In the New Keynesian View, Monetary Policy Has Its Main

Essay

In the new Keynesian view, monetary policy has its main effect on output through the impact of interest rate changes on aggregate demand. In the new Keynesian view, in which of the following countries would an increase in interest rates have the greatest effect on aggregate demand in the short run: (a) Slobovia, which has a large trade sector and where businesses and firms rely heavily on short-term borrowing; or (b) Outlandia, which has a small trade sector and where little use is made of short-term borrowing?