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Consider the real business cycle model, as we studied in the setting of a complete real intertemporal model for a closed economy, with consumers,

 

Consider the real business cycle model, as we studied in the setting of a complete real intertemporal model for a closed economy, with consumers, producers, government, and the money market. Suppose there is a news that oil price is going to decrease in the future. [1] Illustrate the money market of this economy in a diagram to explain all appropriate course of actions for the monetary authority if their target is to stabilize the price level in this economy. [2] Add brief comments about changes relating to output, interest rate, and money demand to support your answer in [1]. [3] Evaluate whether the following statement is True/False/Uncertain: "According to real business cycle theorists, central bank's action could lead to a decrease in the nominal money supply due to stabilizing real output and the expansion of deposit money". Clearly write your response and provide required explanation.

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