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Consider the New-Keynesian model with partial sticky price studied in class. Suppose there is a decrease in the preference for leisure t. a) (10 marks)
Consider the New-Keynesian model with partial sticky price studied in class. Suppose there is a decrease in the preference for leisure t. a) (10 marks) Analyse the short-run effects (on prices, wage, employment, interest rate, and output gap) of this shock. Use diagrams to support your answer. b) (10 marks) Propose an appropriate monetary policy response to this shock and describe the effects of that policy response on output, prices, interest rate, employment and wage rate. Modify the diagram in part a to support your answer.
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