Reference no: EM13375551

3) 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.