401ps4-10 - ECON 401A Autumn 2010 Let Y real aggregate...

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ECON 401A Hartman Autumn 2010 PROBLEM SET IV (for Monday, November 1) Let Y real aggregate output N labor K capital W nominal wage rate P price level C real consumption T real 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. Consider a closed classical economy with misperceptions. The production function is Y N K 2 12 // where K is fixed at K 100, and the supply function for labor is 2 200 100( / ) S NP W  . The consumption function is 3 () 1 0 4 CY T Y T  , the investment demand function is () 60 2 I rr , and the demand function for real money balances is (,) 2 4 LYi Y i . For this problem assume that 40 GT  and 3400 M . No inflation is expected so ir . a. Find the IS and LM curves for this economy. b. Find the aggregate demand ( AD ) function for this economy.
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