Content check — Macroeconomics, Chapter 4: Labor and Financial Markets

Every problem in the chapter beside the book’s answer, a chapter at a time as you scroll.

Chapter 4: Labor and Financial Markets

12 problems · 5 figures

In the labor market, what causes a movement along the demand curve? What causes a shift in the demand curve?

Answer

Changes in the wage rate (the price of labor) cause a movement along the demand curve. A change in anything else that affects demand for labor (e.g., changes in output, changes in the production process that use more or less labor, government regulation) causes a shift in the demand curve.

4-2 §4.1 source ↗

In the labor market, what causes a movement along the supply curve? What causes a shift in the supply curve?

Answer

Changes in the wage rate (the price of labor) cause a movement along the supply curve. A change in anything else that affects supply of labor (e.g., changes in how desirable the job is perceived to be, government policy to promote training in the field) causes a shift in the supply curve.

4-3 §4.1 source ↗

Why is a living wage considered a price floor? Does imposing a living wage have the same outcome as a minimum wage?

Answer

Since a living wage is a suggested minimum wage, it acts like a price floor (assuming, of course, that it is followed). If the living wage is binding, it will cause an excess supply of labor at that wage rate.

4-4 §4.2 source ↗

In the financial market, what causes a movement along the demand curve? What causes a shift in the demand curve?

Answer

Changes in the interest rate (i.e., the price of financial capital) cause a movement along the demand curve. A change in anything else (non-price variable) that affects demand for financial capital (e.g., changes in confidence about the future, changes in needs for borrowing) would shift the demand curve.

4-5 §4.2 source ↗

In the financial market, what causes a movement along the supply curve? What causes a shift in the supply curve?

Answer

Changes in the interest rate (i.e., the price of financial capital) cause a movement along the supply curve. A change in anything else that affects the supply of financial capital (a non-price variable) such as income or future needs would shift the supply curve.

4-6 §4.2 source ↗

If a usury law limits interest rates to no more than 35%, what would the likely impact be on the amount of loans made and interest rates paid?

Answer

If market interest rates stay in their normal range, an interest rate limit of 35% would not be binding. If the equilibrium interest rate rose above 35%, the interest rate would be capped at that rate, and the quantity of loans would be lower than the equilibrium quantity, causing a shortage of loans.

4-7 §4.2 source ↗

Which of the following changes in the financial market will lead to a decline in interest rates:

a. a rise in demand

b. a fall in demand

c. a rise in supply

d. a fall in supply

Answer

b and c will lead to a fall in interest rates. At a lower demand, lenders will not be able to charge as much, and with more available lenders, competition for borrowers will drive rates down.

4-8 §4.2 source ↗

Which of the following changes in the financial market will lead to an increase in the quantity of loans made and received:

a. a rise in demand

b. a fall in demand

c. a rise in supply

d. a fall in supply

Answer

a and c will increase the quantity of loans. More people who want to borrow will result in more loans being given, as will more people who want to lend.

4-9 §4.3 source ↗

Identify the most accurate statement. A price floor will have the largest effect if it is set:

a. substantially above the equilibrium price

b. slightly above the equilibrium price

c. slightly below the equilibrium price

d. substantially below the equilibrium price

Sketch all four of these possibilities on a demand and supply diagram to illustrate your answer.

Answer

A price floor prevents a price from falling below a certain level, but has no effect on prices above that level. It will have its biggest effect in creating excess supply (as measured by the entire area inside the dotted lines on the graph, from D to S) if it is substantially above the equilibrium price. This is illustrated in the following figure.

The graph shows a dashed price floor line substanitally above the equilibrium price with excess supply beneath the equilibrium.

It will have a lesser effect if it is slightly above the equilibrium price. This is illustrated in the next figure.

The graph shows a dashed price floor line that is just slightly above equilibrium.

It will have no effect if it is set either slightly or substantially below the equilibrium price, since an equilibrium price above a price floor will not be affected by that price floor. The following figure illustrates these situations.

The left image shows a dashed price floor line that is just slightly below equilibrium. The right image shows a dashed price floor line that is substantially below equilibrium.

4-10 §4.3 source ↗

A price ceiling will have the largest effect:

a. substantially below the equilibrium price

b. slightly below the equilibrium price

c. substantially above the equilibrium price

d. slightly above the equilibrium price

Sketch all four of these possibilities on a demand and supply diagram to illustrate your answer.

Answer

A price ceiling prevents a price from rising above a certain level, but has no effect on prices below that level. It will have its biggest effect in creating excess demand if it is substantially below the equilibrium price. The following figure illustrates these situations.

The left image shows a dashed price ceiling line that is substantially below equilibrium. The right image shows a dashed price floor line that is just slightly below equilibrium.

When the price ceiling is set substantially or slightly above the equilibrium price, it will have no effect on creating excess demand. The following figure illustrates these situations.

The left image shows a dashed price ceiling line that is substantially above equilibrium. The right image shows a dashed price ceiling line that is just slightly above equilibrium.

4-11 §4.3 source ↗

Select the correct answer. A price floor will usually shift:

a. demand

b. supply

c. both

d. neither

Illustrate your answer with a diagram.

Answer

Neither. A shift in demand or supply means that at every price, either a greater or a lower quantity is demanded or supplied. A price floor does not shift a demand curve or a supply curve. However, if the price floor is set above the equilibrium, it will cause the quantity supplied on the supply curve to be greater than the quantity demanded on the demand curve, leading to excess supply.

4-12 §4.3 source ↗

Select the correct answer. A price ceiling will usually shift:

a. demand

b. supply

c. both

d. neither

Answer

Neither. A shift in demand or supply means that at every price, either a greater or a lower quantity is demanded or supplied. A price ceiling does not shift a demand curve or a supply curve. However, if the price ceiling is set below the equilibrium, it will cause the quantity demanded on the demand curve to be greater than the quantity supplied on the supply curve, leading to excess demand.

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Problems and answers are adapted from Principles of Macroeconomics 3e by Steven A. Greenlaw, David Shapiro and Daniel MacDonald, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-macroeconomics-3e/pages/1-introduction. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.