Dynamics in the New Keynesian Model After an IS Shock: Suppose that you have a standard partial sticky price New Keynesian model as presented in class. The AS curve is given by: Pt=P t (YtYtf) 0 Suppose that the economy initially begins in the efficient, neoclassical equilibrium. Then there is an exogenous increase in At 1. (a) Use the five part graph to show how this exogenous shock will affect Yt, Pt, rt, Nt, and wt in the short run. (b) What happens to Ytf after an exogenous increase in At 1? What happens to the output gap in the short run, Yt Ytf ? (c) At the new short run equilibrium, is the firm hiring more or less labor than it would find optimal, taking prices as given? Be clear and justify your answer. 1 (d) Given the opportunity, how will the firm adjust P t in response to the conditions prevailing in the short run subsequent to the increase in At 1? Show the effects graphically