Consider the following model of a closed economy:
? YS = AK1/2L1/2
? C = 300 +.5(Y – T)
? I = 2000 – 10,000r
? KS= 100
? LS= 225
? A = 24
? G = 1000
? T = 600
a. 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 aggregate income (Y) and national saving (S) result from full employment of labor and capital?
c. What must the interest rate (r) be in order to establish long run equilibrium in the market for loanable funds?
d. What are the long run equilibrium values of W/P, R/P, Y, S and r if total factor productivity (A) increases from 24 to 30, all else equal?
e. What are the long run equilibrium values of W/P, R/P, Y, S and r if taxes (T) decrease from 600 to 400, all else equal? Assume that A = 24.
