When there is Keynesian unemployment in the New Keynesian model, a Pareto optimum can be reached by
A)decreasing the money supply or by increasing current government spending.
B)increasing the money supply or by decreasing current government spending.
C)increasing nominal wages and increasing the money supply.
D)decreasing the money supply or by decreasing current government spending.
E)increasing the money supply or by increasing current government spending.

Question

Quizplus · Accepted Answer

In the New Keynesian model, when there is Keynesian unemployment, the economy is not at its Pareto optimum. To reach the Pareto optimum, the government can either increase current government spending or increase the money supply, as these policies would increase aggregate demand and reduce unemployment. Therefore, the correct choice is E - increasing the money supply or increasing current government spending.

When There Is Keynesian Unemployment in the New Keynesian Model