1. In 2009, the interest rate on 20-year bonds was 2% (per year) on Switzerland's government bonds and 3.5% on U.S. government bonds. Suppose the bonds for both countries were completely safe, the expected real interest rates were equal in both countries, and purchasing-power parity holds at every moment in the past, present, and future. Be as precise as you can and explain exactly what this difference in nominal interest rates (and these assumptions) implied about:
a. Expected changes in the U.S. real exchange rate vis-a-vis Switzerland
b. Expected rates of inflation in the U.S. and Switzerland.
c. Expected changes in the U.S. nominal exchange rate vis-á-vis Switzerland
2. On September 21, 1995, "House Speaker Newt Gingrich threatened to send the United States into default on its debt for the first time in the nation's history, to force the Clinton Administration to balance the budget on Republican terms" (New York Times, September 22, 1995, p. A1). That same day, the interest rate on 30-year U.S. government bonds rose from 6.46% to 6.55%, and the dollar fell in value from 102.7 to 99.0 yen. Use the model of the large open economy to explain this event.
3. a. Explain how the elasticity of demand for low-wage workers determines the change in total wage income accruing to those workers following an increase in the minimum wage
b. Would policymakers be more or less likely to support higher minimum wages if economists found that the demand for low-wage workers was very inelastic? Explain
c. In 1991, Congress passed a subminimum wage proposal whereby young workers could be paid less than the adult minimum wage for a limited period of time. Why are minimum wage laws thought to be more onerous and less essential for teenagers than for adults?
d. Several economists and politicians have argued that subminimum wage laws for teenagers might reduce total adult employment
i. Explain why these economists take this position
ii. Why would the effect of subminimum wage laws for teenagers and adult unemployment depend on whether adults and teenagers are substitutes or complements in production?
4. Suppose that a country experiences a reduction in productivity--that is, and adverse shock to the production function.
a. What happens to the labor demand curve?
b. How would this change in productivity affect the labor market--that is, employment, unemployment, and real wages--if the labor market was always in equilibrium
c. How would this change in productivity affect the labor market if unions prevented real wages from falling?