ECON 304.013 Exam 2 Part 2 Form B
SHORT ANSWER – Carefully answer the question below.
Put your answers in this test
packet.
This section is worth 25 points.
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1.
The production function in a closed economy is
Y = A(5N  0.0025N
2
)
where A is productivity.
With this production function, the marginal product of labor is
MPN = 5A  0.005*A*N
Suppose that A=2.
The labor supply curve is
N
S
= 65 + 10(1  t)w
where N
S
is the amount of labor supplied, w is the real wage, and t = 0.5 is the tax rate on wage income.
Desired consumption and investment are
C
d
= 350 + 0.8(Y  T) – 200r
I
d
= 259.5  250r
Taxes and government purchases are
T = 20 + 0.5Y
G = 60
Money demand is
M
d
/P = 0.5Y  250(r + π
e
)
The expected rate of inflation, π
e
, is 0.02 and the nominal money supply M is 9150.
a.
Solve for the real wage and the level of employment, N that clears the labor market.
Then draw a graph
of the labor market.
Show labor supply, labor demand and equilibrium.
Label the axes, the curves and
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 Fall '07
 STONE,MISTYRIANO,ALEJANDRO
 Economics, Macroeconomics, Supply And Demand, 5w, goods market equilibrium, 109.5 W

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