In the new Keynesian sticky prices model, suppose that consumer's preferences shift so that they want to consume more leisure and less consumption goods. 1. Illustrate the effect(s) in the labour market and the goods market using

relevant diagrams

2. Explain in detail (by making any necessary assumptions) the equilibrium

effects of this expectation.

3. Determine the long-run effects if the government did nothing in response to

the shock.

4. Determine the effects if monetary policy is used to stabilize the economy, with the goal of the central bank being economic efficiency.

5. Determine the effects if government spending is used to stabilize the economy, with the goal of the fiscal authority being economic efficiency.

6. Explain and comment on the differences in your results among parts (ii), (iii)

and (iv).