a. Private economic agents anticipate that future total factor productivity will fall. Use the real intertemporal model (with production and investment) to analyse the effects of this
shock on the economy. Draw diagrams for the labour and goods markets, and the production function. Determine the equilibrium effects of this anticipation on employment, output, consumption, investment, real wages and the real interest rate. Provide a detailed economic analysis explaining your results with the aid of the diagrams.

(b) The government thinks that this view is irrational. The government thinks that, given what it observes, future factor productivity will not fall. Given the government’s view of
the situation, what should it do to counteract the effects on the economy given what the private sector will do? Provide a detailed economic analysis with the aid of diagrams.
What could go wrong with the government’s policy? Discuss.