Suppose that the labor supply curve is vertical, i.e., the quantity of labor is fixed. In this case, what are the effects of an expansionist fiscal policy on output, labor, real interest rates, and real wages? Illustrate your answer using graphs. Explain all changes with words and also the effects on consumption and investment. (Hint: the new shape of the labor supply curve implies a new shape of the output supply curve)

Assume that the economy is initially in equilibrium. Draw all the four graphs utilized in the lecture videos to represent the Real Intertemporal Model with the new shape of both labor supply and output supply curves. Make sure to label the axes (4 points). Show the effects of an increase in government spending on output, labor, real interest rates, and real wages (4 points). Explain with words (2 points). Explain with words what is the effect on consumption and investment (2 points).