Two macroeconomics questions:

Question 1

Suppose in the New Keynesian open-economy model, that there is an increase in future total factor productivity.

(a) Under a flexible exchange rate, what are the equilibrium effects?Should economic policy response to the change in future productivity?If so, how?

(b) Now suppose that there is a fixed exchange rate. Repeat part (a)

(c) Explain your results.

Question 2

Supposethatthecentralbankobservesadropin realGDP,butdoesnotknowwhat caused this drop.

(a) How would the central bank respond if it believed that GDP dropped because of a decline in total factor productivity and that real business cycle theory is correct?

(b) How would the central bank respond if it believed that GDP dropped because of a wave of pessimism and that the Keynesian coordination failure model is correct?

(c) Explain your answers to (a) and (b) with the aid of diagrams.