Question 1

Over the last century, what has been the general trend in average hours worked and real wages in developed economies?

Accepted Answer

Average hours worked have fallen while real wages have risen.

Question 2

According to the economic theory of labour supply, individuals allocate their time between work and leisure to maximize utility. At the optimal allocation, which of the following conditions holds?

Accepted Answer

The marginal value of an hour of work equals the marginal value of an hour of leisure.

Question 3

When the real wage increases, two effects influence labour supply. Which effect describes the tendency for individuals to work more because the opportunity cost of leisure has increased?

Accepted Answer

Substitution effect

Question 4

Suppose a worker receives a temporary increase in real wages. According to the theory, which effect is likely to dominate their labour supply decision?

Accepted Answer

Substitution effect

Question 5

If leisure is a normal good, what is the expected impact on labour supply when an individual's wealth increases, holding the real wage constant?

Accepted Answer

Labour supply decreases

Question 6

Which of the following would cause a shift (not a movement along) the labour supply curve?

Accepted Answer

A change in expected future wages

Question 7

Refer to the following equation for the labour market equilibrium: $$N^s = N^D at$$ $$w^*. $$What does $$w^*$$ represent?

Accepted Answer

The market-clearing real wage

Question 8

If the aggregate labour supply increases due to more people joining the labour force, which margin is being affected?

Accepted Answer

Extensive margin

Question 9

Suppose the current real wage is $$w_0$$ and the labour supply curve shifts rightward due to an increase in expected future wages. What happens to the equilibrium level of employment ($$N^*) in $$the classical model?

Accepted Answer

$$N^*$$ decreases

Question 10

During a business cycle expansion, both real wages and hours worked tend to rise together. Which explanation is most consistent with this observation?

Accepted Answer

The substitution effect dominates the income effect.

Question 11

A permanent increase in real wages is expected to have a larger income effect than a temporary increase. What is the likely impact on labour supply in the long run?

Accepted Answer

Labour supply may decrease as people choose more leisure.

Question 12

Which of the following best describes the classical labour market equilibrium?

Accepted Answer

The real wage adjusts quickly to equate labour supply and demand.

Question 13

If the aggregate labour demand curve shifts to the right, what is the expected effect on the equilibrium real wage ($$w^*) $$and employment ($$N^*$$)?

Accepted Answer

Both $$w^*$$ and $$N^*$$ increase.

Question 14

Suppose a country experiences a sudden increase in national wealth. According to the labour supply theory, what is the most likely effect on the labour supply curve?

Accepted Answer

The labour supply curve shifts to the left.

Question 15

Which of the following equations represents the condition for full-employment equilibrium in the classical labour market?

Accepted Answer

$$N^s = N^D$$

Question 16

A government policy increases the expected future wage for all workers. What is the immediate effect on the current labour supply, holding the current real wage constant?

Accepted Answer

Current labour supply decreases.

Question 17

If the labour supply curve is upward sloping, what does this imply about the relationship between the real wage ($$w) $$and the quantity of labour supplied ($$N$$)?

Accepted Answer

As $$w$$ increases, $$N$$ increases.

Question 18

Which of the following best explains why the aggregate labour supply increases when the real wage rises?

Accepted Answer

Both people already working supply more hours and some people join the labour force.

Question 19

Suppose the labour market is initially in equilibrium. If there is an increase in the expected future wage, what happens to the equilibrium real wage and employment in the short run?

Accepted Answer

Equilibrium real wage rises, employment falls.

Question 20

In the classical model, what is the output produced at the full-employment level of labour called?

Accepted Answer

Potential output ($$\overline{Y})$$

Labour Supply and Equilibrium in Macroeconomics

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