You are given the following labor demand and labor supply curves for the economy.
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d
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s
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N = 250-2(W\P)
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N = 3(W/P)
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a) Calculate the equilibrium real wage rate and the equilibrium quantity of labor.
b) Suppose that the nominal wage rate equals 60. In the short-run, aggregate demand and aggregate supply are equal at a price level of 1.0. Compute the real wage rate. Explain where actual real output is relative to natural real output. Suppose that policymakers change aggregate demand so that in long-run equilibrium, the nominal wage rate stays at 60. What is the long-run equilibrium price level? Explain whether policymakers took actions that increased or decreased aggregate demand.
c) Suppose that the nominal wage rate equals 56. In the short-run, aggregate demand and aggregate supply are equal at a price level of 1.4. Calculate the real wage rate. Where is actual real output relative to natural real output? Given the aggregate demand curve, suppose that in long-run equilibrium the price level equals 1.6. Calculate the value of the nominal wage rate that equates the demand for and supply of labor. How do the nominal wage rate changes and the SAS curve shift as the economy adjusts from its current short-run equilibrium to the new long-run equilibrium?