In the New Keynesian Open Economy Model, Suppose the Exchange

question 33

Multiple Choice

In the New Keynesian open economy model, suppose the exchange rate is flexible and there is a decline in total factor productivity

• A) expansionary fiscal policy is necessary.
• B) contractionary monetary policy is necessary.
• C) expansionary monetary policy is necessary.
• D) no policy intervention is necessary.
• E) the central bank should reduce the real interest rate.

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Definitions:

Market Interest Rate

The prevailing rate of interest available in the market on loans, bonds, and other financial instruments.

Semi-Annual

Occurring twice a year, typically every six months.

Long-Term Notes

Debt securities with a maturity date longer than one year, representing borrowed funds that need to be repaid.

Fixed Rates

Interest rates that remain constant over the lifetime of a financial instrument, unaffected by market fluctuations.