In the context of monetary policy, the 'Divine Coincidence' in basic New Keynesian models refers to:
A. The impossibility of stabilising either inflation or output
B. Only the stabilisation of the exchange rate
C. The fact that stabilising inflation also stabilises the output gap under certain assumptions
D. The conflict between inflation and output stabilisation
Answer: Option C
Solution (By JKSSB Mock Tests)
In the simplest New Keynesian model with only sticky prices and no other distortions, the optimal policy that fully stabilises inflation also closes the output gap—the so-called divine coincidence.
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