Real Intertemporal Model (10 points) Consider the Intertemporal Model we discussed in class, and which is discussed in chapters 11 and 12 in the texthook. 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 invesimenis 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 (7 and z'. Answer the following questions, and justify your answers. Questions: (a) What effect will this shock have on each of the following enrves? (will they shift left or right?) # the consumption demand curve? e the investment demand curve? e the output demand curve? (b) What effect will this shock have on each of the following curves? (will they shift left or right?) e the labor supply curve? e the labor demand curve? s the output supply curve? () How will each of the following values change in equilibrinm? output real interest rate employment real wage e the price level (d) Following the book's example, draw graphs which show the equilibrium of the labor market and the goods/asset market. Illustrate the shocks above. (It may be helpful to drow additional graphs showing how the output supply and demand curves are determined. ) Criteria Ratings Pts A 3 pts 2.5 pts 2 pts 1.5 pts 1 pts 0.5 pts 0 pts For each: 1 point for correct answer with Full No correct solution. Half point for [correct Marks Marks 3 pts answer+wrong explanation OR wrong answer with at least coherent explanation] B 3 pts 2.5 pts 2 pts 1.5 pts 1 pts 0.5 pts 0 pts For each: 1 point for correct answer with Full No correct solution. Half point for [correct Marks Marks 3 pts answer+wrong explanation OR wrong answer with at least coherent explanation] C 2.5 pts 2 pts 1.5 pts 1 pts 0.5 pts 0 pts Full Marks 4 3 2 1 No Marks 2.5 pts D: Draw Graphs 1.5 pts 1 pts 0.5 pts 0 pts Full Marks No Marks 1.5 pts