2 Natural Disaster in the General Equilibrium Model [25 Points] Consider the standard equilibrium businesscycle model with labor, rental and asset markets. The economy is populated by many identical households and a representative rm. Denote the real wage rate by w/P and real rental rate by R/ P. The rm behaves competitively and produces with a standard CobbDouglas function: Y = AK'D'Ll'r, where A, K and L are productivity, capital and labor input, respectively, and Oz > 0. The household's period utility is u(c, l), where c and l are consumption and leisure time, respectively. Households make decisions on consumption (3, savings 3 and leisure time I each period. And they supply the rest of their time to the labor market. Households own the capital stock and the capital utilization rate is exogenous, i.e., a = 1. Households live for many periods. Assume that there is a onetime decrease in the capital stock K, caused by a natural disaster. Before the shock, the economy is in general equilibrium. 1. Analyze in a graph the effect of the natural disaster in capital rental market. Explain carefully. [Hint: You may want to discuss its eifects on supply /demand curves and equilibrium.] 2. Analyze in a graph the effect of the natural disaster in labor market. Explain carefully. [Hint: You may want to discuss its effects on supply / demand curves and equilibrium.] 3. How does the price of government bond react to this disaster? 4. How does the nominal rental rate (R) react to this disaster