Labor Market Y = α (5N – 0.0025N2), where α = 2; N = labor The supply of labor, NS is NS = 55 + 10(1-t)w where t- tax rate = 0.5, w = real wage rate Good Market The desired consumption, Cd is Cd = 300 + 0.8(Y – T) – 200r Where Y = income, T = taxes, r = real interest rate T= 20 + 0.5Y G= 50 Desired investment, Id: Id = 258.5 – 250r Money Market Demand for money, Md/P: Md/P = 0.5Y – 250(r + πe), where πe = 0.02 (expected inflation) Money supply = Ms = 9150 a)Find the equilibrium w, Y and N. b)Find the IS-curve and the equilibrium r, C and I. c)Find the LM-curve and the equilibrium P. d)If G increased to 72.5, find the equilibrium w, P, N, r, C and I. e)Discuss the differences between the equilibrium values in d) with a), b) and c). What is your conclusion with regard to the effectiveness of fiscal policy in this model?
Labor Market
Y = α (5N – 0.0025N2), where α = 2; N = labor The supply of labor, NS is
NS = 55 + 10(1-t)w
where t- tax rate = 0.5, w = real wage rate
Good Market
The desired consumption, Cd is
Cd = 300 + 0.8(Y – T) – 200r
Where Y = income, T = taxes, r = real interest rate T= 20 + 0.5Y
G= 50
Desired investment, Id:
Id = 258.5 – 250r
Demand for money, Md/P:
Md/P = 0.5Y – 250(r + πe), where πe = 0.02 (expected inflation)
Money supply = Ms = 9150
a)Find the equilibrium w, Y and N.
b)Find the IS-curve and the equilibrium r, C and I.
c)Find the LM-curve and the equilibrium P.
d)If G increased to 72.5, find the equilibrium w, P, N, r, C and I.
e)Discuss the differences between the equilibrium values in d) with a), b) and c). What is your conclusion with regard to the effectiveness of fiscal policy in this model?
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