Suppose that there is an increase in the demand for money. What is the appropriate monetary policy response in the New Keynesian sticky price model?
A) an increase in the interest rate target
B) no change in the interest rate target
C) a decrease in the interest rate target
D) an increase in government spending
Question 2
The credit spread is countercyclical and coincident, suggesting that a sudden increase in financial frictions is most likely ________.
A) when the economy has been expanding for some time
B) after the economy has turned into a recession
C) during the recovery phase of the business cycle
D) when expected inflation is declining
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