Suppose the economy is hit with a temporary positive TFP shock. For example, suppose weather conditions are temporarily very favorable for agriculture.
(a) Analyze the effect of the shock in the labor market diagram of a standard DSGE model (with no sticky prices or wages). What is the effect on the real wage and employment in the short run?
(b) How would your answer change if there are sticky prices? Discuss how your answer relates to the impulse response functions shown in Figure 15.11.

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FIGURE 15.11 The Dynamic Effects of a TFP Shock Percent change Percent change 1.5 1.5 0.5 20 Quarters after the shock 20 Quarters after the shock 10 15 Percent change Percent change Hours worked -0.1 -02 Inniation -0.4 -0.4 -06 20 Quarters after the shock 15 10 20 Quarters after the shock 15