b) (20POINTS) Now we are going to focus on the idea that in

b) (20POINTS) Now we are going to focus on the idea that in the longer run, the influence of the decrease in the effective tax rateon capital will have ‘supply-side’effects.  In particular, we argue thatthis new investment, spurred on by the lower effective tax rate on capital,will result in a positive productivity shock resulting in a higher “A and K’which will result in a shift upward in the production function (via increasing theMPKf and MPN….these are the supply side effects) In the space belowdraw a production function with the labor market diagram directly below it andshow what is going on in this longer run. That is, locate the correspondingpoint B (from above), and then show the longer run influence as point C inthese two (supply – side) diagrams.  Whathappens to N* and w*=W/P? Explain indetail. Are these results in the labor market consistent with sub-title ofthe article and the business cycle facts? Now explain why output has changed, give two specific reasons. Note, in this part of the problem, do notworry about identifying point A in the labor market diagram and productionfunction diagram since point A does not exist given the assumption that labormarkets always clear at full employment (i.e., a weakness of the classicalmodel). Be sure to label your graphs completely(relevant shift variables) or points will be taken off.Now show how graphs 1) through 4) areinfluenced by this longer-run development. Note again that we assume that before these longer run developments takehold, the FE line in graph 3) and the LRAS in graph 4) is set at YB.Now let these longer run developments take hold, i.e., these supply sideeffects, and label this final equilibrium as point C. Again, please make sureyou refer to each diagramindividually explaininghow and why we get to point C (i.e., provide intuitive economicreasoning!). Be sure to include adiscussion of why the real interest rate has to change the way it does – hint,the money market!