# Suppose the real side of an economy is characterized

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## Suppose the real side of an economy is characterized

3) Suppose the real side of an economy is characterized by:Y = 80K1/2 L1/2 K=100 and L= 100G = 3000 T = 3000I = 2000 – 6000r C = 600 + .6(Y-T)And suppose the nominal side of this economy is characterized by:Real money demand: (M/P)d= 0.2Y – 1000rNominal money supply: M = 3000Where P is aggregate price level, and M is nominal stock of money.a) Compute the following: Real GDP (Y), real interest rate (r ), real wage rate (W/P, in units ofgoods), aggregate price level (P), and a nominal wage rate (W, in terms of money).b) Suppose that the government raises the money supply 10% from 3000 to 3300. Report thenew values for each of the variables in part (a) above. Does the Classical Dichotomy hold inthis economy? Explain.

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