DSE2010 (Option A)

[vikram]

Please can anyone show how to logically analyze the following questions:

Q1
Consider a closed economy. If the nominal wage is flexible and nominal money supplyzis increased, then which of the following will be true in equilibrium?
(a) Real wage deceases and real money supply decreases
(b) Real wage deceases and real money supply increases
(c) real wage is unchanged and real money supply is unchanged
(d) real wage decreases and real money supply is unchanged


Q2
Suppose an economy is at less than full employment and it consists of an aggregate “worker” and an aggregate “capitalist”, with the former having a higher marginal propensity to consume from his disposable income. Suppose both agents pay income tax according to the same linear schedule. If the government's budget is in balance and a lump-sum income transfer is made from the capitalists to the workers, then. the government's

(a) budget will go to deficit
(b) budget will go into surplus
(c) income and expenditure will be unchanged
(d) income and expenditure will change but the budget will stay in balance

[Chocolate Frog]

Q1. When money supply increases, AD schedule shifts up by exactly the same proportion as the increase in money stock. In the short run, demand will exceed supply and firms will produce more output by hiring more labour, driving up both nominal wages and prices. In the long run, prices will rise by exactly the same proportion as the increase in money stock, and output and employment will be at long-run equilibrium levels. Hence, no change in real wages and real money supply.

[AJ]

Budget will go into surplus.

Since, worker has a greater MPC, an income transfer will result in more consumption expenditure and by multiplier a larger Y. Tax revenue will increase since T=tY. G is still same.
Therefore, budget will go into surlpus.