Question
4. Consider the monetary intertemporal model with the following produc- tion function: Y = zN. There is no capital in this economy and investment is
4. Consider the monetary intertemporal model with the following produc-
tion function:
Y = zN.
There is no capital in this economy and investment is zero. The labor supply does not respond to changes in the real interest rate. For this economy, draw and explain the effects of simultaneous increases in the current-period productivity (z) and government expenditure (G). The increases in z and G are such that the equilibrium real interest rate remains the same. Draw the five inter-related diagrams (1. The labor market; 2. The production function; 3. The C + I + G diagram; 4. The output demand and supply; and 5) The money market), label the initial and subsequent equilibrium points and briefly explain the changes in each diagram
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