Suppose you were a forecaster of the real wage rate, employment, output, the real interest rate, consumption, investment, and the price level. A shock hits the economy, which you think is a temporary adverse supply shock.
(a) What are your forecasts for each of the variables listed above (rise, fall, and no change)?
(b) What if the shock was really due to people's reduced expectations about their future income. Which variables did you forecast correctly, and which did you forecast incorrectly?