Consider the following economy: Labor supply: Nt= 90 Capital stock: Kt = 90 Government spending: Gt...

Consider the following economy:

Labor supply: N_t= 90

Capital stock: K_t = 90

Government spending: G_t = 20

Tax collections: T_t = 20

Production function: Y_t = 2(K_t)^0.5 (N_t)^0.5

Real money demand L_t = 2Y_t - 200r_t

Consumption function: C_t = 16 + 0.8(Yd)_t

Domestic price level: P_t = 4

Investment function: I_t = 25 - 50r_t

Nominal money supply: M_t = 1296

QUESTIONS:

(7 points) Find an expression for the IS curve.
(7 points) Find an expression for the LM curve.
(7 points) Find an expression for the aggregate demand curve.
(7 points) What are the short run equilibrium values for output, interest rate and price level?
(7 points) Plot (a)-(d) on the IS-LM and AD-SRAS-LRAS diagrams. Make sure to label (i) the axes, (ii) the curves and (iii) the initial equilibrium levels.
(7 points) Is this a short-run level of output also a long-run equilibrium? Explain.
(7 points). Suppose that the government the Fed increases money supply to M^s=1620. Find the new short-run equilibrium levels of output and interest rate
(7 points) Find the long-run equilibrium levels of output, interest rates and prices.
(7 points) Graph this combination of policies both in the short and in the long run.
(7 points) Explain how the adjustment from the short-run to the long-run occurs.

Expert Solution

Rahul Sunny answered 1 hour ago

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