3. Answer all parts of this question. (a) Suppose in the real business cycle model...
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3. Answer all parts of this question. (a) Suppose in the real business cycle model that there is a persistent decrease in total factor productivity. Draw diagrams for the labour, goods and money market, and the production function. Determine the equilibrium effects of this decrease in total factor productivity on employment, output, consumption, investment, money, real wages, the real interest rate, and the price level. Provide a detailed economic analysis explaining your results with the aid of the diagrams. (b) Use a two-period small open-economy model to answer this question. Suppose that governments in the rest of the world impose a tax on lending to foreigners. Determine how this affects consumption plus government spending in the present and the future, and the current account surplus. Explain your results with the aid of a diagram.
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