Multiple Choice
In the New Keynesian open economy model with a flexible 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) Reduce the money supply.
B) Increase government spending.
C) Reduce government spending.
D) Increase the money supply.
E) Nothing.
Correct Answer:
Verified
Correct Answer:
Verified
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