In the New Keynesian model,an increase in the money supply

Question

Quizplus · Accepted Answer

According to the New Keynesian model, an increase in the money supply leads to a decrease in the real interest rate (due to an increase in demand for money), which in turn stimulates investment and consumption spending, leading to an increase in real aggregate output. This increase in output results in an increased demand for labor, which increases employment and decreases the unemployment rate. The decrease in the real interest rate also leads to a decrease in the real wage rate (since the real wage rate is determined in the goods market, based on the marginal product of labor), thus making labor more attractive to firms and increasing employment. Therefore, choice A is the best answer.

In the New Keynesian Model,an Increase in the Money Supply