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Explain the effects of a temporary increase in productivity (i.e. an in- crease in z) on the following two economies in the light of the two- period intertemporal model with investment. For each economy, draw four inter-related diagrams (1. The Labor Market; 2. The Production Function; 3. The C+I+G diagram; and 4. The Output Demand and Supply), label the initial and subsequent equilibrium points and briefly explain the changes in each diagram. (a) Economy 1: In this economy, consumption and investment expendi- tures do not respond to changes in the real interest rate. (8 points, 2 points for each diagram) (b) Economy 2: In this economy, the labor supply does not respond to changes in the real interest rate. (8 points, 2 points for each diagram) Explain the effects of a temporary increase in productivity (i.e. an in- crease in z) on the following two economies in the light of the two- period intertemporal model with investment. For each economy, draw four inter-related diagrams (1. The Labor Market; 2. The Production Function; 3. The C+I+G diagram; and 4. The Output Demand and Supply), label the initial and subsequent equilibrium points and briefly explain the changes in each diagram. (a) Economy 1: In this economy, consumption and investment expendi- tures do not respond to changes in the real interest rate. (8 points, 2 points for each diagram) (b) Economy 2: In this economy, the labor supply does not respond to changes in the real interest rate. (8 points, 2 points for each diagram)

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