New-Keynesian model

  1. In the New-Keynesian model where government expenditure is financed through taxation only, if government expenditure increases by 100, which of the following is true? A. Income will increase by 100. B. Income will increase by more than 100 as the fiscal multiplier is greater than 1. C. Income will not change as the increase in government expenditure would crowd out private consumption. D. Income will increase, but we can’t say by how much.   1. You are an economist work for the Central Bank. Propose a monetary policy action to decrease price level without sacrificing a drop in output. Use diagram to support your answer. (2 marks). 2. Explain the concept of “Divine Coincidence” and clearly state the cases where it holds and where it does not hold. (2 marks).