Question 3. [25 marks] Aggregate Supply with Classical Model Answer the following question in context of an economy with the classical model of labour. Suppose strict economic sanctions are imposed on the country of Invasia by most of the world's leading economies. A component of these sanctions is a prohibition on exports of capital goods (such as machinery) and spare parts to Invasia. Futhermore, Invasia lacks the ability to produce capital goods as its economy is focused on resource extraction. Depreciation of existing capital stock in Invasia accelerates, and depreciated capital stock cannot be replaced due to ban on exports of capital goods to Invasia. Capital stock (K) in Invasia begins to decrease rapidly as a result of the economic sanctions. Suppose the Invasian economy is in a state of full employment both before and after the sanctions. (a) The economic sanctions _______ labour demand in Invasia, as the decrease in capital stock capital per unit labour () at any level of employment, causing the marginal productivity of labour to a. decreases; decreases; decrease b. increases; increases; increase c. decreases; increases; decrease d. increases; decreases; increase Choose the most appropriate answer from among a, b, c and d. (2 marks) (b) State the effect of the economic sanctions on equilibrium real wages and labour employment in the Invasian labour market. Illustrate your answer with an appropriate diagram of the labour market - using your answer from part (a). (6 marks) (c) Using your answer from part (b), state whether output supplied will increase or decrease as a result of the decrease in capital. Illustrate your answer with a diagram of the production function. (6 marks) (d) Using your answer to part (c), predict the impact of the economic sanctions on general equilibrium price level and output in the Invasian economy. (You only need to state whether they are predicted to increase or decrease.) Illustrate your answer with an appropriate AD-AS diagram. (7 marks) (e) Ignore the previous discussion of the economic sanctions and your previous answers for parts (a) to (d). The following is a stand-alone question. State the impact of expansionary fiscal policy on equilibrium: i. Output; ii. Price level; iii. Real wages; iv. Employment. No explanation required. (4 marks)