COQUITLAM COLLEGE Econ 202: Principle of Macroeconomics Final Exam 3) The produc
ID: 1201561 • Letter: C
Question
COQUITLAM COLLEGE Econ 202: Principle of Macroeconomics Final Exam 3) The production function in an economy is Y-A(5N-0.0025N), where A is productivity. With this production function, the MPN-5A-0.005AN. Suppose that A-2. The labour supply curve is: N-55+5w. Let desired consumption C-300+0.8(Y-T)-200r, desired investment I-258.5-250r, Taxes and government purchases are T-20+0.5Y; G 50. Nominal money supply M-9150, and real money demand L' = 0.5Y-250(rt). The expected rate of inflation -0.02. a. Find the equilibrium level of employment N and outputYExplanation / Answer
(a)
(i) Labor demand = MPN x w = (5A - 0.005AN) x w = (10 - 0.01N) x w [Since A= 2]
Equating with labor supply:
(10 - 0.01N) x w = 55 + 5w
This is 1 equation with 2 unknowns (N and w). So, N can be found out if value of w is known.
(ii) If value of N is known, we can plug in that value into production function and find out Y. But here N cannot be found out until wage rate is specified. So, equilibrium Y cannot be solved for using production function.
(b)
In equilibrium, Y = C + I + G
Y = 300 + 0.8(Y - T) - 200r + 258.5 - 250r + 50
Y = 608.5 - 450r + 0.8 x [Y - (20 + 0.5Y)] = 608.5 - 450r + 0.8 x (Y - 20 - 0.5Y)
Y = 608.5 - 450r + 0.8 x (0.5Y - 20)
Y = 608.5 - 450r + 0.4Y - 16
0.6Y = 592.5 - 450r
Y = 987.5 - 750r ....(1) [Equation of IS]
(c) In money market equilibrium, (M/P)d = (Ms / P)
0.5Y - 250(r + 0.02) = (9150 / 2) [Since expected inflation = 0.02, P = 2]
0.5Y = 4575 + 250r + 5
0.5Y = 4580 + 250r
Y = 9160 + 500r ......(2) [Equation of LM]
(d) In general equilibrium, expected inflation equals actual inflation. So, price level is 2.
NOTE: First 4 sub-questions are answered.