Labour-force change in Freedonia

Read the extracts and answer the questions that follow.

Text A — Demographic pressures

1. Freedonia's population is ageing and many skilled workers are retiring. The government proposes targeted immigration and childcare support to increase the quantity of labour available.

2. Employers claim that labour shortages are raising wages faster than productivity. This increases unit labour costs and reduces aggregate supply.

Text B — Institutions and adjustment

1. Licensing delays and uncertain property rights discourage investment. A reform commission proposes faster courts, digital licensing and stronger public administration.

2. New classical economists emphasize flexible markets, while Keynesian economists argue that sticky wages can prevent rapid adjustment after a fall in demand.

Table 1

Planned expenditure in Freedonia

Table 2

Labour and output estimates for Freedonia.

Wage and energy pressures in Galenia

Read the extracts and answer the questions that follow.

Text A — Cost pressures

1. A shortage of technicians led to wage increases above productivity growth. At the same time, imported gas prices rose, producing a negative supply shock.

2. Galenia experienced a higher price level and lower real output. Trade unions argue that wages are adjusting to past increases in living costs.

Text B — Policy response

1. The government proposes subsidies for firms' energy costs and expanded technical training. The central bank instead favours weaker aggregate demand to reduce inflation expectations.

2. Economists warn that contractionary policy could enlarge the output gap and increase cyclical unemployment.

Table 1

Planned expenditure in Galenia.

Table 2

Output estimates for Galenia.

Commodity downturn in Harapan

Read the extracts and answer the questions that follow.

Text A — Falling export demand

1. A global commodity downturn reduced demand for Harapan's copper exports. Export revenue, household incomes and private investment declined, shifting aggregate demand.

2. Unemployment increased and factories operated below capacity. Nominal wages did not fall because of long-term contracts and concern about worker morale.

Text B — Fiscal debate

1. The government proposes public investment in electricity and roads. New classical economists argue that the economy will self-correct if wages and other input prices become flexible.

2. Government debt is already high, and imported machinery would create leakage from the spending programme.

Table 1 — Planned expenditure in Harapan

Planned expenditure components in Harapan.

Table 2 — Output estimates

Output estimates for Harapan

Currency depreciation in Ilyria

Read the extracts and answer the questions that follow.

Text A — Exchange-rate movement

1. Ilyria's currency depreciated after foreign investors reduced purchases of domestic assets. Exporters became more competitive, but imported fuel and machinery became more expensive.

2. The government expects net exports to improve after firms and households have time to adjust. Manufacturers warn of immediate cost increases.

Text B — Capacity constraints

1. Ilyria has substantial unused industrial capacity, although ports are congested and skilled engineers are scarce. The economy may therefore move along the upward-sloping section of the Keynesian AS curve.

2. The government proposes port investment and engineering scholarships.

Table 1 — Planned expenditure in Ilyria

Table 1. Planned expenditure in Ilyria

Table 2 — Trade expenditure

Trade expenditure before and after adjustment to depreciation in Ilyria.

Fiscal consolidation in Jorvik

Read the extracts and answer the questions that follow.

Text A — Lower government spending

1. Jorvik's government reduced public-sector purchases to lower its budget deficit. Household confidence weakened because workers expected job losses. The reduction in government spending directly lowered aggregate demand.

2. Private firms also postponed investment, and real output fell below its sustainable level.

Text B — The adjustment debate

1. New classical economists predict that unemployment will place downward pressure on wages and restore full-employment output. Keynesian economists argue that debt commitments and contracts make downward adjustment slow.

2. The government may protect research funding and simplify regulation to improve efficiency despite the spending cuts.

Table 1 — Planned expenditure in Jorvik

Planned expenditure components in Jorvik.

Table 2 — Output estimates

Output estimates for Jorvik

Trade reform in Kintaba

Read the extracts and answer the questions that follow.

Text A — Lower trade barriers

1. Kintaba's trading partners removed barriers on its processed-food exports. Foreign demand increased, and domestic firms ordered new machinery. This raised exports and investment.

2. Kintaba simultaneously reduced tariffs on imported intermediate inputs. Firms expect lower production costs, although some domestic input producers face stronger competition.

Text B — Constraints on expansion

1. Poor roads and unreliable electricity limit production. The government plans logistics infrastructure and reforms to strengthen contract enforcement.

2. Without these reforms, rising demand may create bottlenecks and an inflationary gap rather than sustained output growth.

Table 1

Planned expenditure in Kintaba (initial scenario).

Table 2

Output estimates for Kintaba under the trade-reform scenario

Recession in Arandia

Arandia has experienced falling consumer confidence following several business closures. Commercial banks have also increased interest rates. The government is considering a temporary increase in spending on transport infrastructure.

Table 1

Aggregate expenditure in Arandia

Table 2

Equilibrium real output and potential output in Arandia.

Nominal wages are fixed by multi-year contracts covering most workers. Some economists argue that the economy will eventually return to potential output without government intervention, while others expect the recessionary gap to persist.

Energy-price shock in Belvaria

Belvaria imports most of its energy. A disruption to regional energy supplies has increased electricity and transport costs. Nominal wages have also increased slightly while labour productivity has remained unchanged.

Table 1: Inputs required for one representative unit of output

Inputs required for one representative unit of output before and after the energy shock.

Table 2: Macroeconomic indicators

Belvaria's macroeconomic indicators before and after the energy shock; aggregate demand is assumed unchanged in the short run.

The government is considering subsidizing investment in renewable energy, but the programme would require additional government borrowing.

Productive capacity in Darsenia

Darsenia's government is considering subsidies for worker training and digital technology. Employers report shortages of skilled workers, while unreliable digital infrastructure reduces the efficiency of firms.

Table 1: Productive-capacity data

Productive-capacity data for Darsenia before and after the proposed programme, using the recessionary-gap convention.

The proposed policies would be financed partly through higher business taxes. Firms warn that higher taxes could reduce expected after-tax returns from investment.

Post-restriction recovery in Lusonia

Read the extracts and answer the questions that follow.

Text A — Demand rebounds

1. After public-health restrictions ended, households spent accumulated savings and firms rebuilt inventories. Consumption and investment rose rapidly, shifting aggregate demand to the right.

2. Employment recovered, but shortages of transport capacity and electronic components raised costs. The price level increased faster than real output.

Text B — Models and policy

1. Some economists argue that bottlenecks are temporary and market adjustment will expand supply. Others believe demand should be restrained because output may exceed potential output.

2. The government proposes port expansion, digital training and temporary support for component production. The central bank is considering higher interest rates.

Table 1 — Planned expenditure in Lusonia

Planned expenditure components in Lusonia.

Table 2 — Output estimates

Output estimates for Lusonia

Currency depreciation in Costavia

Costavia's currency, the luma, has depreciated following a decline in investor confidence. Exporters report an increase in foreign orders, but households and firms face higher prices for imported fuel and machinery. Consumer and business confidence have weakened.

Table 1: Exchange rate and expenditure components

Costavia’s exchange rate and aggregate expenditure components before and after depreciation.

A shipment of imported fuel costs US$40 million in both periods. The central bank is considering increasing interest rates to support the luma.

Weak demand in Estoria

A fall in house prices has reduced household wealth in Estoria. Firms have become pessimistic about future sales and have cancelled investment projects. Most wage agreements last three years, and firms report strong worker resistance to reductions in nominal wages.

Table 1: Aggregate expenditure

Estoria's aggregate expenditure before and after the fall in confidence.

Table 2: Output indicators after the fall in demand

Estoria's real-output indicators before and after the demand shock.

Some advisers recommend temporary demand-management policies. Others argue that wage and price flexibility will restore full-employment equilibrium without government intervention.

A mixed policy package in Faron

Faron's equilibrium output is below potential output. The government is considering a package consisting of additional public-infrastructure purchases, higher transfer payments and a reduction in an indirect tax. It expects households receiving the transfers to spend part of the additional income.

Table 1: Baseline expenditure and proposed policy changes

Baseline expenditure data, output levels and proposed fiscal-policy assumptions for Faron.

Table 2: Indirect tax on a representative product

Indirect-tax rates for a representative product before and after the proposed reduction.

Assume that the indirect-tax reduction is passed on fully to consumers and that the pre-tax price remains unchanged initially.