In analyzing the fit of the New Keynesian model to the data, it is important to
A)recognize the important contribution of the real business cycle theorists.
B)understand that consumption is countercyclical.
C)assume that monetary policy is irrelevant.
D)understand the role of international trade.
E)recognize that policy is responding to events in the economy.

Question

Quizplus · Accepted Answer

The New Keynesian model assumes that policy is responding to events in the economy. This is an important factor to consider when analyzing the fit of the model to the data as it affects the effectiveness of policy in stabilizing the economy. It is also necessary to incorporate expectations and uncertainty into the model to fully capture the dynamics of the economy.

In Analyzing the Fit of the New Keynesian Model to the Data