2 Dynamics in the New Keynesian Model (Ezercises 1-2 from GLS Ch27 on page 625-626) 1) Suppose the economy starts in the Neoclassical equilibrium and #; increases. (a) Draw the dynamics in the simple stick price case. Verbally describe what happens. (b) Draw the dynamies in the partial sticky price case. Verbally describe what happens. 2} Consider the basic sticky price New Keynesian model as presented in the text. Suppose that the economy is driven into a recession caused by an exogenous reduction in Ay. (a) Graphically show the effects of the reduction in A, on the endogenous variables of the model. Include in your graph what happens to the Hexible price, neoclassical values of the endogenous variables. (b) What pressure will there be on the position of the AS curve as the economy transi- tions from short run to medium run? () An observer looking at data generated from this model will observe a particular cor- relation between inflation and output conditional on a shock to Ay, Is that correlation consistent with the idea of the Phillips Curve as presented in the text? What is miss- ing from looking at a simple correlation between inflation and output when comparing it to the preditions of the Phillips Curve