Future total factor productivity

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A. Economic agents anticipate that future total factor productivity will fall, but the government thinks that this view is irrational. The government thinks that, given what it observes, future factor productivity will not fall. Given the government's view of the situation, what should it do? Explain with the aid of diagrams and what could go wrong with the government's policy?

B. Suppose that the price of housing increases, and the government thinks that this price rise is an irrational housing bubble. The government proposes to counteract this through a change in government spending. With the aid of diagrams, explain how the government might change government spending to have this effect and are there any unintended consequences that could arise from this policy?

Reference no: EM132601157

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