This is modeled in Figure 3 where we put the real wage rate-that is, the nominal wage rate divided by the price level-on the vertical axis. The aggregate demand for labour will be negatively related to the real wage rate for the same reason that the demand curve for labour in any industry is negatively sloped-at lower wages firms will. May 06, 2016 Money wages or nominal wages are wages that are paid to a person regardless of the inflation rate in the market. Money wages do not take into consideration the purchasing power and the employee receives the amount that is promised to him when he/she is hired. Real wages are wages that provided taken into consideration the inflation amount. In this problem we're given a simple production function, a partially parameterized Cobb-Douglas Production Function. We derive output/production, then find.

How To Calculate Wage Rates

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1) Money demand is

a) Suppose that P = 100, Y = 1000, and i = 0.10. Find real money demand, nominal money demand, and the velocity of money.

Then use the formula: real interest rate = nominal interest rate – inflation, to find the real interest rate. Question 10 3.5 / 3.5 pts Real Wage and Nominal Wage XYZ company agreed to pay its workers $40 an hour in 1999 and $43 an hour in 2001. The CPI in 1999 was 166 and in 2001 was 180. Determining cost from production function, wage, and rental rate. So I have a production function Q = 2 K + 20 L 1 / 2 and I suppose the wage is w = 5 and the rental rate is r = 9. I want to find the long-run cost of production, which I know is constrained by M P L M P K = w / r and therefore. Which implies L = 81.

b) Suppose the price level doubles to 200. Find real money demand, nominal money demand, and the velocity of money.

c) How is the velocity of money affected by an increase in the price level, an increase in real income, and an increase in nominal interest?

2) Consumer expenditures on durable goods such as cars and furniture, as well as purchases of new houses, fall much more than expenditures on nondurable goods and services during most recessions. Why do you think that is?

3) It has been argued that the stock market predicts recessions. Using quarterly data since 1961, plot the real value of the stock market index (the S&P 500 in the last day of the quarter divided by the GDP deflator at that time). Draw in the times of business cycle peaks and troughs. Do you find the stock market to be a good economic forecaster? Data on the S&P 500 can be obtained from finance.yahoo.com. You should use the adjusted closing price.

4) Desired consumption and investment are

C^d=4000-4000r+0.20Y

I^d=2400-4000r.

Y is real GDP and r is the real interest rate. Government purchases G = 2000.

a) Find an equation relating desired national saving Sd to r and Y.

b) What value of the real interest rate clears the goods market when Y = 10000? When Y = 12000? Graph the IS curve.

c) Government purchases rise to 2400. How does this change the equation for national saving in (a)? What value of r clears the goods market if Y = 10000? How is the IS curve affected by the increase in G?

5) The real money demand function is”

M^d/P=3000+0.1Y-10000i

wherei is the nominal interest rate. Assume the money supply is M = 6000, P = 2.0, and expected inflation is ?e = 0.02.

a) What is the real interest rate r that clears the asset market when Y = 8000? When Y = 9000? Graph the LM curve.

b) Repeat (a) for M = 6600. How does the LM curve compare with the LM curve in (a)?

c) Repeat (a) for ?e = 0.03. Compare the LM curve in this case with the LM curve in (a).

6) The full-employment line for the economy is Y = 1000. Desired consumption and desired investment are

C^d=200+0.8(Y-T)-500r

I^d=200-500r.

Government purchases are G = 196, and taxes are

T = 20 + 0.25Y.

Money demand is

M^d/P=0.5Y-250(r+p^e ).

Expected inflation is ?e = 0.1 and the nominal supply of money is M = 9890.

a) Under full employment, what are the general equilibrium values of the real interest rate, price level, consumption, and investment?

b) Suppose that government purchases are increased to G = 216. How do the answers to (a) change?

7) The production function in an economy is

Y = A(5N? 0.0025N2),

whereA is productivity. The marginal product of labor is

MPN = A(5 ? 0.0050N).

Suppose that A = 2. The labor supply curve is

Ns = 55 + 10(1 ?t)w,

wherew is the real wage and t = 0.5 is the tax rate on wage income.

Desired consumption and investment are

Cd = 300 + 0.8(Y?T) ? 200r

Id = 258.5 ? 250r.

Taxes and government purchases are

T = 20 + tY

G = 50

Money demand is

Find Real Wage Rate With Money Wage Rate Equation

M^d/P=0.5Y-250(r+p^e ).

The expected rate of inflation is ?e = 0.02 and the nominal money supply is M = 9150.

a) What are the full-employment levels of the real wage, employment, and output?

Annual Salary To Hourly Wage

b) Find the IS curve. What are the full-employment values of the real interest rate, consumption, and investment?

c) Find the LM curve. What are the full-employment value of the price level?

d) Suppose government purchases increase to G = 72.5. Assuming the price level is fixed, what are the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment?

e) In the long run, the economy returns to full employment? What are the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level?

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10.1 Nominal Wages and Real Wages

Learning Objectives

What is the difference between the real minimum wage and the nominal minimum wage?
What determines the equilibrium real wage and the level of employment?

When the federal minimum wage was first introduced in the United States in 1938, it was set at $0.25 per hour. Since then, Congress has raised the minimum wage several times. Figure 10.2 'Nominal Federal Minimum Wage in the United States' shows the minimum wage since 1938. You can see that the wage increases in steps whenever Congress enacts an increase in the wage.

Figure 10.2 Nominal Federal Minimum Wage in the United States

The figure shows the federal minimum wage in the United States. When introduced in 1938 the minimum wage was set at $0.25 per hour. The minimum wage, since 2009, is $7.25 per hour.

The repeated increases in the minimum wage are not primarily due to the increased generosity of the US Congress. As you probably know, prices and wages have also tended to increase over time—a process we call inflationA situation where, on average, the prices of goods and services are increasing.. The price level in 2007 was, on average, 14.8 times higher than in 1938, so $0.25 per hour is equivalent in modern terms to $3.70 ($0.25 × 14.8 = $3.70). Most of the increase in the minimum wage has simply been about keeping up with inflation. That said, the current minimum wage is $7.25, so the federal minimum wage has increased faster than the rate of inflation since its inception.

We call the wage in dollars the nominal wage. It is not the most useful measure of the amount that workers are receiving. Inflation means that a given nominal wage becomes worth less and less over time in terms of the goods and services that it buys. Between 1938 and 1957, for example, the general price level in the United States doubled. Had there been no change in the minimum wage, the $0.25 per hour minimum wage would have been worth only half as much in 1957 as it was when it was established.

From Nominal to Real Wages

The nominal wage is the wage measured in money (dollars in the United States). The real wageThe nominal wage (the wage in dollars) divided by the price level. is the nominal wage in an economy adjusted for changes in purchasing power. It is defined as the nominal wage divided by the general price level: