Consider the small open economy monetary intertemporal model with investment. Initially the economy has balanced trade. The government increases its expenditure but instead of financing them by raising taxes, it prints money and increases money supply. At the same time, the

economy also experiences a significant increase in productivity. The

effect of productivity increase on GDP is larger than that of the increase

in government expenditure. With this, show these changes and draw five inter-related diagrams (in all diagrams, label the initial equilibrium point e₁ and the final equilibrium point e₂) :

(a) The labor market

(b) The production function

(c) The output demand and supply

(d) The C + I + G+ NX diagram

(e) The money market

(f) Briefly explain the changes (and their

causes) in all the diagrams by mentioning the following seven variables: (1) Nominal

wage; (2) Nominal interest rate; (3) Consumption; (4) Investment;

(5) Trade balance; (6) Exchange rate; and (7) Price level.