Business, 27.11.2019 23:31 mpateltx

Consider the monetary intertemporal model we discussed in class, and which is discussed in chap- ters 11 and 12 in the text book. you can assume that when real wages go up, the subsitution effect overwhelms the income effect, and so labor supplied increases. you can also assume that liquidity demand is more sensitive to changes in output than to changes in interest rates. 1. following the book's example, draw graphs which show the equilibrium of the labor, asset, and money markets in this economy. (it may be to draw additional graphs showing how the output supply and demand curves are determined.) 2. on the graphs you drew, illustrate the effects of a decrease in current total factor productivity, 2. determine the effects this shock will have on output, investment, consumption, employment, real wage, real interest rates, average labor productibity, and the price level. briefly describe what is happening in the economy. 3. how well do the results from part 3.2 match the actual movement of economic variables during business cycles? in which ways does it fail to reflect the real world? 4. draw another set of graphs, this time illustrating the effect of an increase in the money supply. how does the equilibrium of the economy change? 5. now assume that consumers are unaware of changes in price, and so misinterpret an increase in nominal wages as an increase in real wages. illustrate the effect of an increase in the money supply. how does the equilibrium of the economy change in this 'money surprise' version of the model?

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Consider the monetary intertemporal model we discussed in class, and which is discussed in chap- ter...

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