1. Suppose firms invest in a new artificial intelligence program that develops high caliber robots that can handle large amounts of data and deliver instructions to workers.

a. Explain how the investment plan affects the IS, LM, and AD curves.

b. Suppose the workers’ productivities and expected incomes are unaffected. How will this affect the AS curve with and without this assumption?

c. For simplicity, we keep the assumption in part (b).

Use your answers in

(a) and

(b) to discuss the real interest rate, employment, real wages, nominal wages, consumption, investment, and the price level.

d. Based on the misperceptions theory, modify the above AS–AD graph to show the short-run equilibrium.