ECON2102
Macroeconomics
Additional Tutorial Questions
Tutorial 3
Question 1* – Consider an individual who has just turned 18 years of age and is deciding whether to 1) enter the workforce immediately after high school or 2) attain a 4-year economics degree at university first before entering the workforce. If the first option is selected the individual can expect to earn post-tax income of $34,000 per year until retirement (age 67). If the second option is selected, the annual tuition fees are $10,000. Upon graduation the individual expects to earn post-tax income of $29,000 that grows at an average 3.50% annually. To simplify matters, suppose the individual has no plans to invest in equity or bond markets. Suppose the discount rate is constant for all periods at 6%. All figures are expressed in real terms. The individual expects to retire at age 67.
a) What is the premium of the university degree over the individual’s working life?
b) What is the compound annual growth rate of the individual’s investment in their human capital?
Question 2 – Consider the bathtub model of unemployment which is expressed as:
where
is the job separation rate which is defined as the probability that an employed person will become unemployed in given period.
is the job finding rate is defined as the probability that a job-seeker will become employed in given period.
is the labour force
U* is the number of unemployment rate
a) Is the model best described as a structural model or mechanical model?
b) What is the steady state condition of the model?
c) What is the law of motion governing the unemployed?
d) What is the unemployment rate that would result if the job separation rate were 2% and the job finding rate is 35%? Would these parameters correspond to an economic expansion or recession?
e) Is it necessarily true if there was a rise in the demand for labour then:
(i) the job finding rate will increase.
(ii) the job separation rate will decrease.
f) At the beginning of the COVID-19 pandemic, the unemployment rate in
Australia increased from about 5% to 7.5%. The Federal Government embarked on the Job Keeper program. Discuss the likely effects this policy had on both the job separation rate and the job finding rate during the lockdowns.