Question

# Chapter 11, page 440 in the 8th edition, Numerical Problem 5, which is the same as Numerical Problem5 on page 438 in the 9th edition, and on page 447 in

the 10th edition.(Appendix 11.A) Consider an economy in which all workers are covered by contracts that specify the nominal wage and give the employer the right to choose the amount of employment. The production function is Y = 20VN and the corresponding marginal product of labor is MPN =10/n Suppose that the nominal wage is W = 20. a. Derive an equation that relates the real wage to the amount of labor demanded by firms (the labor demand curve). b. For the nominal wage of 20, what is the relationship between the price level and the amount of labor demanded by firms? c. What is the relationship between the price level and the amount of output supplied by firms? Graph this relationship. Now suppose that the IS and LM curves of the economy (the goods market and asset market equilibrium conditions) are described by the following equations: Y = 120 – 500r M/P= 0.5Y – 500r| d. The money supply M is 300. Use the IS and LM equations to derive a relationship between output,Y, and the price level, P. This relationship is the equation for the aggregate demand curve. Graphit on the same axis as the relationship between the price level and the amount of output supplied by firms (the aggregate supply curve) from Part (c). e. What are the equilibrium values of the price level, output, employment, real wage, and real interestrate? f. Suppose that the money supply, M, is 135. What are the equilibrium values of the price level,output, employment, real wage, and real interest rate?

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