Answer

Solution

1. 1

   With $P=10$, real money endowment is $\bar M/P = 10$. The money-demand

2. 2

   condition

3. 3
   $$\frac{M}{P} = \tfrac{1}{4}\!\left(L + \tfrac{\bar M}{P}\right)$$
4. 4

   becomes

5. 5
   $$10 = \tfrac{1}{4}(L + 10) \;\Longrightarrow\; L + 10 = 40 \;\Longrightarrow\; L = 30.$$
6. 6

   Since the price is above the market-clearing level $P^* = 6$ (Question 26), the

7. 7

   labour market is in excess supply and employment is demand-determined.

8. 8

   Output $Y = L = 30$.

Answer structure / marking notes

Content note