Consider the following model of the economy Production function: Y = AKN – N2/2Marginal product of labor: MPN = AK – N. Where the initial values of A = 8 and K = 10. The initial labor supply curve is given as: NS = 20 + 9w. Cd = 401 + .50(Y-T) – 500rId = 800 – 500rG = 500T= 100 Md/P = 469 + 0.5Y- 1000r Nominal Money supply M = 4000 We assume that expectedinflation is zero (?e?= 0) so that money demand depends directly onthe real interest rate (since i = r). 1 a) Solve for the labor market clearing real wage (w*), theprofit maximizing level of labor input (N*), and the full employment level ofoutput (Y*). Please show your work. Draw two diagrams verticallywith the labor market on the bottom graph and the production function on thetop graph. Be sure to label everything including this initial equilibrium pointas point A b) Derive an expression for the IS curve (r in terms of Y). Please show all work c) Find the real interest rate that clears the goods market. Please show all work d) Find the price level needed to clear the money market. Please show all work e) Find the expression for the LM curve (r in terms of Y). Please showall work
Consider the following model of the economy
Production function: Y = AKN – N2/2
Marginal product of labor: MPN = AK – N.
Where the initial values of A = 8 and K = 10.
The initial labor supply curve is given as: NS = 20 + 9w.
Cd = 401 + .50(Y-T) – 500r
Id = 800 – 500r
G = 500
T= 100
Md/P = 469 + 0.5Y- 1000r
Nominal Money supply M = 4000
We assume that expected
inflation is zero (?e?= 0) so that money
the real interest rate (since i = r).
1 a) Solve for the labor market clearing real wage (w*), the
profit maximizing level of labor input (N*), and the full employment level of
output (Y*). Please show your work.
Draw two diagrams vertically
with the labor market on the bottom graph and the production function on the
top graph. Be sure to label everything including this initial equilibrium point
as point A
b) Derive an expression for the IS curve (r in terms of Y). Please show all work
c) Find the real interest rate that clears the goods market. Please show all work
d) Find the price level needed to clear the
e) Find the expression for the LM curve (r in terms of Y). Please show
all work
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