Using theReal Intertemporal Modelcovered in class, assumezincreases in the current period, and the consumer expects the productivity to return to its initial level in period 1, that is, he expectszto decrease.

1. Describe the expected shifts in theNs,Nd,Ys, andYdcurves. Give the driver of each shift.

2.Assume the changes inYdandYsare such thatYremains 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 equilibriumYandNare linked by the production functionY=zF(K,N).)

4. Comment the final changes in the equilibrium consumption (C) and investment (I).

note : theres no need to use numbers in this exercise