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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=.95-.0005Y

R M/P B
R LM
6.4% 6.4% B LM=Lm
5.4% A=C
Id

S/I

IS

1772. 1792

P
M/P=M/P LRAs
B A=C 2 B A

5.4%

880 L C SRAs’
1.96
AD’ AD
900

M/P

1772 1792
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