Problem
Suppose that households change their preferences so that they wish to consume more and save less in the current year. Since the households reduce savings, the interest rate in the economy increases.
a. Show on a graph (with axes L and real wage rate w) the effects on the labor market. What happens to the equilibrium labor input and real wage rate?
b. Show on a graph (with axes K and real interest r; assume that the supply of capital is perfectly elastic) the effects on the market for capital services. What happens to the equilibrium level of capital and interest rate?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.