Problem
In the real business cycle model, suppose that firms become infected with optimism and they expect that total factor productivity will be much higher in the future.
(a) Determine the equilibrium effects of this.
(b) If waves of optimism and pessimism of this sort cause GDP to fluctuate, does the model explain the key business cycle facts?
(c) Suppose that the monetary authority wants to stabilize the price level in the face of a wave of optimism. Determine what it should do, and explain.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.