2) Long-run classical model from Chapter 3. You must provide properly labeled graphs to get full credit!!!!!!!

A) Suppose there is a permanent increase in the labor force (L).

1. a)What will be the impact on the real wage (W/P) and the real rental price of capital (R/P)?
2. b)What will be the impact on the long-run level of real GDP (Y)?

B) Suppose a technological advance improves the production function (i.e. A)

1. a)What will be the impact on the real wage (W/P) and the real rental price of capital (R/P)?
2. b)What will be the impact on the long-run level of real GDP (Y)?

6) Consider a closed economy described by the following equations:

(1) Y = C + I + G

(2) Y = 5(K)0.5(L)0.5

(3) K = 1600

(4)L= 1600

(5) G = 2500

(6) T = 2000

(7) C = 1000 + 2/3 (Y-T)

(8) I = 1200-100r, where r is the real interest rate.

a) What is the equilibrium level of income? Show your work.

b) Solve for the equilibrium interest rate (r) and the level of investment (I). The interest rate will be a whole number.

c) Suppose G increases by 500 to 3000.

i.) What happens to Y? And, why?

ii.) Solve for the new equilibrium interest rate. iii.) What happens to I? And, why?