3) 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.
