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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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 Spring '08
 Staff
 Macroeconomics

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