Question

Suppose now producers (firms) receive news that future total factor productivity

will be

high

. The monetary authority targets the interest rate to the long run

equilibrium le

vel, and uses money supply to keep the interest rate at the target.

What will happen to the labor employment, real wage, output, consumption,

investment, average labor productivity, and money supply? Explain the reasons of

the direction of change for each

of the variables, and when necessary, use graphs

to help your explanation.

Answer 1