5. Suppose that we have a partial sticky price New Keynesian model. Suppose that the economy is hit with an increase in At+1. Suppose that the central bank wants to adjust the money supply in such a way that the real wage does not change in response to this shock. How must the central bank adjust policy in response to the increase in A+1 in order to achieve this end? How does output react to the change in Aț+1 if the central bank follows such a policy? How does this change in Y; compare to a world in which the money supply is exogenous (i.e. does not react to the increase in Af+1)?
5. Suppose that we have a partial sticky price New Keynesian model. Suppose that the economy is hit with an increase in At+1. Suppose that the central bank wants to adjust the money supply in such a way that the real wage does not change in response to this shock. How must the central bank adjust policy in response to the increase in A+1 in order to achieve this end? How does output react to the change in Aț+1 if the central bank follows such a policy? How does this change in Y; compare to a world in which the money supply is exogenous (i.e. does not react to the increase in Af+1)?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![5. Suppose that we have a partial sticky price New Keynesian model. Suppose
that the economy is hit with an increase in At+1. Suppose that the central
bank wants to adjust the money supply in such a way that the real wage
does not change in response to this shock. How must the central bank adjust
policy in response to the increase in Af+1 in order to achieve this end? How
does output react to the change in A+1 if the central bank follows such a
policy? How does this change in Y compare to a world in which the money
supply is exogenous (i.e. does not react to the increase in A41)?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F48998a8f-2749-400e-9f10-ccbd90964463%2Fdde15ef8-e038-4217-b3d9-af8a3389edfd%2F20f8yad_processed.png&w=3840&q=75)
Transcribed Image Text:5. Suppose that we have a partial sticky price New Keynesian model. Suppose
that the economy is hit with an increase in At+1. Suppose that the central
bank wants to adjust the money supply in such a way that the real wage
does not change in response to this shock. How must the central bank adjust
policy in response to the increase in Af+1 in order to achieve this end? How
does output react to the change in A+1 if the central bank follows such a
policy? How does this change in Y compare to a world in which the money
supply is exogenous (i.e. does not react to the increase in A41)?
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