In the New Keynesian model, an increase in the money supply
A)decreases the real interest rate, increases real aggregate output, increases the real wage rate, and decreases employment.
B)increases the real interest rate, decreases real aggregate output, decreases the real wage rate, and increases employment.
C)decreases the real interest rate, increases real aggregate output, decreases the real wage rate, and increases employment.
D)decreases the real interest rate, decreases real aggregate output, decreases the real wage rate, and increases employment.
E)decreases the real interest rate, increases real aggregate output, increases the real wage rate, and increases employment.

Question

Quizplus · Accepted Answer

In the New Keynesian model, when the money supply increases, it lowers the nominal interest rate. However, in the short run, prices are fixed so the real interest rate decreases. This leads to an increase in aggregate demand, output, and employment. Since the labor market is not fully flexible in the short run, a decrease in the real interest rate leads to a decrease in the real wage rate, which in turn increases employment.

In the New Keynesian Model, an Increase in the Money