1) Consider an hypothetical &quot;Classical&quot; market ec...

Transcribed Text

1) Consider an hypothetical "Classical" market economy characterized by the following equations (all variables as defined in class). NS=4# (labour supply) ND = 220 - w (labour demand) Y = (production function) M = 8Y P (Qty theorg) a) What will the real wage and the level of employment be for this economy? b) Assume K = R = 4. What would the "natural" rate of output be for this economy? c) If the money supply in this economy was M = 6, what would the price-level be? What would the nominal wage, W. be? d) What would happen to the level of output, the price-level, and nominal wages in this economy if the money supply increased to M = 8? e) Illustrate the so-called Aggregate Demand and Aggregate Supply curves for this economy. 2) Now consider the following Short-Run Keynesian model of the goods market only. Z=C+I+G C = 10 + 0.75(Y T) / 8 G T 3 a) Solve for the equilibrium value of output (Y) in this economy. b) What is the value of the expenditure-multiplier in this economy? c) Now, assume that investment also depends on income similarly to consump- tion. Specifically, instead of I = 8 as above, assume that investment is given by, 1=4+0.2(Y). What is the equilibrium value of output for this version of our model economy? d) What is the value of the expenditure-multiplier in this case of "endogenous investment"? e) Explain the difference in the expenditure-multipliers from parts b) and d) above.

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a) When we equate the labor demand and labor supply, we find the equilibrium wage rate and the employment level.

4W/P =220-8 W/P
12 W/P = 220
W/P = 220/12 = 18.33

The number of employed = 4*18.33 = 73.32...

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