Full Employment Model:

Consider the long-run model of the economy

a. Two politicians are debating the better approach to spur long-run growth. Candidate Simpson suggests cutting taxes on households such that households have more money to spend on goods and services. Candidate Griffin suggests lower taxes on interest income such that households have a greater incentive to save. Assuming both policies would do what the candidates suggest, which is more likely to spur long-term growth? Briefly explain.

b. Suppose the government introduces a new requirement that all people on any form of state aid, such as food stamps or living assistance funding, actively seek work. As a result, the labor force participation rate increases. Assuming all else equal, what effect does that have on (real) wages and labor productivity in the long run? (Assume a vertical labor supply curve.)

c. While we often consider the macro-economic models to cover an entire economy, one could apply such models to regions of a larger economy. For example, consider California and Mississippi as two separate economies. In 2019 California had a state real GDP per capita of $70,662 and Mississippi came in at $35,015 (both adjusted to $2012). Over the past decade California's GDP per capita growth rate was roughly 2% per year whereas Mississippi's growth rate was roughly 0% per year. Assuming this is the long-run and the full employment model holds, what might explain this difference in outcomes? (There may be more than one reason, pick one and explain why that might help explain the difference.)

d. Construction season, also known as summer, is just around the corner and work will be done on roads and other infrastructure. In the US that is often done with large machinery (e.g., concrete trucks, pavement spreaders, etc.). In lower income countries these same activities are more likely done by hand (i.e., more workers and less machines). Why might that be the case?