Analyze the macroeconomic effects of bad news about future total factor productivity from a perspective of the real business cycle model. Specifically, suppose that all agents in the model learn in the current period that z' will decrease in the future from z1' to z2'.

Assume that the central bank does not change its policy to answer the parts a) - c) of this question.

a) Determine the equilibrium effects of the decrease in z' on equilibrium output Y, employment N, the real wage w, the real interest r and the price level P in the current period. Denote all the initial equilibrium values with the subscript one (e.g. Y1) and all new equilibrium values with the subscript two (e.g. Y2).

Illustrate your answer with the correctly labeled separate diagrams of the labour market, the goods market, and the money market. Explain the economic reasons for the resulting effects in words, and relate your explanations to the assumptions about the preferences and the production function, whenever possible.

b) Determine the equilibrium response of consumption C. Illustrate your answer graphically by plotting the demand for consumption curve. Explain the economic reasons for the resulting effects in words, and relate your explanations to the assumptions about the consumer's preferences.

c) Determine the equilibrium response of investment I. Illustrate your answer graphically by plotting the demand for investment curve. Explain the economic reasons for the resulting effects in words, and relate your explanations to the assumptions about the production function.

d) Suppose that the central bank wants to stabilize the price level. Can the central bank bring the price level to its pre-shock value P1? If yes, explain how the central bank should adjust its monetary policy. If no, explain why this policy is not feasible.

e) Suppose that the central bank wants to stabilize the aggregate output. Can the central bank bring the aggregate output to its pre-shock value Y1? If yes, explain how the central bank should adjust its monetary policy. If no, explain why this policy is not feasible.