# Quiz2Banswer - ECO 420-002 and 004 Fall 2008 Quiz 2B On my honor I have neither given nor received unauthorized aid on this quiz Name Section 1 In

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ECO 420-002 and 004, Fall 2008 Quiz 2B On my honor, I have neither given nor received unauthorized aid on this quiz: ______________ Name:___________________________________________ Section: _______________ 1. In the country of Wiknam, the velocity of money is constant. Real GDP grows by 5% per year, the money stock grows by 12% per year, and the real interest rate is 2%. What is the nominal interest rate? (3 points) % Change in M + % Change in V = % Change in P + % Change in Y 12% + 0 = % Change in P + 5% % Change in P = 7% = Inflation rate Nominal interest rate = 7%+2%=9% 2. Consider the following production function: Y = K 0.3 L 0.7 a. Let K=100 and L=100, what is the equilibrium real wage?(2 points) MPL = W/P 0.7*K 0.3 L -0.3 = W/P W/P = 0.7 b. If real wage is 1, what is the level of employment?(2 points) MPL = W/P 0.7*100 0.3 L -0.3 = 1 Solve for L 0.7*K 0.3 = L 0.3 0.7*100 0.3 = L 0.3 2.78675 = L 0.3 2.78675^(10/3) = L L = 30.5 workers c. If labor supply is fixed at 100, what is the level of unemployment?(2 points)

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## This document was uploaded on 10/28/2011 for the course ECON 420 at UNC.

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Quiz2Banswer - ECO 420-002 and 004 Fall 2008 Quiz 2B On my honor I have neither given nor received unauthorized aid on this quiz Name Section 1 In

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