Some macroeconomists have argued that it would be beneficial for the government to run a deficit when the economy is in a recession, and a surplus during a boom. Does this make sense? Carefully explain why or why not, using the New Keynesian model.
Answer to relevant QuestionsIn the New Keynesian model, how should the central bank change its target interest rate in response to each of the following shocks. Use diagrams and explain your results.(a) There is a shift in money demand.(b) Total factor ...Assume a two-period model where national income is 100 in the current period, and 120 in the future period. The world real interest rate is assumed to be 10% per period. The representative consumer always wishes to set ...Suppose that there is a cost to carrying out transactions in the foreign exchange market. That is, to purchase one unit of foreign currency requires e(1 + a) units of domestic currency, where e is the nominal exchange rate ...Suppose in the New Keynesian open-economy model, that there is an increase in future total factor productivity.(a) Under a flexible exchange rate, what are the equilibrium effects? Should economic policy respond to the ...How would we modify the Friedman rule in the context of a New Keynesian sticky price model like the one in Chapter, assuming that monetary policy is the only policy that can be used to close output gaps? Explain.
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