Suppose that we have a standard real intertemporal model with investment with two twists. First, the effect of the real interest rate r on current consumption C is assumed to be zero. [Remember, in the standard model, we said that C decreases when r increases.] Second, the effect of the real interest rate r on current leisure l is assumed to be zero. [Remember, in the standard model, we said that l decreases (which means current labor supplied N = h − l increases) when r increases.]
1.) Graphically derive the aggregate output demand curve Yd under these assumptions. Be sure to show all graphs and all work. Will the Yd curve be steeper or flatter under this assumption, compared to the Ydcurve of the standard model?
2.) Graphically derive the aggregate output supply curve Ys under these assumptions. Be sure to show all graphs and all work.
3.) Suppose that there is a known increase in future TFP, z ′. Show how this will affect Y, C, I, N, r, and w in the new equilibrium under the maintained assumptions of this particular problem.