1. Use the following information about the labor market:

Labor Market and Production:

W = 11-N

W = 1+N

Y = A*K.5N.5

Goods Market:

C = 5+0.5(Y-T)

I = 15-50r

T = 10

G = 5

Asset Market:

MS = 25/P; assume that the P=1 initially

MD = Y - 50r

a. Suppose that the current capital-labor ratio is 1 (the amount of capital exactly equals the number of

workers) and that the total factor productivity (A) equals 6. What are the equilibrium wage, employment

level, and the full employment level of output? Draw this all graphically and make sure to label the graph.

b. Use the information from part an along with the goods market and the asset market information. What are

the initial general equilibrium interest rate, output, and price? Draw this graphically under the Keynesian

assumptions. Include both the IS/LM/FE and the AD/AS models making sure to completely label the

graphs.

c. Suppose that there is a collapse in consumer confidence that decreases consumption by 5 units. What are

the Short Run and Long Run values for the interest rate, output, and price? Draw this graphically under the

Keynesian assumptions. Include both the IS/LM/FE and the AD/AS models making sure to completely

label the graphs. This can be done on the previous graphs.

d. Suppose when the economy is in the Short Run equilibrium and the Federal Reserve wanted to conduct

a stabilization policy. What policy would they conduct? How large would this policy have to be? Draw this

graphically under the Keynesian assumptions. Include both the IS/LM/FE and the AD/AS models making

sure to completely label the graphs. This should be done on a new graph.

e. Suppose when the economy is in the Short Run equilibrium and the Government wanted to conduct

a stabilization policy. What are the 3 policies they can do? How large would each policy have to be? Draw

this graphically under the Keynesian assumptions. Include both the IS/LM/FE and the AD/AS models

making sure to completely label the graphs. This should be done on a new graph.