In the New Keynesian Open Economy Model with a Flexible

question 41

Multiple Choice

In the New Keynesian open economy model with a flexible exchange rate, suppose that the output gap is initially zero and there is an increase in labour supply. What is the correct policy response
To keep the output gap at zero?

• A)Increase the money supply.
• B)Reduce the money supply.
• C)Nothing.
• D)Reduce government spending.
• E)Increase government spending.

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Definitions:

Permanent Increase

A lasting upward adjustment in size, amount, or value.

Real Output

The quantity of goods and services produced, adjusted for inflation, reflecting the true productivity of an economy.

Inflation Rate

The percentage increase in the price level of goods and services over a period of time, often measured annually.

Government Debt

The total amount of money that a government has borrowed and not yet repaid.