Using the Real Intertemporal Model seen in class, suppose the government announces a decrease in future government spending G0 .

1. How will you expect the decrease in G0 to affect the Ns , Nd , Y s , and Y d curves? Give the driver of each shift.

2. Assuming that the change in Y d is in absolute value more important than the change in Y s , what are the equilibrium effects on Y ? and r ?

3. Taking into account the final adjustment in the labour market, do you think the equilibrium employment will increase or decrease?

4. What are the equilibrium effects on consumption and Investment C ? and I ?