Labor Market and Production: Wage=100-N Wage=25+2N Y=A*K.5N.5

Goods Market: C=50+2/3(Y-T)-200r I=100-200r G=70 T=50

Asset Market: MS=245/P MD=1/2(Y)-100r

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 (technology) equals 20. 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 a 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 25 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 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 balanced budget stabilization policy. How is the balance budget stabilization conducted? 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.

f. Starting at the initial equilibrium. Suppose that for stabilization reasons the government decides to change the lump sum tax from 50 to a progressive tax system where the total tax will be equal to 10% of the output level (T1=0.10*Y). Draw the initial general equilibrium under this new tax regime and show how the decrease in consumption by 25 units will have a different Short Run equilibrium. What is the Short Run equilibrium? You can draw this graphically under the Keynesian assumptions with only the IS/LM/FE model. Make sure to completely label the graph. This should be done on a new graph but include any of the original lines that help to show how the new tax change has changed things.