The production function in an economy is Y = 2(5L 0.0025L 2 ). The labor supply curve is L S = 55 + 10(1 ), where L S is the amount of labor supplied, is the real wage, and is the tax rate on wage income, which is 0.5. Desired consumption and desired investment are C = 300 + 0.8(Y T) 200r I = 258.5 250r 1 Government purchases and taxes are

G = 50 T = 20 + 0.5Y Money demand is MD P = 0.5Y 250(r + e ) where the expected rate of inflation, e , is 0.02. The nominal supply of money MS = 9150.

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

(b) For any level of output, Y , find an equation that gives the real interest rate, that clears the goods market; this equation describes the IS curve. What are the general equilibrium values of the real interest rate, consumption, and investment?

(c) For any level of output, Y , find an equation that gives the real interest rate that clears the asset market; this equation describes the LM curve. What is the general equilibrium value of the price level?

(d) Suppose that government purchases increase to G = 72.5. Now what are the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and price level?