Consider the following model of the economyProduction

Consider the following model of the economy

Production function: Y = A·K·N – N²/2

Marginal product of labor: MPN = A·K – N.

where the initial values of A = 6 and K = 10.

The initial labor supply curve is given as: N^S = 30 + 4w

Initial conditions in the goods market

C^d = 120 + .50(Y-T) – 500r
I^d = 800 – 500r
G = 100
T = 100

M^d/P = 218 + 0.5Y- 1000(r + π^e)

Nominal Money supply M = 3000

Expected inflation is equal to 3% (π^e = 0.03)

SCENARIO #1

Suppose that the consumption function has changed and is now

C^d = 140 + .50(Y-T) – 500r

S1 a) Name and support two reasons why the consumption function would change like this.

S1 b) What is the new, short run (fixed price level) expression for the IS curve? Please show all work.

S1 c) What is the short run, Keynesian (fixed price) level of equilibrium output and real interest rate? Please show all work.

Please label these new short run conditions to your four diagrams as point B. Be sure to label diagrams completely with the inclusion of all the relevant shift variables