Question: Consider the following model of a closed economy:

• 𝑌=𝐴𝐾 ^1/2 𝐿 ^1/2
• 𝑌 ^𝑑 =𝐶+𝐼+𝐺
• 𝑌=𝑌 ^d
• 𝐶=250+0.7(𝑌−𝑇)
• 𝐼=2000−20,000𝑟
• 𝐴=25; 𝐾=144; 𝐿=100
• 𝐺=600; 𝑇=500
• 𝑀=1500; 𝑉=8

a. What values of aggregate income (Y) and national saving (S) result from full employment of labor and capital?

b. What must the interest rate (r) be in order to establish long run equilibrium in the market for loanable funds?

c. According to the quantity theory of money, what is the equilibrium price of goods (P) for this economy?

d. If the money supply increases by 20% (from 1500 to 1800), what will the new equilibrium price of goods be, all else equal?

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Deliverable: Word Document