Question: THIS IS THE GENERAL EQUILIBRIUM PROBLEM THAT I PROMISED.YOU FIRST SOLVE FOR THE INITIAL EQUILIBRIUM AS POINT A.WE CONSIDER TWO DIFFERENT AND SEPARATE SHOCKS (I

THIS IS THE GENERAL EQUILIBRIUM PROBLEM THAT I PROMISED.YOU FIRST SOLVE FOR THE INITIAL EQUILIBRIUM AS POINT A.WE CONSIDER TWO DIFFERENT AND SEPARATE SHOCKS (I CALL THEM SCENARIOS). THE FIRST SHOCK IS TO THE IS CURVE, THE SECOND SHOCK IS A 'LM' SHOCK. AGAIN, WE CONSIDER THESE SHOCKS SEPARATELY SO THAT AFTER YOU COMPLETE SCENARIO 1 (THE IS SHOCK), WE GO BACK TO THE ORIGINAL CONDITIONS AND CONSIDER THE SECOND SCENARIO WHICH IS THE 'LM' SHOCK.

Consider the following model of the economy

Production function: Y = AKN - N2/2

Marginal product of labor: MPN = AK - N.

where the initial values of A = 6 and K = 10.

The initial labor supply curve is given as: NS= 20 + 4w

Initial conditions in the goods market

Cd= 100 + .50(Y-T) - 500r

Id= 800 - 500r

G = 100

T= 100

Md/P=202 + 0.5Y- 1000(r + e)

Nominal Money supplyM = 2000

Expected inflation is equal to 2% (e= 0.02)

1 a) Solve for the labor market clearing real wage (w*), the profit maximizing level of labor input (N*), and the full employment level of output (Y*). Please show work.

Draw two diagrams vertically with the labor market on the bottom graph and the production function on the top graph. Be sure to label everything including this initial equilibrium point as point A. (completely labeled and correct diagrams)

b) Derive an expression for the IS curve (r in terms of Y).Please show all work

c) Find the real interest rate that clears the goods market. Please show all work

d) Find the price level needed to clear the money market. Please show all work

e) Find the expression for the LM curve (r in terms of Y). Please show all work

Now draw four separate diagrams: (40 points total)Top left:a desired savings equals desired investment (Sd= Id), Top right: a FE - IS - LM diagram,Bottom left:a money market diagram, Bottom right: An AD - AS diagram,locating this initial equilibrium point as point A.BE SURE to LABEL all diagrams completely (10 points for each correctly drawn and labeled diagram...each diagram will have three different equilibriums points A, B, and C)

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