Question 1 a) In light of the New Keynesian model, answer each of the following questions about the Central Bank’s adjustment of interest rate in response to each of the following shocks. Note that in each case, the Central Bank wants the output gap to be zero. (i) There is an increase in demand for money. (ii) There is a fall in current total factor productivity due to the pandemic. (iii) There is an expected increase in future total factor productivity due to the discovery of new technologies. b) In the New Keynesian model, assume that the economy is in a liquidity trap. Show that the Central Bank could somehow convince the public of more expected inflation in the future. Use an appropriate set of diagrams to explain your answers.
Question 1
a) In light of the New Keynesian model, answer each of the following questions about the Central Bank’s adjustment of interest rate in response to each of the following shocks. Note that in each case, the Central Bank wants the output gap to be zero.
(i) There is an increase in demand for money.
(ii) There is a fall in current total factor productivity due to the pandemic.
(iii) There is an expected increase in future total factor productivity due to the discovery of new technologies.
b) In the New Keynesian model, assume that the economy is in a liquidity trap. Show that the Central Bank could somehow convince the public of more expected inflation in the future. Use an appropriate set of diagrams to explain your answers.
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