Answered: 1. Suppose in the New Keynesian…

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter14: A Macroeconomic Theory Of The Open Economy

Section: Chapter Questions

Problem 9PA

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1. Suppose in the New Keynesian open-economy model that there is a negative output gap and
the central bank decreases the current money supply.
(a) Assuming that the exchange rate is flexible. Draw diagrams for the labour, goods and
money markets, and the production function. Determine the equilibrium effects of this
decrease in the money supply on employment, output, consumption, investment, money,
real wages, the real interest rate, the price level and the exchange rate. Provide a detailed
economic analysis explaining your results with the aid of the diagrams.
(b) Repeat part (a) for the case of a fixed exchange rate.

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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