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Consider a two period economy without investment but with variable hours of work No. In this economy, the aggregate (inverse) labour supply function is wi = 2+0.3No +0.2Co and the aggregate consumption function is Co (r) = 0.6(Yo - Go) + 24/ ( hit r ) Aggregate output is produced according to Yo = zoNo. It follows that firms are willing to hire any amount of labor at wage wo - Zo. The government spends Go = 100 in period 0 which is entirely financed by lump sum taxes To. Assume that labour productivity zo is equal to 15. (a) Suppose that Co - 50. Draw the inverse labor demand curve (i.e. wo against No). Would consumers accept to work if wo = 10 ? (b) Find the equilibrium value of No and the equilibrium wage wo, given Co. (c) Suppose that No = 10. Find the equilibrium interest rate r and aggregate consump- tion in this case. Illustrate with a graph. (d) What do you conclude from (a), (b), (c)? Explain. Suppose that government spending increases by 17.5 (e) What happens to consumption and to aggregate demand if r and No stay the same (i.e. r = 0.2 and No = 10)? Explain why No will also change. (f) Verify that No will increase by 1 if r remains constant. Explain why r cannot remain at 0.2. Will r increase or decrease? How will Co and No be affected by this change? (g) Illustrate with a graph of the Goods market and a graph of the labor market what happens after Go increases (from one equilibrium to the other): first, when r remains constant, and then, when r changes