In the basic New Keynesian model, suppose that there is an increase in government spending. • First, suppose that the ce

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In the basic New Keynesian model, suppose that there is an
increase in government spending. • First, suppose that the central
bank does nothing (accommodates the shock). Illustrate on the
graphs and explain what will be the effects on inflation and
output? • Second, suppose that economy initially has inflation
equal to the central bank’s inflation target and an output gap of
zero. What action do you expect the central bank would undertake?
Illustrate you answer on the graph and explain.