Question 1

The propagation mechanism

Accepted Answer

A) explains why shocks to the economy have long-lasting effects 
B) says that changes in money supply affect individual markets but have only limited effects on the economy since markets clear rapidly 
C) supports the notion that anticipated money supply changes have no real effect on output 
D) says that unemployment is a result of firms paying workers higher than market-clearing wages to get them to work harder 
E) none of the above 
A) explains why shocks to the economy have long-lasting effects 
B) says that changes in money supply affect individual markets but have only limited effects on the economy since markets clear rapidly 
C) supports the notion that anticipated money supply changes have no real effect on output 
D) says that unemployment is a result of firms paying workers higher than market-clearing wages to get them to work harder 
E) none of the above A

Question 2

The random walk of GDP model assumes that

Accepted Answer

A) output follows a trend which can be explained by capital improvements 
B) output generally follows a steady trend but there are always some transitory business fluctuations 
C) there is no tendency for GDP to return to trend after a supply-side disturbance 
D) permanent changes in output are infrequent, so changes in aggregate demand always dominate 
E) all output fluctuations are transitory 
A) output follows a trend which can be explained by capital improvements 
B) output generally follows a steady trend but there are always some transitory business fluctuations 
C) there is no tendency for GDP to return to trend after a supply-side disturbance 
D) permanent changes in output are infrequent, so changes in aggregate demand always dominate 
E) all output fluctuations are transitory C

Question 3

Dynamic stochastic general equilibrium (DSGE) models

Accepted Answer

A) are based on nonlinear specifications 
B) combine traditional models with real business cycle models and price stickiness models 
C) have to be solved by computers using simulation techniques 
D) are used by some central banks as a forecasting tool 
E) all of the above 
A) are based on nonlinear specifications 
B) combine traditional models with real business cycle models and price stickiness models 
C) have to be solved by computers using simulation techniques 
D) are used by some central banks as a forecasting tool 
E) all of the above E

Question 4

The rational expectations approach

Accepted Answer

A) 	insists that all available information is efficiently used to form expectations 
B) 	concludes that rational people never react to an unexpected change in monetary policy 
C) 	concludes that price predictions are based solely on the behavior of nominal wages 
D)  	agrees with the frictionless neoclassical model that there is never any deviation from the full-employment level of output 
E)   	assumes that all markets immediately clear except for the labor market since wages tend to adjust slowly 
A) 	insists that all available information is efficiently used to form expectations 
B) 	concludes that rational people never react to an unexpected change in monetary policy 
C) 	concludes that price predictions are based solely on the behavior of nominal wages 
D)  	agrees with the frictionless neoclassical model that there is never any deviation from the full-employment level of output 
E)   	assumes that all markets immediately clear except for the labor market since wages tend to adjust slowly

Question 5

The real business cycle theory states that

Accepted Answer

A) changes in money supply result in output fluctuations 
B) labor supply is highly elastic in response to permanent changes in the real wage rate 
C) the most important economic disturbances arise from supply shocks or unanticipated changes in productivity 
D) firms are reluctant to change prices due to the menu costs involved 
E) a change in labor productivity will not have a long-lasting effect on real output 
A) changes in money supply result in output fluctuations 
B) labor supply is highly elastic in response to permanent changes in the real wage rate 
C) the most important economic disturbances arise from supply shocks or unanticipated changes in productivity 
D) firms are reluctant to change prices due to the menu costs involved 
E) a change in labor productivity will not have a long-lasting effect on real output

Question 6

The rational expectations equilibrium approach emphasizes

Accepted Answer

A) the microeconomic foundations of macroeconomics 
B) the idea that after disturbances output will not return to trend 
C) the idea that even small menu costs involved in making price changes cause big problems 
D) that fiscal and monetary policies are always successful in changing real output 
E) that even rational decisions in an imperfectly competitive world often lead to socially undesirable outcomes 
A) the microeconomic foundations of macroeconomics 
B) the idea that after disturbances output will not return to trend 
C) the idea that even small menu costs involved in making price changes cause big problems 
D) that fiscal and monetary policies are always successful in changing real output 
E) that even rational decisions in an imperfectly competitive world often lead to socially undesirable outcomes

Question 7

Critics of the so-called DSGE models point out that these models

Accepted Answer

A) do not incorporate rational expectations 
B) assume that wages and prices adjust slowly so markets take a long time to clear 
C) ignore the fact that the economy can be hit by random shocks 
D) make the unrealistic assumption that people have a well-designed, long?term plan and can therefore adapt to unexpected shocks in a rational, consistent way 
E) all of the above 
A) do not incorporate rational expectations 
B) assume that wages and prices adjust slowly so markets take a long time to clear 
C) ignore the fact that the economy can be hit by random shocks 
D) make the unrealistic assumption that people have a well-designed, long?term plan and can therefore adapt to unexpected shocks in a rational, consistent way 
E) all of the above

Question 8

The rational expectations approach assumes that

Accepted Answer

A) people never make any mistakes in forming inflationary expectations 
B) people do make mistakes in their forecasts from time to time, but they do not make any systematic mistakes 
C) people change their inflationary expectations only long after it has become clear that they were wrong 
D) unannounced policy changes have little effect on output since people change their inflationary expectations only very slowly 
E) none of the above 
A) people never make any mistakes in forming inflationary expectations 
B) people do make mistakes in their forecasts from time to time, but they do not make any systematic mistakes 
C) people change their inflationary expectations only long after it has become clear that they were wrong 
D) unannounced policy changes have little effect on output since people change their inflationary expectations only very slowly 
E) none of the above

Question 9

If we compare the classical model with the imperfect-information model of the aggregate supply curve by Lucas, we can conclude that

Accepted Answer

A) deviations from the full-employment level of output are possible in both models 
B) there is never any deviation from full employment in either of the models since both assume flexible wages 
C) in both cases nominal wages and prices always change proportionally, even in the short run, and therefore markets always clear immediately 
D) only the Lucas model explains why wages tend to be rigid even over an extended time period 
E) none of the above 
A) deviations from the full-employment level of output are possible in both models 
B) there is never any deviation from full employment in either of the models since both assume flexible wages 
C) in both cases nominal wages and prices always change proportionally, even in the short run, and therefore markets always clear immediately 
D) only the Lucas model explains why wages tend to be rigid even over an extended time period 
E) none of the above

Question 10

The real business cycle theory asserts that even slight changes in wages may have a significant impact on output since

Accepted Answer

A) labor supply is highly sensitive to temporary changes in wage rates 
B) even a small wage rate change will induce people to work harder if it is assumed to be permanent 
C) wages adjust only slowly, so even a small wage rate change will leave the labor market out of equilibrium for a long time 
D) smaller wage rate changes are harder to detect and therefore workers are more likely to make forecasting errors 
E) none of the above 
A) labor supply is highly sensitive to temporary changes in wage rates 
B) even a small wage rate change will induce people to work harder if it is assumed to be permanent 
C) wages adjust only slowly, so even a small wage rate change will leave the labor market out of equilibrium for a long time 
D) smaller wage rate changes are harder to detect and therefore workers are more likely to make forecasting errors 
E) none of the above

Question 11

The rational expectations equilibrium approach to macroeconomics

Accepted Answer

A) stresses the importance of market imperfections in determining the outcome of macroeconomic policies 
B) asserts that monetary policy can do little to affect output or unemployment unless it is unanticipated 
C) implies that macroeconomic policy works only when the public completely understands it 
D) ignores the microeconomic decision making process of households and firms 
E) was first developed in the 1960s but was soon discarded since most economists believed that it is unimportant to incorporate microeconomic foundations into macroeconomics 
A) stresses the importance of market imperfections in determining the outcome of macroeconomic policies 
B) asserts that monetary policy can do little to affect output or unemployment unless it is unanticipated 
C) implies that macroeconomic policy works only when the public completely understands it 
D) ignores the microeconomic decision making process of households and firms 
E) was first developed in the 1960s but was soon discarded since most economists believed that it is unimportant to incorporate microeconomic foundations into macroeconomics

Question 12

If all economic agents have rational expectations,

Accepted Answer

A) wages and prices must be perfectly flexible 
B) imperfect competition will not lead to an undesirable outcome 
C) involuntary unemployment cannot exist 
D) some small menu cost of changing prices may still exist, preventing markets from clearing rapidly 
E) none of the above 
A) wages and prices must be perfectly flexible 
B) imperfect competition will not lead to an undesirable outcome 
C) involuntary unemployment cannot exist 
D) some small menu cost of changing prices may still exist, preventing markets from clearing rapidly 
E) none of the above

Question 13

If we compare the model by Gregory Mankiw with that of Robert Lucas, we realize that

Accepted Answer

A) both assume rational expectations 
B) Mankiw assumes that firms are price takers, while Lucas assumes that firms are price setters 
C) Lucas assumes that firms are reluctant to change prices, while Mankiw assumes that firms have imperfect information about prices 
D) Lucas assumes that people have good information but make systematic forecast errors, while Mankiw assumes that people have imperfect information and therefore cannot make accurate forecasts 
E) all of the above 
A) both assume rational expectations 
B) Mankiw assumes that firms are price takers, while Lucas assumes that firms are price setters 
C) Lucas assumes that firms are reluctant to change prices, while Mankiw assumes that firms have imperfect information about prices 
D) Lucas assumes that people have good information but make systematic forecast errors, while Mankiw assumes that people have imperfect information and therefore cannot make accurate forecasts 
E) all of the above

Question 14

The random walk of GDP model asserts that

Accepted Answer

A) demand-side disturbances are not very important 
B) most important fluctuations occur randomly on the demand side 
C) there is a high elasticity of labor supply in response to temporary changes in wage rates 
D) there are many transitory and random fluctuations over the business cycle, but the economy always returns to its growth trend 
E) the performance of the economy is closely connected to stock market performance, which follows a random walk 
A) demand-side disturbances are not very important 
B) most important fluctuations occur randomly on the demand side 
C) there is a high elasticity of labor supply in response to temporary changes in wage rates 
D) there are many transitory and random fluctuations over the business cycle, but the economy always returns to its growth trend 
E) the performance of the economy is closely connected to stock market performance, which follows a random walk

Question 15

The theory of the intertemporal substitution of leisure

Accepted Answer

A) explains why people work more at some times than at others 
B) explains why unemployment is higher in a recession than in a boom 
C) states that the elasticity of labor supply in response to temporary wage rate changes is high 
D) maintains that people will substitute leisure for work when they are offered lower wages 
E) all of the above 
A) explains why people work more at some times than at others 
B) explains why unemployment is higher in a recession than in a boom 
C) states that the elasticity of labor supply in response to temporary wage rate changes is high 
D) maintains that people will substitute leisure for work when they are offered lower wages 
E) all of the above

Question 16

If we compare the frictionless neoclassical theory with the rational expectations approach, we can conclude that in both cases

Accepted Answer

A) wages and prices are assumed to be rigid 
B) there is little or no room for stabilization policy since markets are assumed to clear rapidly 
C) the AS-curve is upward sloping in the short run but vertical in the long run 
D) the effects of fiscal policy on output are permanent 
E) all of the above 
A) wages and prices are assumed to be rigid 
B) there is little or no room for stabilization policy since markets are assumed to clear rapidly 
C) the AS-curve is upward sloping in the short run but vertical in the long run 
D) the effects of fiscal policy on output are permanent 
E) all of the above

Question 17

The rational expectations equilibrium approach has influenced modern macroeconomic thinking since

Accepted Answer

A) most economists now admit that wages are completely flexible and that markets always clear rapidly 
B) evidence has shown that recessions have never been policy-induced 
C) empirical studies have proven without a doubt that monetary policy is incapable of changing real output 
D) many modern economists agree that macroeconomic models need to be developed from basic microeconomic foundations 
E) none of the above 
A) most economists now admit that wages are completely flexible and that markets always clear rapidly 
B) evidence has shown that recessions have never been policy-induced 
C) empirical studies have proven without a doubt that monetary policy is incapable of changing real output 
D) many modern economists agree that macroeconomic models need to be developed from basic microeconomic foundations 
E) none of the above

Question 18

According to the Lucas' rational expectations approach,

Accepted Answer

A) people may not always forecast accurately, but they do not make systematic errors 
B) anticipated changes in money supply have no real effect on output 
C) unanticipated changes in money supply have only a short-lived effect on output and are soon reflected in a proportional price change 
D) nominal wages are set on the basis of expected prices, and if expectations are wrong, output and employment will be affected 
E) all of the above 
A) people may not always forecast accurately, but they do not make systematic errors 
B) anticipated changes in money supply have no real effect on output 
C) unanticipated changes in money supply have only a short-lived effect on output and are soon reflected in a proportional price change 
D) nominal wages are set on the basis of expected prices, and if expectations are wrong, output and employment will be affected 
E) all of the above

Question 19

According to the rational expectations equilibrium approach

Accepted Answer

A) announced changes in money supply have no effect on nominal GDP 
B) announced changes in money supply have no effect on prices 
C) unannounced changes in money supply temporarily affect the level of output and prices 
D) announced changes in fiscal policy have no effect on prices 
E) none of the above 
A) announced changes in money supply have no effect on nominal GDP 
B) announced changes in money supply have no effect on prices 
C) unannounced changes in money supply temporarily affect the level of output and prices 
D) announced changes in fiscal policy have no effect on prices 
E) none of the above

Question 20

Assume people expect money supply to rise by 10% but the Fed allows money supply to rise only by 5%.What will be the short-run effect under the Lucas model of rational expectations?

Accepted Answer

A) output will decline and prices will increase by less than 10% 
B) output and prices will increase by more than 5% 
C) output will remain unchanged and prices will rise by 5% 
D) output will remain unchanged and prices will rise by 10% 
E) output and prices will both rise by 5% 
A) output will decline and prices will increase by less than 10% 
B) output and prices will increase by more than 5% 
C) output will remain unchanged and prices will rise by 5% 
D) output will remain unchanged and prices will rise by 10% 
E) output and prices will both rise by 5%

Exam 24: Advanced topics

The propagation mechanism

The random walk of GDP model assumes that

Dynamic stochastic general equilibrium (DSGE) models

The rational expectations approach

The real business cycle theory states that

The rational expectations equilibrium approach emphasizes

Critics of the so-called DSGE models point out that these models

The rational expectations approach assumes that

If we compare the classical model with the imperfect-information model of the aggregate supply curve by Lucas, we can conclude that

The real business cycle theory asserts that even slight changes in wages may have a significant impact on output since

The rational expectations equilibrium approach to macroeconomics

If all economic agents have rational expectations,

If we compare the model by Gregory Mankiw with that of Robert Lucas, we realize that

The random walk of GDP model asserts that

The theory of the intertemporal substitution of leisure

If we compare the frictionless neoclassical theory with the rational expectations approach, we can conclude that in both cases

The rational expectations equilibrium approach has influenced modern macroeconomic thinking since

According to the Lucas' rational expectations approach,

According to the rational expectations equilibrium approach

Assume people expect money supply to rise by 10% but the Fed allows money supply to rise only by 5%.What will be the short-run effect under the Lucas model of rational expectations?

Introduction

National income accounting

Growth and accumulation

Growth and policy

Aggregate supply and demand

Aggregate supply and the phillips curve

Unemployment

Inflation

Policy preview

Income and spending

Money, interest, and income

Monetary and fiscal policy

International linkages

Consumption and saving

Investment spending

The demand for money

The fed, money, and credit

Policy

Financial markets and asset prices

The national debt

Recession and depression

Inflation and hyperinflation

International adjustment and interdependence

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