If the central bank in a New Keynesian model can always reduce the output gap to zero
A)the price level will be procyclical.
B)investment will be procyclical if there are total factor productivity shocks.
C)consumption will be countercyclical if there are total factor productivity shocks.
D)the price level will be countercyclical.
E)this would be inefficient.

Question

Quizplus · Accepted Answer

In a New Keynesian model, if the central bank can always reduce the output gap to zero, investment would be procyclical in the presence of total factor productivity shocks. This is because positive productivity shocks would lead to higher output and income, encouraging more investment.

If the Central Bank in a New Keynesian Model Can