Suppose government spending increases temporarily in the New Keynesian model. (a) What are the effects on real
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(a) What are the effects on real output, consumption, investment, the price level, employment, and the real wage?
(b) Are these effects consistent with the key business cycle facts from Chapter? What does this say about the ability of government spending shocks to explain business cycles?
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An increase in G shifts the output demand curve to the right With a fixed interest rate ...View the full answer
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