Using the Real Intertemporal Model, suppose the government announces an increase in future government spending G'.

1. How will you expect the increase in G' to affect the N^s, N^d, 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 Ys, 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? Hint: Use the fact that the equilibrium Y* and N* are linked by the production function Y* = zF(K, N*).

4. What are the equilibrium effects on consumption and Investment C* and I*? Hint: Use the income-expenditure identity Y* = C'* + I* + G.