Consider the following model of a closed economy:
5. Consider the following model of a closed economy: ? YS = AK1/2L1/2 ? C = 200 + 0.75(Y “?o T) ? I = 1200 “?o 10,000r ? KS = 100 ? LS = 225 ? A = 24 ? G = 1000 ? T =
800 a. What must the real wage (W/P) and real rental price of capital (R/P) be to establish equilibrium in the labor and capital markets? b. What values of
aggregate income (Y) and national saving (S) result from full employment of labor and capital? c. What must the interest rate (r) be in order to establish long run
equilibrium in the market for loanable funds? d. What are the long run equilibrium values of W/P, R/P, Y, S and r if the labor supply (LS) increases from 225 to
625, all else equal? e. What are the long run equilibrium values of W/P, R/P, Y, S and r if government purchases (G) decrease from 1000 to 200, all else equal?
Assume that L = 225.
800 a. What must the real wage (W/P) and real rental price of capital (R/P) be to establish equilibrium in the labor and capital markets? b. What values of
aggregate income (Y) and national saving (S) result from full employment of labor and capital? c. What must the interest rate (r) be in order to establish long run
equilibrium in the market for loanable funds? d. What are the long run equilibrium values of W/P, R/P, Y, S and r if the labor supply (LS) increases from 225 to
625, all else equal? e. What are the long run equilibrium values of W/P, R/P, Y, S and r if government purchases (G) decrease from 1000 to 200, all else equal?
Assume that L = 225.
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