Intertemporl Model

Consider the lntertemporal Model we discussed in class, and which is discussed in chapters 11 and 12 in the textbook. You can assume that when real wages go up, the subsitution effect overwhelms the income effect, and so labor supplied increases. Suppose the economy is initially in equilibrium, and then a new government program is announced. This program will make public infrastructure investments in the current period that will be funded by lump sum tax revenue and will increase future productivity. That is, a shock occurs which increases G and z' . Answer the following questions, and justify your answers. Questions: (a) What effect will this shock have on : I consumption demand? I investment demand? I output demand? (b) What effect will this shock have on x I labor supply? I labor demand? I output supply? ((2) How will each of the following change in equilibrium? I output I real interest rate I employment I real wage o the price level ((1) Following the book's example, draw graphs which show the equilibrium of the labor, asset, and money markets in this economy. Illustrate the shocks above. (It may be helpful to draw additional graphs showing how the output supply and demand curves are determined.)