Considerthefollowingmodeloftheeconomy

Productionfunction: Y=AKN-N2/2Marginalproductoflabor:MPN=AK-N.

wheretheinitialvalues ofA= 10and K =10.

The initial labor supply curve is given as: NS = 50 + 4wInitialconditionsinthegoodsmarket

Cd=790+.50(Y-T)-500rId=1000-500r

G=800

T= 100

Md/P=110+0.5Y-1000(r+e)

NominalMoneysupply M= 5000

Expectedinflationisequalto2%(e=0.02)

1a) (6points)Solvefor the labormarketclearing realwage(w*),the profitmaximizinglevel of labor input (N*), and the full employment level of output (Y*). Please show work.Drawtwodiagramsvertically withthelabor market onthe bottomgraphandtheproductionfunctiononthetopgraph. Besuretolabel everythingincludingthis initialequilibriumpointaspointA.(10pointsfor completelylabeledand correctdiagrams)

Answer

Real int rate LM 15 1496 0 Real GDP ( )Md/ MS = 110 + 0 .5y - 1600 7 5000 output