INSTRUCTION: Take a few minutes to plan and outline each answer. In answering the questions, you should
emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis.
Include diagrams, if useful, in explaining your answers. All diagrams should be correctly labeled.
C1. Suppose the labour market in the house cleaning industry in Quebec City can be described by the following
demand and supply equations: LD = 400 ? 10w and LS = 40 + 20w.
a) Calculate the equilibrium wage and employment if the market is free.
b) Suppose the Cleaners? Union, of which all cleaning workers must be members, requires that employers
provide workers with high-tech protection equipment, which increases the employers? cost of labour
by approximately $2 per hour. However, most workers think that this equipment is not necessary,
because their regular, inexpensive outfit does about the same job. Calculate the equilibrium wage and
employment under the new equipment requirement.
c) Draw a graph to show the effect of the requirement.
C2. (Challenging) Let ?X denote a small change in the variable X. Starting from the quantity equation MV = PY,
show that the following relation between percentage changes holds: ?M/M + ?V/V = ?P/P + ?Y/Y. (Note: It
should be emphasized that this relationship holds for small changes, say less than 5 percent. The larger the
changes, the less precise are the results derived from this relationship.)
C3. Refer to the following:
a. The central bank of the Republic of Moldova needs to determine by how much to increase the money
supply next year, if they estimate an increase in the overall economic activity (real GDP) of 2.5
percent and have a target inflation rate of 4 percent. The velocity of money has been observed to be
constant over the past many years. If you were a consultant to the government, what would your
b. Next year, the National Bank of Moldova wishes to reduce inflation to 2 percent, and estimates an
increase in real GDP by 1.5 percent. What should be the change in the money supply?
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