Using the Real Intertemporal Model covered in class, assume z decreases in the current period, and the consumer expects the future productivity z' to increase.

1. Describe the expected shifts in the Ns , Nd , Y s , and Y d curves. Give the driver of each shift.

2. Assume the changes in Y d and Y s are such that Y ? remains unchanged. How does the equilibrium interest rate change?

3. Using a graph, illustrate how the final interest rate adjustment in the labour market affect the equilibrium employment. Will the equilibrium employment decrease or increase?

4. Comment the final changes in the equilibrium consumption (C*) and investment (I*).