In the real business cycle model, suppose the government spending increases temporarily.

1. Determine the effect on labour market, holding the interest rate constant?

2. Explain what impact this temporary increase in government spending has in the goods market, holding the interest rate constant? Illustrate with graphs.

3. Suppose that the interest rate increases in response to this temporary increase in government spending. How will it affect the labour market and the goods market? Illustrate with graphs.

4. Argue that the price level could go up or down. Specify the conditions under which the price level goes up. Illustrate graphically.

5. Determine whether investment and average labor productivity increases or decreases.

6. Are these predictions consistent with the business cycle facts? (Draw a table)