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1) Briefly answer the following questions:

a) How are New Keynesian models different from the Neoclassical model?

b) Why does output ( ) “over-react” to demand shocks in New Keynesian models?

2) Consider the New Keynesian and Neoclassical models discussed in class. Initially the economy is in equilibrium. Suppose that the current level of productivity ( ) increases.

a) Graphically show how this affects the endogenous variables, if the economy is represented by the simple sticky price model.

b) Graphically show how this affects the endogenous variables, if the economy is represented by the partial sticky price model. Page 2 of 2 c) Graphically show how this affects the endogenous variables, if the economy is represented by the Neoclassical model. d) Does output ( ) “under-react” to this type of supply shocks in New Keynesian models? Explain.

3) Consider the New Keynesian models discussed in class. Initially the economy is in equilibrium. Suppose a one-time increase in the price level from ̅ 0 to ̅ 1.

a) Graphically show how this affects the endogenous variables, if the economy is represented by the simple sticky price model.

b) Graphically show how this affects the endogenous variables, if the economy is represented by the partial sticky price model.