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.Suppose that the U.S. government increases its expenditure on highways and bridges by $10

.Suppose that the U.S. government increases its expenditure on highways and bridges by $10

.Suppose that the U.S. government increases its expenditure on highways and bridges by $100 billion. Explain the effect that this expenditure would have on needs-tested spending and the government’s budget surplus.

 

Labor market

 

Production function

Real wage rate
(dollars
per hour)

Quantity of labor
demanded
(thousands of hours)

Quantity of labor
supplied
(thousands of hours)

 

Employment
(thousands
of hours)

Real GDP
(millions of dollars)

10.00

18

6

 

6

7

10.50

15

9

 

9

12

11.00

12

12

 

12

16

11.50

9

15

 

15

19

12.00

6

18

 

18

21

12.50

3

21

 

21

22

           

The first table to the left describes the labor market in LowTaxLand and the second table to the right describes the economy’s production function. LowTaxLand introduces an income tax of $1 per hour worked. Use the tables to work Problems 4 to 6.

4.What are the levels of employment and potential GDP in LowTaxLand, what is the real wage rate paid by employers, and what is the after-tax real wage rate received by workers?

5.If LowTaxLand eliminates its income tax, what then are the levels of employment and potential GDP and what is the real wage rate in LowTaxLand?

Abhinav 05-Dec-2019

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