1. Discuss whether the existence of business cycles and the observed positive correlation between real and monetary variables mean that the modern classical models are neither valid nor relevant for policy purposes.
2. Specify a model that generates real business cycles only. Discuss whether this model allows for the observed cyclical correlation between money and output.
3. Present the new classical model (with rational expectations and Ricardian equivalence). Analyze the role of monetary policy in this model.
How would this model explain the major recession in the early 1990s in most developed economies? What monetary policies - if any - are consistent with this model for moderating the effects of the recession on output and unemployment?