Question

Please make sure to answer all parts, previous expert answers have not and it's really confusing!!

Closed Economy IS-LM-FE model. The behaviour of households and firms in a closed economy is represented by the following equations Y50N - 0.5N2 Cd 40 + 0.8Y d = 80-500r 0.5y-250(r + π*) where π-0.02 = _ where Y is output, N is labour, w is the real wage, Ns is the amount of labour supplied Cd is desired consumption. Id is desired investment. \ is the real money demand. r is the real interest rate, and πΉs the expected inflation. Assume that the economy is initially in a general equilibrium with government expenditure G set to 20 and the nominal money supply M set to 195. (a) What are the full employment levels of the real wage, employment, and output? (b) Derive the IS and LM equations, writing the real interest rate on the left side of the equations. Find the implied long-run real interest rate, output and price level. (c) Suppose the government increases its expenditure to G-40. What are the short-run output and real interest rate? Illustrate the transition from the general equilibrium to the short-run equilibrium using the IS-LM-FE diagram (d) Compute the crowding out effect in adjusting from the general equilibrium to the short run equilibrium after the fiscal expansion. (e) Explain the process that restores the economy to general equilibrium and derive the implied real interest rate, output and price level. Md