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In: Economics

Consider the following shocks in the two-period model with money. Suppose firms become infected with optimism...

Consider the following shocks in the two-period model with money.

Suppose firms become infected with optimism and expect total factor productivity will be higher in the future.
i. What are the effects on the competitive equilibrium? Explain in words and with diagrams.
ii. Explain the extent to which the model driven by optimism or pessimism of this sort can or cannot replicate the key business cycle facts. Be sure to reference which specific facts the model can or cannot explain.
iii. Suppose the monetary authority wants to stabilize the price level in the face of a wave of optimism. Determine what it will do and explain how the competitive equilibrium responds.

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Expert Solution

Answer:-

1.2.3.

Rahul Sunny answered 2 years ago
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