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Read the following passage: An unusually severe ice storm hit eastern Canada January 5-10, 1998.... This storm represented an important shock to the Canadian

Read the following passage:

"An unusually severe ice storm hit eastern Canada January 5-10, 1998.... This storm represented an important shock to the Canadian economy, with the damage to the aggregate capital stock being quite significant.... In spite of the widespread damage, there appear to have been no effects on aggregate economic activity. Aggregate output and employment seem not to have been affected."

  1. Use the real intertemporal model with investment from Chapter 11 of Williamson (2018) Macroeconomics to explain the behaviour of the Canadian economy following the 1998 ice storm. In particular, demonstrate how and why the ice storm can have no effects on output and employment. Illustrate your answer graphically. Be precise about the adjustment mechanisms of the model.

2. Using the same model, derive the predicted equilibrium responses of consumption and investment after the 1998 ice storm. Illustrate your responses using the demand for consumption goods and the demand for investment goods schedules. Explain your predictions, and link them to the assumptions imposed on the preferences and the production function.

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