Consider a monetary intertemporal model with flexible prices. Suppose that the to- tal factor productivity increases...

 

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Consider a monetary intertemporal model with flexible prices. Suppose that the to- tal factor productivity increases temporarily. Answer the following questions using relevant graphs. (a) How does this TFP shock affect the endogenous variables in equilibrium? (b) If the government wants to maintain employment unchanged before and after the TFP shock, what should the government do with fiscal policy? How are other endogenous variables affected by the policy? (c) If the government wants to maintain price level unchanged before and after the TFP shock, what should the government do with fiscal policy? How are other endogenous variables affected by the policy? Consider a monetary intertemporal model with flexible prices. Suppose that the to- tal factor productivity increases temporarily. Answer the following questions using relevant graphs. (a) How does this TFP shock affect the endogenous variables in equilibrium? (b) If the government wants to maintain employment unchanged before and after the TFP shock, what should the government do with fiscal policy? How are other endogenous variables affected by the policy? (c) If the government wants to maintain price level unchanged before and after the TFP shock, what should the government do with fiscal policy? How are other endogenous variables affected by the policy?

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Analyzing a Temporary TFP Shock in a Monetary Intertemporal Model with Flexible Prices a Endogenous Variables in Equilibrium A temporary increase in total factor productivity TFP in a monetary interte... View the full answer