Consider the basic Neoclassical model.

Suppose that there is an increase in t .

(a) Graphically analyze this change and describe how each endogenous variable changes.

(b) Now, draw out two versions of the model, one in which labor demand is relatively elastic (i.e. sensitive to the real wage), and one in which labor supply is relatively inelastic (i.e. relatively insensitive to the real wage). Comment on how the magnitudes of the changes in Yt , rt , wt , and Nt depend on how sensitive labor supply is to the real wage.