Consider the following model of a closed economy: YS = AK1/2L1/2 C = 200 + 0.75(Y – T) I = 1200 – 10,000r KS = 100 LS = 225 A = 24 G = 1000 T = 800…

10. Consider the following model of a closed economy:

 YS = AK1/2L1/2

 C = 200 + 0.75(Y – T)

 I = 1200 – 10,000r

 KS = 100

 LS = 225

 A = 24

 G = 1000

 T = 800

a. According to classical macroeconomic theory, what must the real wage (W/P) and real rental price of capital (R/P) be to establish equilibrium in the labor and capital markets?

b. What values of real aggregate income (Y) and national saving (S) result from full employment of labor and capital?

c. What must investment (I) and the interest rate (r) be to establish equilibrium in the market for loanable funds?

d. Recalculate the equilibrium values of W/P, R/P, Y, S, I, and r if the labor supply (LS) increases from 225 to 625 (all else equal).

e. Using the original quantity of labor supplied (LS = 225), recalculate the equilibrium values of W/P, R/P, Y, S, I, and r if government purchases (G) decrease from 1000 to 200 (all else equal).

 
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