Question

Under the New Keynesian model, what happens to inflation and unemployment rate when nominal interest rate increases?

Answer 1

Keynesian model in which unemployment arises because of matching frictions, namely a labor demand friction. Additionally, we elaborate our results thoroughly by including endogenous participation decisions, something which brings along also a labor supply friction.

In this environment we compare alternative fiscal packages, both in terms of target for the fiscal stimulus and in terms of source of financing. We consider two forms of government spending: a traditional increase in aggregate demand and an increase in firms’ hiring subsidy.

similarly, Keynesian theories were based on the basic idea that, given fixed nominal wages, a monetary authority (central bank) can control the employment rate. Since wages are fixed at a nominal rate, the monetary authority can control the real wage (wage values adjusted for inflation) by changing the money supply and thus affect the employment rate.