Using the Real Intertemporal Model seen in class, suppose the government announces a decrease in future government spending G ^/ while keeping the current spending G unchanged.

1. How will you expect the decrease in G ^/ to affect the N s , N d , Y s , and Y d curves? Show on well-labeled graphs and explain the driver (reasoning) of each shift.

2. Assuming that the change in Y d is larger than the change in Y s in magnitude, what are the equilibrium effects on Y* and r* ? Show on a graph and state clearly whether Y * and * ? increase or decrease.

3. Taking into account the final adjustment in the labour market (due to the movement in r), do you think the equilibrium employment will increase or decrease? Justify your answer and show the expected change on the labor market graph.

4. What are the equilibrium effects on consumption C * and investment I * ? Explain with words