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. Let us consider the monetary intertemporal model studied in class. Suppose that the economy is initially in equilibrium. Equilibria in the labor, goods, and

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. Let us consider the monetary intertemporal model studied in class. Suppose that the economy is initially in equilibrium. Equilibria in the labor, goods, and money market in the current period are illustrated below. 4 SE] Consider the following two scenarios, and explain clearly how each affects equilibria in the current labour, goods and money market, taking care to explain clearly the impact on the decision made in the current period by the representative consumer and representative rm. (a) Scenario 1 (8 marks) A new technological innovation is announced that will come on line in the future period (Hint: model it as an increase in future TFP, z'). (b) Scenario 2 (7 marks) The government increases its expenditure in the current period. However, instead of nancing this increase by raising taxes, it decides to nance it by printing money (e. g, increasing money supply from ill1'1 to H2)

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