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1 Question 1 AS-AD model and monetary policy Consider the following model of the economy: Wages are determined by the following equation W = Pe(2.5- 10Price is determined by the following equation P=2Production function Y=NLabour force is fixed L=100 Consumption function C=10+0.5(Y-T)Investment functionI=12+0.3Y-100 Government spending G=4, Taxes T=10 The central bank is using the following Interest Rate Rule: it = in+ 2(P-PT) where PTa.Derive the AS relationship for this economy. Find the natural rate of unemployment and the natural level of output. u) W. i=10. ( ) ( )( )( )( )( ( ))( ( ))( )( )( )b.Derive the IS relationship for this economy. i
2 ( ) ( ) ( ) ( ) ( ) c.Derive the AD relationship for this economy =10. )) ))