In the New Keynesian Open Economy Model, Suppose the Exchange

question 15

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

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Definitions:

Output

refers to the total amount of goods or services produced by a firm, industry, or economy within a certain period.

Profit-Maximizing Rule

A principle stating that profit maximization occurs when a firm expands output until marginal cost is equal to marginal revenue.

MR = MC

The condition for profit maximization in economic theory, where marginal revenue (MR) equals marginal cost (MC).

Economic Profit

The discrepancy across total turnover and total spendings, including expenses both explicit and implicit.