Reference no: EM132484440
Using the Real Intertemporal Model covered in class, assume z increases in the current period, and the consumer expects the productivity to return to its initial level in period 1, that is, he expects z′ to decrease.
1. Describe the expected shifts in the Ns, Nd, Y s, and Y d curves. Give the driver of each shift.
2. Assume the changes in Yd and Ys are such that Y ? remains unchanged. How does the equilibrium interest rate change?
3. Using a graph, illustrate how the final interest rate adjustment in the labour market affect the equilibrium employment. Will the equilibrium employment decrease or increase?
(Hint: Use the fact that the equilibrium Y? and N? are linked by the production function Y? =zF(K,N?).)
4. Comment the final changes in the equilibrium consumption (C?) and investment (I?).
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