Question 5. The short and medium run: Aggregate supply In an economy, the firms profit-maximize by comparing the MPL to the wage: 0.5.A. √K/√L = w And workers negotiate their wage raises by looking at the # of jobs and the expected inflation: EP W = √ī P The productivity is A=3.7 and there is K = 36 of capital. Workers expect the price level EP = 2. (a) Express the labor market equilibrium condition for P as a function of L. That is, isolate P and have everything else on the right-hand side. Keep L but plug in and simplify everything else. (b) Use the production function Y = A√K √L to substitute labor L in the labor market and obtain the AS curve as P(Y). That is, have √P isolated and everything else, including Y, on the right- hand side (c) Without shocks and policies, the economy is in the long-term equilibrium at Yo=74, Po=2. A fiscal expansion moves the expenditure to Y₁=80.4 in the very short-run and to Y₂=79 in the short run. Remember the distinction between very short and short. With that, find: ■ ■ the very short run output the very short run price level the short run price level (d) Show your three results from (c) in an AS/AD graph. Answers Provided: 5. (a) P = 0.18 * L (b) √P = √0.18. Y 3.7√36 (c) 74, 2, 2.28
Question 5. The short and medium run: Aggregate supply In an economy, the firms profit-maximize by comparing the MPL to the wage: 0.5.A. √K/√L = w And workers negotiate their wage raises by looking at the # of jobs and the expected inflation: EP W = √ī P The productivity is A=3.7 and there is K = 36 of capital. Workers expect the price level EP = 2. (a) Express the labor market equilibrium condition for P as a function of L. That is, isolate P and have everything else on the right-hand side. Keep L but plug in and simplify everything else. (b) Use the production function Y = A√K √L to substitute labor L in the labor market and obtain the AS curve as P(Y). That is, have √P isolated and everything else, including Y, on the right- hand side (c) Without shocks and policies, the economy is in the long-term equilibrium at Yo=74, Po=2. A fiscal expansion moves the expenditure to Y₁=80.4 in the very short-run and to Y₂=79 in the short run. Remember the distinction between very short and short. With that, find: ■ ■ the very short run output the very short run price level the short run price level (d) Show your three results from (c) in an AS/AD graph. Answers Provided: 5. (a) P = 0.18 * L (b) √P = √0.18. Y 3.7√36 (c) 74, 2, 2.28
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
100%
I need assitance with part D, on how to graph it. the solutions are provided.
Transcribed Image Text:Question 5. The short and medium run: Aggregate supply
In an economy, the firms profit-maximize by comparing the MPL to the wage:
0.5 A √K/√L = w
And workers negotiate their wage raises by looking at the # of jobs and the expected inflation:
EP
√L
P
The productivity is A=3.7 and there is K = 36 of capital. Workers expect the price level EP = 2.
(a) Express the labor market equilibrium condition for P as a function of L. That is, isolate P and
have everything else on the right-hand side. Keep L but plug in and simplify everything else.
W =
(b) Use the production function Y = A√K√L to substitute labor L in the labor market and obtain
the AS curve as P(Y). That is, have √P isolated and everything else, including Y, on the right-
hand side
(c) Without shocks and policies, the economy is in the long-term equilibrium at Yo=74, Po=2. A
fiscal expansion moves the expenditure to Y₁=80.4 in the very short-run and to Y₂=79 in the
short run. Remember the distinction between very short and short. With that, find:
the very short run output
the very short run price level
the short run price level
(d) Show your three results from (c) in an AS/AD graph.
Answers Provided:
5. (a) P = 0.18 * L (b) √P √0. 18.
Y
3.7√36
(c) 74, 2, 2.28
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education