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Part A We consider the effects of productivity change and monetary policy in this question. We assume that prices are xed during the economic events
Part A We consider the effects of productivity change and monetary policy in this question. We assume that prices are xed during the economic events considered in this question. (1) (5 points) Suppose productivity is expected to rise persistently in the future. What will happen to output, the real interest rate, consumption and investment this period? Explain using the IS-LM diagram. (2) Given that productivity is expected to rise persistently, the central bank announces that they will decrease money supply persistently in the future. Con- sider two cases. (a) (5 points) Suppose people believe the central bank's announcement. What will happen to output, the real interest rate, consumption, and investment this period? Explain using the ISLM diagram. (1)) (5 points) Suppose people do not believe that the central bank will actu- ally do what they announce. What will happen to output, the real interest rate, consumption, and investment this period? Explain using the IS-LM diagram
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