Consider the Real Intertemporal Model. Suppose that a severe blizzard hits the economy of Connecticut and destroys big plants located in Manchester. In the context of our model, this is equivalent to a decrease in the current capital stock K.

1. Show its impact on labor demand. Note that you must begin with an initial equilibrium, like in class. Do not talk about labor supply or wage rate at this point. Why does labor demand change the way it does? Draw the graph and explain.

2. Now show its impact on the goods(or the output) market. Here, you must draw graph to show how equilibrium output and price (interest rate r) changed as a result of the blizzard. You should explain how output demand and output supply change and why.

3. Next, go back to your answer in part 1 and show how labor supply changes in the labor market. Explain why labor supply changes that way. Hint: think about the price you determined in part 2. Please re-draw the graph below. Now that you know about labor demand and labor supply, determine what happens to the equilibrium employment (N) and the equilibrium real wage rate w. Explain your thinking behind the graph.