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(20 marks) Uonsider the Real lntertemporal Model with investment trom Chapter 11 or the Williamson textbook. Suppose the normal assumptions given by the book correctly
(20 marks) Uonsider the Real lntertemporal Model with investment trom Chapter 11 or the Williamson textbook. Suppose the normal assumptions given by the book correctly describe behaviour. This question asks you to examine what is happening graphically given the information described. You can assume that for consumers, the SE > I E (a) (15 marks) A natural disaster hits destroying much of the current stock of capital, i.e. K0 2' where zi is the TFP after the natural disaster. Create a set of graphs and explain (in words) the dynamics for the current period. In your explanation, make clear how w, r, Y, N, C, and I change before and after the natural disaster. (Note: Assume the transition dynamics are still K' = (1 d)K + I, G 85 G' are exogenous and constant, and be clear about any assumptions you are making.)
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