QUESTION 1

Consider the hypothetical example of Dominion Island that has firms producing only two goods, gold and cotton, the proceeds of which it uses to purchase other goods and services from neighbouring islands through its banks. Assuming that all other required institutions in an economy are prevalent in this island, discuss the circular flow of income and spending in Dominion Island. No diagram is required.

QUESTION 2

Use Figure 2 to fully discuss the welfare effect of setting a minimum wage of $ 13/hr above or below the equilibrium wage.

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