The profit maximizing level labor input
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1.Consider the following model of the economy:
The initial conditions in the goods market are as follows:
Nominal Money supply: M = 1800
Expected inflation is equal to 2% (πe = 0.02)1 a) (6 points) 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 your work.
| w = | N* = | 1 | ||||
|---|---|---|---|---|---|---|
| Y* = | ||||||
56 N
W
|
|---|
| R | M/P | B | R | LM | |||
|---|---|---|---|---|---|---|---|
| 6.4% | 6.4% | B | LM=Lm | ||||
| 5.4% | A=C | ||||||
| Id |
|
IS | |||||
|
|||||||
| P | |||||||
| M/P=M/P | LRAs | ||||||
| B | A=C | 2 | B | A | |||
|
880 | L | C | SRAs’ | |||
| 1.96 | |||||||
| AD’ | AD | ||||||
| 900 | |||||||
|
|||||||
| 1772 | 1792 | ||||||