Consider an economy with aggregate firm that produces GDP using capital and ; production technology has diminishing return to every factor. that current capital stock is fixed. This economy is described by AD-AS model with downward sloping curve and

Consider an economy with aggregate firm that produces GDP using capital and\nlabour; production technology has diminishing return to every factor.\nSuppose that current capital stock is fixed. This economy is described by AD-AS model with downward sloping\nAD curve and upward sloping SRAS curve.\nSuppose that business cycle is due to fluctuations in aggregate demand.\nSketch a graph with the economy’s production function and show at this graph that (contrary to the\nempirical data) average productivity of labour in this economy is countercyclical.\nVerify the result obtained in (ii) algebraically.\nSuppose that the shock comes from the supply side. Using a new graph with production function\ndemonstrate the case where the behavior of the average productivity of labour is consistent with real data.