LO 3 In the New Keynesian model, suppose that supply is initially equal to demand in the goods market and there is a negative shock on the demand for investment goods because irms anticipate lower total factor productivity in the future.

(a) Determine the efects on real output, real interest rate, price level, employment, and real wage if the government takes action in response to the shock.

(b) Determine the efects if the central bank lowers the interest rate with the interest rate target still in place.

(c) Determine the efects if government spending decreases to stabilize the economy, with the goal of the iscal authority being economic eiciency.

(d) Explain and comment on the diferences in your results among parts (a), (b), and (c).