Question

Consider an economy where the IS curve is given by the following equation:

i = (C+I+G-mT+b(pie)^e)/b - ((1-m)Y/b)

And the LM Curve is given by the following equation:

i = (M + (M/P))/h + (k/h)Y

In a Standard AS-AD Framework:

a) Derive AD Curve. what are the slope and intercept of this curve?

b) Derive the labour demand curve if the production function is given by F(L) = L^1/2. Illustrate the labour market graphically.

c) Assuming the classical paradigm and that the economy consists of 100 total workers, derive the AS curve.

d)Which of the following two policies, monetary expansion or tax reductions, will have a large impact on increasing output? Explain your answer.

Answer 1

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