Consider a closed economy. Assume that all prices are perfectly flexible and all markets are in equilibrium. Use an AD/AS diagram to model the goods market, a labor demand/supply diagram to model the labor market, and the loanable fund’s diagram to model the financial market. Assume that aggregate consumption depends on current and expected future income as well as on the real interest rate. Speculate what would happen in the current time period to equilibrium output, prices, real interest rates, savings (and consumption) and investment expenditures, real wages and employment as a result of:

 A temporary increase in productivity that results in a substantial increase in output but does not change the marginal products of labor or capital.

Consumers expect a large increase in their future incomes.

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