Question 1: Suppose individuals in the economy are infected with optimism, and they expect that total factor productivity will be much higher in the future. Determine the equilibrium effect of this using the monetary intertemporal model. Can waves of optimism and pessimism explain the key facts of the business cycle? What should the FED do to keep prices stable? Question 2: Many have suggested that recent increases in prices are the result of supply chain shortages. Suppose that we all expect this issue to be temporary. In our framework, it can be represented by a decrease in current total factor productivity. Use the monetary intertemporal model to show whether supply chain shortages can cause inflation.
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