In the New Keynesian model, an increase in current total factor productivity
A)shifts output supply right and opens a positive output gap.
B)shifts output demand left and opens a negative output gap.
C)shifts output demand right and opens a positive output gap.
D)shifts output supply right and opens a negative output gap.
E)shifts output supply left and opens a negative output gap.

Question

Quizplus · Accepted Answer

In the New Keynesian model, an increase in total factor productivity shifts the output supply curve rightward, indicating an increase in potential output. This results in a positive output gap as the economy is producing more than its potential output level. This is because firms are now able to produce more output at any given price level, leading to increased employment and output.

In the New Keynesian Model, an Increase in Current Total