5. Consumer preferences fluctuate across time. For example, during the COVID-19 pandemic,consumers value current leisure more than all other goods since market work exposes them to virusinfection. Thus, the disruption is identified as a huge adverse labor supply shock in the economy.Suppose that a representative consumer chooses (c, d, l, l') to maximize her utility u(c, c', l, l') sub-ject to a real lifetime budget constraintc+wl +1w'+ -I' ≤ wh+T+1+r 1+rw'h + π'1 + rThe consumer also make a decision on money holdingmDm² = pL(y,r)where P denotes the nominal price level, y is the real GDP, and r denotes the real interest rate.Assume that the money supply ms is fixed and exogenous.The firm in this economy chooses the amount physical capital investment i and the amount of laborthey hire in the first and second period, nD and nD', to maximize the profitII = π +πT'1+rwhereπ =zF(k,n) - wn-iT' = 2F (k', n') + (1 - 8)k' -w'n'k' = (1-8)k + i.Consider the adverse labor supply shock is powerful enough so that in equilibrium, leisure increasesand current consumption falls. Identify and explain how the following change (i.e., rise, fall, nochange, or ambiguous)Current outputb. Current investmentc. Current employmentd. Current real wagee. The real interest rate

Labor supply shock refers to a significant change that lessens the labor supply availability. The…

Consider the adverse labor supply shock is powerful enough so that in equilibrium, leisure increases and current consumption falls. Identify and explain how the following change (i.e., rise, fall, no change, or ambiguous) a. Current output b. Current investment c. Current employment d. Current real wage e. The real interest rate

Consider the adverse labor supply shock is powerful enough so that in equilibrium, leisure increases and current consumption falls. Identify and explain how the following change (i.e., rise, fall, no change, or ambiguous) a. Current output b. Current investment c. Current employment d. Current real wage e. The real interest rate

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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