EBK PRINCIPLES OF ECONOMICS
8th Edition
ISBN: 8220103600453
Author: Mankiw
Publisher: CENGAGE L
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Chapter 21, Problem 4CQQ
To determine
The impact of increased income on normal and inferior goods.
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Question Seven
There are specific applications of the hidden-action or moral hazard model. Consider employment
contracts signed between a firm's owners and a manager who runs the firm on behalf of the
owners. The manager is offered an employment contract which they can accept and decide how
much effort, e ≥ 0, to exert. Suppose that an increase in effort, e, increases the firm's gross profit,
not including payments to the manager, but is personally costly to the manager and the firm's gross
profit, Пg, takes the following form: Пg = e +ε, ε~N(0,2). Let s denote the salary, which may
depend on effort and/or gross profit, depending on what the owner can observe, offered as part of
the contract between the owner and manager. Suppose that the manager is risk averse and has a
utility function with respect to salary of the form:
Aσ²
U(W)=μ- 2
a) Derive the optimal result of the owner's expected net profit where there is full information and
state what it implies.
b) Suppose now that the…
1. The IS/MP model assumes that the Fed sets the real interest rate at a given level Rt. Suppose the Fed
adopts a monetary policy rule that instructs it how to change the real interest rate in response to short-run
output. Let's call this a monetary policy rule (MPR):
The parameter x is positive.
Rt=+xY
a) Redraw the IS/MP diagram replacing the MP curve with the MPR curve. Show how an
aggregate demand shock affects output and interest rates in the short run. Use the IS and MPR equations
to solve for the changes in output and the real interest rate.
b) How does the change in a affect investment in the IS/MPR model? Explain how a tax cut
affects short-run output and investment in this version of the short-run model. The effect on investment is
called crowding out.
c) Add the Phillips curve to complete the short-run model. Illustrate how the Fed's choice of large
it makes reveals its trade off between inflation and output in the short run.
not use ai please
Chapter 21 Solutions
EBK PRINCIPLES OF ECONOMICS
Ch. 21.1 - Prob. 1QQCh. 21.2 - Prob. 2QQCh. 21.3 - Prob. 3QQCh. 21.4 - Prob. 4QQCh. 21 - Prob. 1CQQCh. 21 - Prob. 2CQQCh. 21 - Prob. 3CQQCh. 21 - Prob. 4CQQCh. 21 - Prob. 5CQQCh. 21 - Prob. 6CQQ
Ch. 21 - Prob. 1QRCh. 21 - Prob. 2QRCh. 21 - Prob. 3QRCh. 21 - Prob. 4QRCh. 21 - Prob. 5QRCh. 21 - Prob. 6QRCh. 21 - Prob. 7QRCh. 21 - Prob. 1PACh. 21 - Prob. 2PACh. 21 - Prob. 3PACh. 21 - Prob. 4PACh. 21 - Prob. 5PACh. 21 - Prob. 6PACh. 21 - Prob. 7PACh. 21 - Prob. 8PACh. 21 - Prob. 9PACh. 21 - Prob. 10PACh. 21 - Prob. 11PACh. 21 - Prob. 12PA
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