In the New Keynesian Model, Suppose That the Output Gap

question 4

Multiple Choice

In the New Keynesian model, suppose that the output gap is initially zero, there is an increase in money demand, and the central bank wants to keep the output gap at zero. What happens?

• A)Investment goes down.
• B)Output goes up.
• C)Money supply goes up.
• D)Consumption goes up.
• E)Employment goes down.

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Definitions:

Federal Government

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Adverse Selection

A situation in which sellers have information that buyers do not (or vice versa) about some aspect of product quality.

Moral Hazard

The risk that one party to a transaction has not entered into the contract in good faith, or has provided misleading information about its assets, liabilities, or credit capacity.