Question 3 (20 points) In the Keynesian sticky (nominal) wage model, suppose that the economy in time period 1 is initially as described in Figure 2:…

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Question 3 (20 points)In the Keynesian sticky (nominal) wage model, suppose that the economy in time period1 is initially as described in Figure 2: the real output is Yi, the real rate of interest is F1,the price level is Pi, and the fixed nominal wage in time period 1, Wi, is such that theimplied real wage in time period 1, uf, where it = Wi/Pi, is above the market clearingreal wage in the labour market.Suppose that the government spends Gt and taxes Ti in real terms in time period t.The government is also the central bank; the supply of money in time period t is Mt-Now suppose that the governmannounces that it will increase its spending permanently by 4, starting from time period 1. All announcements made by the governmentcredible and known to the public.Explain the impact of this change in government expenditures, in time period 1, withthe aid of graphs.

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