The reason inflation ________ in the Smets-Wouters DSGE model if TFP rises is because ________.
A) falls; TFP increases potential output, which expands supply
B) rises; inflationary expectations rise
C) rises; aggregate demand rises with higher incomes
D) stays the same; of money neutrality
E) falls; real interest rates adjust to equal the marginal product of capital

Question

Quizplus · Accepted Answer

In the Smets-Wouters DSGE model, TFP increases potential output, which expands supply. As a result, when TFP rises, there is a fall in inflation as there is an increase in supply of goods and services, causing a decrease in prices.

The Reason Inflation ________ in the Smets-Wouters DSGE Model If