Labor Market and Production Function:
W=N+10
W=210-N
Y=1*N.5K.5, K=25
Goods Market: Money Market:
C=25+0.5*(Y-T)-100r Ms=10/P, P=1
T=10 Md=1/2 (Y) – 100r
G=20-100r
I=30-100r
a) What is the w*, Y*, and N*? How does the labor market relate to the IS/LM/FE and AD/AS model? Show graphically
and solve numerically.
b) What is the initial general equilibrium r*, Y* and P*? Show graphically and solve numerically.
c) Suppose that there is a decrease in G by 2. What is the SR r, Y, and P? Show graphically and solve numerically.
d) Suppose that at the SR the Federal Reserve wants to stabilize the economy. Show graphically (only not numerically)
the stabilization. Numerically what is the LR r, Y, and P?
e) Suppose that at the SR the Government wants to stabilize the economy. Show graphically (only not numerically) the
stabilization. Numerically what is the LR r, Y, and P?