Under the assumptions of the new Keynesian model,an increase in aggregate demand will
A)increase prices and output in the short-run.
B)lead to a decrease in unemployment and an increase in prices in the short run.
C)lead to an increase in the nominal wage rate in the long run and a decrease in unemployment in the short run.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

The new Keynesian model suggests that in the short run, an increase in aggregate demand will lead to higher prices and output due to price and wage stickiness. This also results in a decrease in unemployment as firms hire more to meet the increased demand. In the long run, the nominal wage rate adjusts. Therefore, all of the statements are correct in the context of the new Keynesian model.

Under the Assumptions of the New Keynesian Model,an Increase in Aggregate