Money Surprise Model (25%) Suppose in the Friedman-Lucas money surprise model, there is a negative TFP shock. Neither private sector agents nor the central bank can observe this shock directly. The central bank is committed to interest rate targeting. a- Using labour market diagram, draw the impact of this shock on the labour demand holding the interest rate constant. Provide an explanation. b- Argue that what happened in part (a) will affect the goods market. c- What action the central bank will take? How will this intervention affect the labour supply and goods market? You do not need to draw any diagrams d- Draw diagrams (labour market, goods market, and money market) to illustrate the final stage of the economy after the shock.
Money Surprise Model (25%) Suppose in the Friedman-Lucas money surprise model, there is a negative TFP shock. Neither private sector agents nor the central bank can observe this shock directly. The central bank is committed to interest rate targeting.
a- Using labour market diagram, draw the impact of this shock on the labour demand holding the interest rate constant. Provide an explanation.
b- Argue that what happened in part (a) will affect the goods market.
c- What action the central bank will take? How will this intervention affect the labour supply and goods market? You do not need to draw any diagrams
d- Draw diagrams (labour market, goods market, and
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