3. IS-LM-FE with exible prices - All three markets (22 pts) Suppose the production function in an economy is Y = A(6N 0.0025N 2) Suppose that A = 4. The labor supply curve is N S = 55 + 10w Where N s is the quantity of labor supplied, w is the real wage, (This is just a labor market you've dealt with before. Remember that the labor demand curve comes from the MPN). Desired consumption and investment are: Cd = 600 + 0.8(Y T ) 200r Id = 600 250r Taxes, T , and government purchases, G, are T = 50 G = 50 Money Demand is Md/P = 0.5Y 250(r + e) The expected rate of inflation, e, is 0.02 and the nominal money supply, Ms , is 9150

(a) (6 pts) What are the general equilibrium levels of the real wage, employment and output?

(b) (6 pts) For any level of output, Y, nd an equation that gives the real interest rate r that clears the goods market; this equation describes the IS curve. (Hint: write the goods market equilibrium condition and solve for r interms of Y and other variables.) What are the general equilibrium values of the real interest rate, consumption, investment

(c) (6 pts) For any level of output, Y, nd an equation that gives the real interest rate that clears the asset/money market; this equation describes the LM curve (Hint: as in part (b) write the equilibrium condition for this market and solve for r in terms of Y and other variables) What is the general equilibrium value of the price level?

(d) (4 pts) Suppose that government purchases increase to G=72.5. Assume this coincides with an equal increase in taxes. First demonstrate on a graph how that impacts the ISLM curves (you don't have to graph them exactly just roughly). Now what are the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment and the price level?