Question
Answer each of the following questions about the Keynesian models a. Consider the Keynesian Coordination Failure model studied in class. Suppose that money plays the
Answer each of the following questions about the Keynesian models a. Consider the Keynesian Coordination Failure model studied in class. Suppose that money plays the role of a sunspot variable in the Keynesian Coordination Failure model, so that the economy is in the bad equilibrium when the money supply is low and in the good equilibrium when the money supply is high. Explain briefly what the monetary authority could do to make consumers better off. b. Suppose that there is a natural disaster that destroys some of the nation's capital stock. According to the New Keynesian model studied in class, how should the central bank change its target interest rate and money supply if the central bank always closes the output gap in the short run where prices are sticky?
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