ECON 401A
Hartman
Autumn 2010
PROBLEM SET II
(for Thursday, October 14)
In what follows we use the following notation:
Y
real aggregate output
N
labor
K
capital
W
nominal wage rate
P
price level
C
real consumption
T
real (lump sum) taxes
I
real investment
r
real interest rate measured as a percent
i
nominal interest rate measured as a percent
G
real government purchases
M
nominal money stock
1.
This problem involves a simple specification of an
IS

LM
model where
P
is fixed exogenously.
Assume
no inflation is expected so the real and nominal interest rates are the same,
i.e
.,
0
e
so
ir
.
Suppose that the consumption function is
C Y
T
Y
T
()
.
10 8
,
that the investment demand function is
I r
r
65 4
,
and that the demand function for real money balances is
L Y r
Y
r
(,)
21
0
.
a.
Use the ISLM approach to find the equilibrium levels of
Y
and
r
in terms of the exogenous
parameters,
P
,
M
,
G
, and,
T
.
What happens to the equilibrium levels of
Y
and
r
if
G
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 Spring '08
 Staff
 Economics, Macroeconomics, Inflation, Supply And Demand, nominal wage rate

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