Part 2

Consider the Real Intertemporal Model we discussed in class. Suppose that the economic agents expect the energy(oil) prices decrease in future. This is equivalent to an increase in the future total factor productivity(z 0 ) in our model.

Show its impact on the goods(or the output) market. In other words, you must draw graph to show how equilibrium output (Y ) and price (interest rate r) change as a result of the fall in oil prices. You should also explain how output supply changes and why