1.In this question, we add uncertainty into the example economy from Question One on AssignmentTwo. Recall the description of that economy. The household has h= 100 units of time and the household's preferences over consumption of clocks and leisure is given by the following utility function: u(C) = 2C+ 500 ln(l). The firm that produces clocks uses household labour and a fixed amount of capital equal to K= 16 with the following production function: Y=z(N^d)^0.5(K)^0.5 : Here, z randomly fluctuates between zL= 12 and zH= 15. At the beginning of each quarter, the household and the firm receive an announcement stating how severe global supply chain (GSC) disruptions will be during that quarter. The announcement can be either very severe or not severe. (I realize this doesn't quite fit the description of clock production here but global supply chain disruptions are very current so let's go with it.)Each quarter, the household and the firm choose labour supply and labour demand after receiving the announcement regarding GSC disruptions but before observing z. They cannot change labour input after observing z but the wage and output can adjust after z is observed. The household and the firm know that the probability of a particular z occurring in a quarter is related to the severity of GSC disruptions

P(zL ;very severe) = 0:75

P(zL;not severe) = 0:20:

(1.A.) (15 points) Complete Table 1. Use your results to determine the qualitative predictions ofthis economy regarding the cyclical properties of equilibrium consumption, real wages, average labour1productivity, and labour hours when there are uctuations only in the announcement regarding GSCdisruptions (that is, an expectations-driven business cycle). Provide economic intuition to explain eachof these cyclical properties.

Table 1: Aggregate Variables With and Without Uncertainty With Uncertainty | No Uncertainty Report is Report is VERY Severe NOT Severe GSC Disruptions GSC Disruptions _ Variable _ 374-09 U(C"', 2*) 2804.66