In the New Keynesian Open Economy Model with a Fixed

question 12

Multiple Choice

In the New Keynesian open economy model with a fixed 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 government spending.
• B)Increase the money supply.
• C)Reduce the money supply.
• D)Reduce government spending.
• E)Nothing.

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Definitions:

Units

Measurements or quantities of a product or service.

Short-Run Costs

Costs that vary with the level of output in the short term, where at least one factor of production is fixed.

Profitable Level

The point at which a business or operation generates revenue that exceeds its costs, leading to profitability.

Given Price

A specific price point that is set or assumed within a particular context, often used as a reference in economic analysis.