Suppose the real side of an economy is characterized by:
Y = 80K1/2 L1/2
K=100 and L= 100
G = 3000
T = 3000
I = 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 - 1000r
Nominal money supply:
M = 3000
Where 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 of goods), 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 the new values for each of the variables in part (a) above. Does the Classical Dichotomy hold in this economy? Explain.