In the New Keynesian model, suppose that supply is initially equal to to demand
ID: 1187341 • Letter: I
Question
In the New Keynesian model, suppose that supply is initially equal to to demand in the goods market and that there is a negative shock to the demand for investment goods, because firms anticipate lower total factor productivity in the future.
a) Determine the effects on real output, the real interest rate, the price level, employment, and the real wage if the government did nothing in response to the shock.
b) Determine the effects if monetary policy is used to stabilize the economy, with the goal of the central bank being economics efficiency.
c) Determine the effects if government spending is used to stabilize the economy, with the goal of the fiscal authority being economic efficiency.
d) Explain and comment on the differences in your results among parts (a), (b), and (c).
Explanation / Answer
a)real output -decrease, real interest rate - increase, price level -increase,
employment -decrease , real wage-decrease
b)real output -increase,real interest rate-decrease,price level -decrease,
employment -increase, wage-increase.
c)real output-increase, real interest rate- increase, price level -decrease,
employment -increase, real wage-increase.