Suppose that agents come to expect a higher ination rate which in the

model is represented by an increase in the exogenous variable et+1.

(a) Graphically show how this affects the endogenous variables of the in the

simple sticky-price model. Discuss how consumption, investment, the

real wage, and the labor input change.

(b) Graphically show how this affects the endogenous variables of the in the

partial sticky-price model. Discuss how consumption, investment, the

real wage, and the labor input change.

(c) Graphically show how this affects the endogenous variables of the in

the Neoclassical model. Discuss how consumption, investment, the real

wage, and the labor input change.

5. Suppose that we have a partial sticky price New Keynesian model. Suppose

that the economy is hit with an increase in At+1. 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 At+1 in order to achieve this end? How

does output react to the change in At+1 if the central bank follows such a

policy? How does this change in Yt compare to a world in which the money

supply is exogenous (i.e. does not react to the increase in At+1)?