What insights into the macroeconomic consequences of financial frictions arise from the new Keynesian model?
What will be an ideal response?
The new Keynesian model highlights the dependence of aggregate demand and short-run aggregate supply on expectations. When financial institutions seem to be dealing well with asymmetric information, the availability of low-cost credit inspires optimism. A disruption of financial markets causes a decrease in aggregate demand, due to an immediate widening of the credit spread and the expectation of reduced future output and a higher future real interest rate for households and businesses. Expected increases in aggregate supply might exacerbate the expectations-driven decreases in aggregate demand, unless the zero-lower-bound problem is addressed. With economic activity so heavily dependent on expectations, recovery from a financial-crisis-induced recession can be quite rapid.
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According to the textbook, for most goods and services-foods, beverages, entertainment, etc.-the income elasticity of demand is:
A. larger in the short run than in the long run. B. larger in the long run than in the short run. C. about the same in the short run and in the long run. D. is difficult to differentiate from the short run to the long run.
The above figure shows a labor market with minimum wage equal to $16. In this figure, what area equals the deadweight loss?
A) area A B) area B C) area C D) area D E) area E