1) Consider an hypothetical "Classical" market economy characterized by the
following equations (all variables as defined in class).
ND = 220 - w (labour demand)
Y = (production function)
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
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
2) Now consider the following Short-Run Keynesian model of the goods market
C = 10 + 0.75(Y T)
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
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
e) Explain the difference in the expenditure-multipliers from parts b) and d)
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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...