1. The discovery of a new technology increases the expected future marginal product of capital.

a. Use the classical IS–LM model to determine the effect of the increase in the expected future MPK on current output, the real interest rate, employment, real wages, consumption, investment, and the price level. Assume that expected future real wages and future incomes are unaffected by the new technology. Assume also that current productivity is unaffected.

b. Find the effects of the increase in the expected future MPK on current output and prices from the AD–AS diagram based on the misperceptions theory. What accounts for the difference with Part (a)?