Question 3 (25 points) - Chapter 3

Each part of this question isnotrelated to other parts.

a)"According to the long-run classical model, there will be a decrease in the world interest rate and the world level of investment when the aging populations of industrial countries start running down their savings and, at the same time, the investment appetite of emerging economies begins to slow down."True/False, explain with the aid of one diagram for theworldmarket for loanable funds. (10 points)

Note:The world as a whole is a closed economy.

b)A new study shows that the level of total factor productivity increases and, at the same time, the labour force participation rate falls.According to the long run classical model, what happens to the equilibrium levels of the real interest rate, the real rental price of capital, and the real wage?Explain in words and support your answer by usingONEloanable funds market diagram,ONElabour market diagram, andONErental market for capital diagram.(15 points)