Using theReal Intertemporal Modelseen in class, suppose the government announces an increase in future government spendingG.

1. How will you expect the increase inGto affect theNs,Nd,Ys, andYdcurves? Give the driver of each shift.
2. Assuming that the change inYdis in absolute value more important than the change inYs, what are the equilibrium effects onYandr?
3. Taking into account the final adjustment in the labour market, do you think the equilibrium employment will increase or decrease?
4. Hint: Use the fact that the equilibriumYandNare linked by the production functionY=zF(K,N).
5. What are the equilibrium effects on consumption and InvestmentCandI? (Hint: Use the income-expenditure identityY=C+I+G.)