Question 3: Monetary Policy

Suppose that we have a partial sticky price New Keynesian model. Consider an increase in government spending in t+1 (Gt+1increases)

a. Graphically analyze and show how this affects the equilibrium values ofeachof the endogenous variables of the model, including labor market variables. Explain your work!

b. Suppose that the central bank wants to adjust the money supply in such a way that the real wage does not change in response to this shock. How must the central bank adjust policy in response to the increase in Gt+1in order to achieve this end? Show this graphically. Explain!