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Thu 24 Apr, 2014 09:34 am
Y - Agg Real Output per year
P- Price level
C- Agg Consumption expenditure per year
I- Agg Investment expenditure per year
L- Agg employment (in labor hours per year)
L*- Total labor supply (in labor hours per year)
w- hourly money wage rate
W - Agg wage income per year
R- Agg non wage income per year
Consider an economy in which labor is homogeneous, agg productivity of labor (Y/L) is a constant 'a' and price level (when output is bellow full employment level) is a factor m times the wage cost per unit of agg output. Price at full employment is always greater than or equal to that at below full employment level. In equilibrium, PY = C+I
1. If I= 4000, C=1000+.8W+.6R, w= 10, m= 4/3, a= 16, L*= 2000, what is full employment output level in economy?
2. if C= 1000+.8W+.6R w=10 m=4/3 a=16 L*=2000 and output is below full employment level , what is the increase in nominal income per unit increase in investment expenditure in economy?