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Eklimur Raza

Expertise

It appears some students in this website are confused about elasticity of demand and the slope of the demand curve when they are trying to figure out why rectangular hyperbola comes up in case of unitary demand curve. First, they don't know that RH can be depicted in a positive quadrant of price,quantity plane. Secondly, they make the mistake that the slope of RH is constant at -1. Two points could help them: first, e=1 at each and every point of the RH, because the tangent at any point shows lower segment=upper segment (another geometric definition of e); yet slopes at different points,dQ/dP, are different; second, e is not slope but [(Slope)(P/Q)]in absolute terms. Caveat: only if we measure (log P) along the horizontal axis and (log Q) up the vertical axis, can we then say slope equals elasticity --in which case RH on P,Q plane is transformed into a straight-line demand curve [with slope= -tan 45 deg] on (log Q),(logP) plane, and e= -d(log Q)/d(log P). [By the way, logs are not used in college textbooks --although that is helpful in econometric estimation of elasticity viewed as an exponent of P, when demand equation is transformed into log-linear form.] I have not found the geometrical explanation I have given in any textbook followed in undergraduate and college classes in Canada (including the book followed in a university where I taught for a short time and in the book followed in George Brown College, Toronto, where I teach.

Experience

About 11 years' teaching economics and business studies, and also English, history and elementary French.Practical experience in a development bank, working with international donor agencies like the World Bank and the ADB. Experience in free-lance journalism, including Canada's "National Post."

Organizations
I teach micro- and macroeconomics at George Brown College (continuing education), Toronto, ON, Canada.

Publications
Many articles and editorials, on different subjects, in English newspapers. Recently an applied Major Research Paper, based on a synthesis of the Solow growth model and the Lewis two-sector model, has be accepted by Ryerson University, Toronto. Professors Thomas Barbiero and Eric Cam, Ryerson University, accepted the paper.

Education/Credentials
Master degree in Interantional Economics and Finance and diploma with honours in Business Administration from Canada.

Awards and Honors
Received First Prize in an inter-university Literary Contest.

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