Question

1. Suppose that I give you an aggregate production function: Y = AK^(1/2)N^(1/2)

a) Suppose that A = 1 and K = 4. Derive the labour demand curve.

b) If the labour supply curve is: w = (1 − t) √ N^s Solve for the equilibrium real wage and full employment level of employment when t = 0.75. What is the full employment level of output?

c) Suppose that A(prime aka future) = 1/2 temporarily. K is unchanged and the wage stays fixed at the level you derived in part

b). What are the new values for output and employment? Are they at their full employment levels?

d) Suppose that taxes go down to t = 0.5. What will be the effect on the full employment level of employment and output? Draw this effect on a diagram with r on the vertical axis and Y on the horizontal axis. Hint: Assume that A = 1, K = 4 and t = 0.75.

For the remaining questions use the following:

Suppose that the consumption function is: C d = 200 + 0.75(Y − T) Desired investment is: I d = 200 − 250r Government spending is fixed at G = 100 and the government balances its budget (T = 100).

The money demand equation is: L(Y, r) = Y − 1000r

The money supply is Ms = 1, 000

Answer 1

dl Nd 2 Y2 w a 2. empw ymumt uwels 2.