Question

2. Assume the economy is initially in equilibrium, and then firms expect future total factor productivity, z', to decrease. Using the New Keynesian Model framework, what are the implications on the following outcomes. For the money market, use the framework with interest rates on the vertical axis. f) Wages (increase / decrease / indeterminate / no change)? g) Money supply increase / decrease / indeterminate / no change)? h) Money demand increase / decrease / indeterminate / no change)? i) Interest rates (increase / decrease / indeterminate / no change)? j) If the goal of the Central Bank is to achieve economic efficiency, the bank should change the interest rate in which way increase / decrease / no change)?

Answer 1

Answer :-

First we will see What is the Keynesian model?

- Keynesian economics is a theory that says the government should increase demand to boost growth. Keynesians believe consumer demand is the primary driving force in an economy. As a result, the theory supports expansionary fiscal policy.

2) I will try to merge F,G,H question in one answer because all three interrelated with them, please check below -

- Wages are exogenous in Keynes's system. ... His initial assumption was that so long as there is unemployment workers will be content with a constant money wage, and that when there is full employment they will demand a wage which moves in parallel with prices and money supply.

3) Interest Rates -

The Keynesian theory of interest rate refers to the market interest rate, i.e. the rate „governing the terms on which funds are being currently supplied‟ (Keynes, 1960, p. 165)1. According to Keynes, the market interest rate. depends on the demand and supply of money.

4) Centeral Bank -

The objectives of the central bank include economic growth in line with the economy's potential to expand; a high level of employment; stable prices (that is, stability in the purchasing power of money); and moderate long-term interest rates. The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars. When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy.

As interest rates rise, profitability on loans also increases, as there is a greater spread between the federal funds rate and the rate the bank charges its customers. ... This is an optimal confluence of events for banks, as they borrow on a short-term basis and lend on a long-term basis.