Macro Module 22 price-misperceptions practice exam questions

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Let L = worker-hours and W = real wage rate per worker-hour

●    The demand curve for labor is Ld = 413 workers-hours – 21 × W
●    The supply curve for labor is Ls = 19 × W

The monetary authorities increase the money supply 14.35%, the price mis-perceptions model holds, employers know the true price level, and workers are not aware that the price level has changed.

Question 21.2: Equilibrium real wage rate

What is the equilibrium real wage rate before the change in the money supply?

Answer 21.2: 413 – 21W = 19W ➾ W = 413 / (21 + 19) = 10.3250

(quantity demanded = quantity supplied in equilibrium)


Question 21.3: Equilibrium quantity of labor supplied

What is the equilibrium quantity of labor supplied before the change in the money supply?

Answer 21.3: Derive by either demand curve or supply curve:

●    Demand curve: 413 – 21 × 10.3250 = 196.18
●    Supply curve: 19 × 10.3250 = 196.18


Question 21.4: Supply curve for labor

What is the supply curve for labor after the change in the money supply?

Answer 21.4: Ls = 19 × (1 + 14.35%) × W    = 21.7265 × W

Workers over-estimate the real wage rate by (1 + 14.35%).


Question 21.5: Equilibrium real wage rate

What is the equilibrium real wage rate after the change in the money supply?

Answer 21.5: 413 – 21W = 21.7265W ➾ W = 413 / (21 + 21.7265) = 9.6661

(quantity demanded = quantity supplied in equilibrium)


Question 21.6: Equilibrium quantity of labor supplied

What is the equilibrium quantity of labor supplied after the change in the money supply?

Answer 21.6: Derive by either demand curve or supply curve:

●    Demand curve: 413 – 21 × 9.6661 = 210.01
●    Supply curve: 21.7265 × 9.6661 = 210.01