E304exam2_essayREVIEW

E304exam2_essayREVIEW - Label the axes, the curves and the...

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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 = 6A - 0.006*A*N Suppose that A=2. The labor supply curve is N S = 60 + 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 = 400 + 0.8(Y - T) – 200r I d = 288.5 - 250r Taxes and government purchases are T = 20 + 0.5Y G = 50 Money demand is M d /P = 0.6Y - 260(r + π e ) The expected rate of inflation, π e , is 0.03 and the nominal money supply M is 9750. 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.
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Unformatted text preview: Label the axes, the curves and the equilibrium wage and quantity of labor b. Use the value for N that you calculated in part (a) to find the equilibrium level of output Y. Then draw a graph of the production function. Show the general shape of the production function, label the axis, the curve, and the equilibrium values of Y and N. c. Use the value for Y that you found in part (b) to construct the desired savings formula as a function of r. d. Solve for the goods market equilibrium: what are the equilibrium values of r and investment? Graph the goods market equilibrium. Show and label the desired investment and desired savings curves. Show and label the equilibrium values and label the axes. e. Solve for the asset market equilibrium price level....
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