Real Intertemporal Model

Question 5 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 > to decrease. 1. Describe the expected shifts in the N, No, Y$, and Yo curves. Give the driver of each shift. 2. Assume the changes in Y" and Y 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 /* are linked by the production function Y* = =F(K, N*). 4. Comment the final changes in the equilibrium consumption (C*) and investment (I*)