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

Question

Quizplus · Accepted Answer

In the New Keynesian model, an increase in the money supply causes an increase in aggregate demand, which leads to an increase in output. However, as firms respond to higher demand by raising prices, the central bank responds by increasing the nominal interest rate to keep inflation in check. This increase in the nominal interest rate leads to a decrease in the real interest rate, which further stimulates aggregate demand and output. Therefore, an increase in the money supply in the New Keynesian model increases output and decreases the real interest rate.

In the New Keynesian Model, an Increase in the Money