ECON 401A Hartman Autumn 2010 PROBLEM SET IV (for Monday, November 1) Let Yreal aggregate output Nlabor Kcapital Wnominal wage rate Pprice level Creal consumption Treal taxes Ireal investment rreal interest rate measured as a percent inominal interest rate measured as a percent Greal government purchases Mnominal money stock 1. Consider a closed classical economy with misperceptions. The production function is YNK212//where Kis fixed at K100, and the supply function for labor is 2200 100( /)SNPW. The consumption function is 3()104CY TY T, the investment demand function is () 60 2Irr, and the demand function for real money balances is (,) 2 4LYiYi. For this problem assume that 40GTand 3400M. No inflation is expected so ir. a. Find the ISand LMcurves for this economy. b. Find the aggregate demand (AD) function for this economy.
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