Q. 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. Assume that your household gets a machine that cost Lesley provides you with food. Illustrate what would that do to your labor supply? For credit, in your answer, discuss Illustrate what the income effect will be of the mew invention, also Illustrate what that will do to your decision to work. Also, discuss Illustrate what the substitution effect will be of the new invention, also Illustrate what that will do to your decision to work. (Hint, don't get bogged down by considering anything but Illustrate what this will do to your household. Also assume that you are the only household that has such an invention also that the economy as a whole won't be affected.)
3. Assume that your household is the beneficiary of a government program that matches any interest you earn. Illustrate what would that do to your consumption this year? Would you spend more, or less? In your answer, discuss the income also substitution effects of the program. (Hint, as above, this program is unique to you also the economy as a whole does not notice. In your answer, remember to discuss the multiyear budget constraint. Whenever doing so, remember that income effects come from changes in V while substitution effects come from changes in prices.)