Inthe space below, discuss how the newclassical economists (

Inthe space below, discuss how the newclassical economists (hint, island) addressed the business fact that moneyand output are positively correlated.  In this part, be extremely specific in the model that was developed (tell astory) and relate the assumptions in the model to the empirical factabove.   Be sure to explain exactly why the firmchanges their output, using the terms: relative shock and aggregate shock. Usethe bread making example that we used in class making sure you identify clearly,the asymmetry with regard to the real wage the firm pays and the real wage theworker receives.  Include 2 graphs as wedid in class and explain the intuition as to why the workers change theirbehavior and why the boss (firm) changes their behavior. Now draw an aggregatedemand and aggregate supply diagram explaining how your individual islandanalysis (as given above) maps to the macro economy (include points A, B, and Cas we did in class). Write out the expression for the Lucas aggregate supplycurve explaining the intuition underlying the Lucas Aggregate supplycurve.  In the last part of your essay,discuss what determines the power ofmonetary policy (in terms of changing output) in this model, what determines how long the short run is,and whether or not you believe that thismodel is a solid basis for conducting countercyclical monetary policy.  Finish the essay by commenting on thefollowing:  This model was developed backin the 1960s and 1970s and it is now 2014. Do you believe the model is more relevant or less relevant todayrelative to when it was written? Explain. We drew a non-linearaggregate supply in class with its shape depending on the state of the economy.Draw that aggregate supply curve identifying the Keynesian portion and theClassical portion and provide the intuition as to why the shape of theaggregate supply curve does depend on the state of the economy. We now considerthe Great Recession where the unemployment rate went up to 10% and thecorresponding GDP gap went from zero to -7%. Write a brief essay explaining why the unemployment rate went up to 10%and the GDP gap fell to -7% (think about and mention what happened to all of therelevant shift variables foraggregate demand). Locate this point as point A on your diagram with anaggregate demand curve going through point A that corresponds to the conditionsduring the Great Recession. Now explain how macroeconomic policy makersresponded to these conditions and explain why we would or wouldn’t expect thesepolicies to work in terms of lowering unemployment and eliminating the GDP gap.Locate as point B that corresponds to the conditions as of the present, wherethe unemployment rate is 5.5% and the GDP gap is -3% (still some slack but muchless than before). Which of the policies would Keynes favor and why?  Are your results consistent with thefollowing pic of the misery index? Why or why not?