Assume the economy is initially in equilibrium, and then firms expect future total factor productivity to decrease. Using the New Keynesian Model framework:
a. Explain and show graphically the impacts of this event on the goods and money markets.
b. If the goal of the Central Bank is to achieve economic efficiency, what type of monetary policy should be used in response to this event? Show graphically and explain.
The question is graduate-level.
Running head: KEYNESIAN ECONOMIC APPROACH1 Keynesian Economic ApproachStudent’s nameInstitution KEYNESIAN ECONOMIC APPROACH 2 Effects of decrease in production on goods and Money markets…