macroeconomic policy in the NK model

Question 1

what happens in an economy under flexible prices?

Answer 1

real variables are completely seperate from nominal variables
monetary policy has no effect on any real variables and affects only price level and inflation - monetary neutrality
first welfare theorem holds - policy intervention undesireable in the first place

Question 2

in an economy with flexible prices describe if stabilisation policy should be used?

Answer 2

stabilisation via fiscal policy is undesireable and stabilisation via monetary policy is not possible and even if it were it would be undesireable so stabilisation policy should not be used

Question 3

what does the empiracle evidence say about monetary neutrality

Answer 3

the empiracle evidence rejects monetary neutrality - monetary policy in the NK model is not neutral and sticky prices justify the intervention