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Exercise 4 (35 Points) Consider a two period economy without investment but with variable hours of work No. In this economy, the aggregate (inverse) labour supply function is mg = 2 + 0.31% + 0.200 and the aggregate consumption function is 03(1") = 0.60\"}; 00) + 24/(1 + 1") Aggregate output is produced according to Y0 = ZoN. It follows that rms are willing to hire any amount of labor at wage tug = 20. The government spends Co = 100 in period 0 which is entirely nanced by lump sum taxes To. Assume that labour productivity 20 is equal to 15. (a) Suppose that Co = 50. Draw the inverse labor demand curve {i.e. tug against No). Would consumers accept to work if we = 10 ? (b) Find the equilibrium value of N0 and the equilibrium wage tug, given 00. (c) Suppose that NC. = 10. Find the equilibrium interest rate r and aggregate consump- tion in this case. Illustrate with a graph. (d) What do you conclude from (a), (b), (c)? Explain. Suppose that government spending increases by 17.5 (e) What happens to consumption and to aggregate demand if r and N0 stay the same (i.e. r = 0.2 and N0 = 10)? Explain why No will also change. (i) Verify that NO will increase by 1 if 1" remains constant. Explain why i\" cannot remain at 0.2. Will 1" increase or decrease? How will 0.3 and N}; be affected by this change? (g) Illustrate with a graph of the Goods market and a graph of the labor market what happens after 00 increases (from one equilibrium to the other): rst, when it" remains constant, and then, when 1' changes