If there are total factor productivity shocks in the New Keynesian model, and the central bank always reduces the output gap to zero
A)the New Keynesian model will produce the same data as the real business cycle model only if the central bank pegs the price level in the real business cycle model.
B)the New Keynesian model will produce the same data as the real business cycle model.
C)average labour productivity is countercyclical.
D)employment is constant.
E)employment is countercyclical.

Question

Quizplus · Accepted Answer

In the New Keynesian model, if the central bank always reduces the output gap to zero, it implies that the central bank is actively managing the economy to stabilize output. For the New Keynesian model to produce the same data as the real business cycle (RBC) model, the central bank in the RBC context would need to peg the price level, effectively removing fluctuations in the price level that could arise from productivity shocks, thus aligning the outcomes of both models under the specific condition of productivity shocks.

If There Are Total Factor Productivity Shocks in the New