Clculate the following real gdp y real interest rate r

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Reference no: EM13391276

Suppose the real side of an economy is characterized by:

Y = 80K1/2 L1/2

K=100 and L= 100

G = 3000

T = 3000

I = 2000 - 6000r

C = 600 + .6(Y-T)

And suppose the nominal side of this economy is characterized by:

Real money demand:

(M/P)d = 0.2Y - 1000r

Nominal money supply:

M = 3000

Where P is aggregate price level, and M is nominal stock of money.

a) Compute the following: Real GDP (Y), real interest rate (r ), real wage rate (W/P, in units of goods), aggregate price level (P), and a nominal wage rate (W, in terms of money).

b) Suppose that the government raises the money supply 10% from 3000 to 3300. Report the new values for each of the variables in part (a) above. Does the Classical Dichotomy hold in this economy? Explain.

Reference no: EM13391276

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