According to the New Keynesian model, after a negative shock to output
A)the government increases expenditures and the central bank increases its target rate.
B)the government decreases expenditures and the central bank decreases its target rate.
C)the government decreases expenditures and the central bank increases its target rate.
D)the government leaves expenditures unchanged and the central bank increases its target rate.
E)the government increases expenditures and the central bank decreases its target rate.

Question

Quizplus · Accepted Answer

In response to a negative shock to output, according to the New Keynesian model, the government is likely to increase expenditures to stimulate the economy, while the central bank decreases its target interest rate to make borrowing cheaper, encouraging investment and spending.

According to the New Keynesian Model, After a Negative Shock