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1. why a favorable shock to the production function tends to reduce the price level, P. How could the monetary authority prevent this fall in P?
1. why a favorable shock to the production function tends to reduce the price level, P. How could the monetary authority prevent this fall in P?2. Suppose that your household gets a machine that costlessly provides you with food. What would that do to your labor supply? For credit, in your answer, discuss what the income effect will be of the mew invention, and what that will do to your decision to work. Also, discuss what the substitution effect will be of the new invention, and what that will do to your decision to work. (Hint, don’t get bogged down by considering anything but what this will do to your household. Also assume that you are the only household that has such an invention and that the economy as a whole won’t be affected.)3.Suppose that your household is the beneficiary of a government program that matches any interest you earn. What would that do to your consumption this year? Would you spend more, or less. In your answer, discuss the income and substitution effects of the program. (Hint, as above, this program is unique to you and the economy as a whole does not notice. In your answer, remember to discuss the multiyear budget constraint. When doing so, remember that income effects come from changes in V while substitution effects come from changes in prices.)
