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3) Neoclassical Model: Assume the following equations summarize the structure of the economy. Equation of Exchange: MV = PY Money in circulation determined by the
3) Neoclassical Model: Assume the following equations summarize the structure of the economy. Equation of Exchange: MV = PY Money in circulation determined by the central bank: M = 200 Velocity of circulation: V = 2 . Production function: Y = 40/0.5 . Labor supply in the competitive labor market: NS = 50(") a) Derive the AD curve. (1) Explain how, from the neoclassical perspective, AD curve is derived (in other words, the theoretical foundation of the neoclassical AD curve). (1) b) Calculate the equilibrium level of P, W, and Y (1.5) c) If M increases by 200, what will be the new equilibrium of P, W, and Y (1.5) d) Compare your results in question a) and b) and explain the similarities and differences using the neoclassical theory. (2)
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