Question 1

The rational expectations equilibrium approach

Accepted Answer

A) is supported by the insider-outsider model 
B) believes that markets clear very rapidly 
C) implies that deviations from full employment can be long in duration 
D) implies that unanticipated money supply changes have no real effect on output 
E) all of the above 
A) is supported by the insider-outsider model 
B) believes that markets clear very rapidly 
C) implies that deviations from full employment can be long in duration 
D) implies that unanticipated money supply changes have no real effect on output 
E) all of the above

Question 2

According to the real business cycle theory, a decrease in labor productivity will

Accepted Answer

A) increase both prices and output 
B)  decrease both prices and output 
C)  increase prices and decrease output 
D) decrease prices and increase output 
E) have no effect on prices or output 
A) increase both prices and output 
B)  decrease both prices and output 
C)  increase prices and decrease output 
D) decrease prices and increase output 
E) have no effect on prices or output

Question 3

The rational expectations equilibrium approach

Accepted Answer

A) attempts to build macroeconomic theory on microeconomic foundations 
B) was first proposed by Gregory Mankiw 
C) implies that policy changes always significantly affect output since people understand how it works 
D) assumes that disturbances caused by real shocks are long in duration since they have to work their way through different markets 
E) was developed in the 1960s, but was given little attention since most economists rejected the idea of rational expectations 
A) attempts to build macroeconomic theory on microeconomic foundations 
B) was first proposed by Gregory Mankiw 
C) implies that policy changes always significantly affect output since people understand how it works 
D) assumes that disturbances caused by real shocks are long in duration since they have to work their way through different markets 
E) was developed in the 1960s, but was given little attention since most economists rejected the idea of rational expectations

Question 4

If we compare the models of Lucas and Mankiw we realize that

Accepted Answer

A) Mankiw does not assume that people have rational expectations 
B) Lucas assumes firms are price setters while Mankiw assumes that firms are price takers 
C) Lucas assumes that prices are sticky because firms are reluctant to change them 
D) both models permit a demand-based explanation of the business cycle 
E) none of the above 
A) Mankiw does not assume that people have rational expectations 
B) Lucas assumes firms are price setters while Mankiw assumes that firms are price takers 
C) Lucas assumes that prices are sticky because firms are reluctant to change them 
D) both models permit a demand-based explanation of the business cycle 
E) none of the above

Question 5

If the central bank announces a decrease in money supply but actually leaves money supply unchanged, what will happen in the short run according to the Lucas aggregate supply model?

Accepted Answer

A) output and prices will both remain unchanged 
B) output will increase and prices will decrease 
C) output will decrease and prices will increase 
D) output and prices will both decrease 
E) output will remain unchanged but prices will decrease 
A) output and prices will both remain unchanged 
B) output will increase and prices will decrease 
C) output will decrease and prices will increase 
D) output and prices will both decrease 
E) output will remain unchanged but prices will decrease

Question 6

In a case where price expectations are rational but wages nonetheless adjust very slowly

Accepted Answer

A) only unanticipated monetary policy changes can affect output 
B) anticipated fiscal policy changes cannot affect output 
C) even anticipated monetary policy changes can affect output 
D) neither fiscal nor monetary policy can reduce unemployment 
E) even misguided government policy will not change real output 
A) only unanticipated monetary policy changes can affect output 
B) anticipated fiscal policy changes cannot affect output 
C) even anticipated monetary policy changes can affect output 
D) neither fiscal nor monetary policy can reduce unemployment 
E) even misguided government policy will not change real output

Question 7

The real business cycle theory asserts that output can vary significantly over a business cycle even if real wage rate changes are relatively small because

Accepted Answer

A) labor supply is very responsive to permanent wage rate changes 
B) people are willing to substitute leisure intertemporarily 
C) firms will adjust their output immediately by laying people off 
D) even small changes add up after a while 
E) workers spend their wage increases right away 
A) labor supply is very responsive to permanent wage rate changes 
B) people are willing to substitute leisure intertemporarily 
C) firms will adjust their output immediately by laying people off 
D) even small changes add up after a while 
E) workers spend their wage increases right away

Question 8

The real business cycle theory

Accepted Answer

A) refutes the notion that macroeconomics should be built on microeconomic foundations 
B) asserts that even though markets may clear rapidly, output can still fluctuate greatly if, for example, labor productivity changes 
C) supports the notion that changes in money supply are primarily responsible for changes in real output 
D) asserts that economic fluctuations are caused by the banking system which fails to adequately expand money supply to accommodate a boom 
E) none of the above 
A) refutes the notion that macroeconomics should be built on microeconomic foundations 
B) asserts that even though markets may clear rapidly, output can still fluctuate greatly if, for example, labor productivity changes 
C) supports the notion that changes in money supply are primarily responsible for changes in real output 
D) asserts that economic fluctuations are caused by the banking system which fails to adequately expand money supply to accommodate a boom 
E) none of the above

Question 9

The new Keynesian theories which are based on microeconomic foundations assert that

Accepted Answer

A) unanticipated fiscal policy changes cannot affect the output level in the short run 
B) anticipated monetary policy changes have no real short-run effect on output 
C) under imperfect competition individual actions of consumers or firms can lead to socially undesirable outcomes 
D) markets tend to be perfectly competitive, so firms are price takers 
E) most firms have considerable monopoly power, so they change their prices immediately after a disturbance has occurred 
A) unanticipated fiscal policy changes cannot affect the output level in the short run 
B) anticipated monetary policy changes have no real short-run effect on output 
C) under imperfect competition individual actions of consumers or firms can lead to socially undesirable outcomes 
D) markets tend to be perfectly competitive, so firms are price takers 
E) most firms have considerable monopoly power, so they change their prices immediately after a disturbance has occurred

Question 10

The random walk of GDP theory argues that if the effect of a shock to the economy is permanent, it must come from

Accepted Answer

A) an unanticipated monetary policy change 
B) a misguided fiscal policy change 
C) irrational expectations 
D) the supply side and not the demand side 
E) the demand side and not the supply side 
A) an unanticipated monetary policy change 
B) a misguided fiscal policy change 
C) irrational expectations 
D) the supply side and not the demand side 
E) the demand side and not the supply side

Question 11

Assume that people have rational expectations and wages are fixed by long-term contracts.If prices of goods can change fairly quickly, we should still expect that

Accepted Answer

A) random shocks will not significantly affect the level of output 
B)  labor markets will be in equilibrium longer than goods markets 
C) firms will not supply more output after a price increase 
D) unanticipated monetary policy changes will affect the level of real output in the short run 
E) none of the above 
A) random shocks will not significantly affect the level of output 
B)  labor markets will be in equilibrium longer than goods markets 
C) firms will not supply more output after a price increase 
D) unanticipated monetary policy changes will affect the level of real output in the short run 
E) none of the above

Question 12

According to Lucas' rational expectations approach, what will happen if the Fed announces and implements a 4% decrease in money supply?

Accepted Answer

A) output will remain unchanged but the price level will decrease by 4% in the long run 
B) both output and the price level will decrease by more than 4% in the short run and by 4% in the long run 
C) output and the price level will both decrease in the short run, but only output will change by 4% in the long run 
D) output will decrease by 4% and the price level will initially remain the same but will decrease by 4% as people change their expectations 
E) output and the price level will both immediately decrease by 4% 
A) output will remain unchanged but the price level will decrease by 4% in the long run 
B) both output and the price level will decrease by more than 4% in the short run and by 4% in the long run 
C) output and the price level will both decrease in the short run, but only output will change by 4% in the long run 
D) output will decrease by 4% and the price level will initially remain the same but will decrease by 4% as people change their expectations 
E) output and the price level will both immediately decrease by 4%

Question 13

According to the random walk of GDP model, when trying to investigate business cycles, it is very important to

Accepted Answer

A) know whether people's expectations are rational or adaptive 
B) assume that markets do not clear rapidly 
C) realize that markets are imperfectly competitive 
D) use the right trend model when trying to identify shocks 
E) know the impact of changes in stock values on the level of consumption 
A) know whether people's expectations are rational or adaptive 
B) assume that markets do not clear rapidly 
C) realize that markets are imperfectly competitive 
D) use the right trend model when trying to identify shocks 
E) know the impact of changes in stock values on the level of consumption

Question 14

Which of the following is FALSE regarding the dynamic stochastic general equilibrium models?

Accepted Answer

A) in each quarter, shocks will occur that will affect the individual equations used in the model to describe the economy 
B) decisions made by economic agents are assumed to depend on the agents' expectation about the future 
C) most equations in the models are based on linear specifications 
D) the models assume intertemporal optimization on everyone's part 
E) some central banks use these models to better understand how the economy responds to policy changes 
A) in each quarter, shocks will occur that will affect the individual equations used in the model to describe the economy 
B) decisions made by economic agents are assumed to depend on the agents' expectation about the future 
C) most equations in the models are based on linear specifications 
D) the models assume intertemporal optimization on everyone's part 
E) some central banks use these models to better understand how the economy responds to policy changes

Question 15

The rational expectations approach differs from the perfect foresight approach, since it assumes that

Accepted Answer

A) markets do not clear rapidly 
B)  people make systematic errors in their forecasts 
C) the monetary policy multiplier is always zero 
D) people may not always be right but their best guess of the forecast error is zero 
E) none of the above 
A) markets do not clear rapidly 
B)  people make systematic errors in their forecasts 
C) the monetary policy multiplier is always zero 
D) people may not always be right but their best guess of the forecast error is zero 
E) none of the above

Question 16

An important feature of the inflation-expectations augmented aggregate supply curve is that

Accepted Answer

A) unemployment cannot increase as long as inflationary expectations remain constant 
B)  output will be above the full-employment level if actual prices are below expected prices 
C) if actual prices are above expected prices, the real wage rate is too high to achieve full employment 
D) the full-employment level of output is supplied if expected prices are equal to actual prices 
E) all of the above 
A) unemployment cannot increase as long as inflationary expectations remain constant 
B)  output will be above the full-employment level if actual prices are below expected prices 
C) if actual prices are above expected prices, the real wage rate is too high to achieve full employment 
D) the full-employment level of output is supplied if expected prices are equal to actual prices 
E) all of the above

Question 17

The rational expectations model asserts that the monetary policy multiplier

Accepted Answer

A) is larger than the fiscal policy multiplier but only in the long run 
B) can be large in the short run but is zero in the long run 
C)  is zero in the short run and large in the long run 
D) can be zero if the Fed has no credibility 
E) is always zero for any unannounced policy changes 
A) is larger than the fiscal policy multiplier but only in the long run 
B) can be large in the short run but is zero in the long run 
C)  is zero in the short run and large in the long run 
D) can be zero if the Fed has no credibility 
E) is always zero for any unannounced policy changes

Question 18

The imperfect-information model of the Lucas aggregate supply curve assumes that

Accepted Answer

A) firms cannot be sure whether higher prices are caused by higher demand or simply reflect an increase in the overall price level 
B) outsiders have imperfect information and only insiders can take part in wage negotiations 
C) in an imperfectly competitive environment even small menu costs will deter firms from changing their prices 
D) even under imperfect information, firms make optimal decisions, so the full-employment level of output is always maintained 
E) all of the above 
A) firms cannot be sure whether higher prices are caused by higher demand or simply reflect an increase in the overall price level 
B) outsiders have imperfect information and only insiders can take part in wage negotiations 
C) in an imperfectly competitive environment even small menu costs will deter firms from changing their prices 
D) even under imperfect information, firms make optimal decisions, so the full-employment level of output is always maintained 
E) all of the above

Question 19

When individuals form expectations using information efficiently and without systematic errors, then they

Accepted Answer

A) can never be wrong with any of their price expectations 
B) are never surprised by unannounced money supply changes 
C) never supply more labor even if their nominal wage rate increases 
D) have adaptive expectations 
E) have rational expectations 
A) can never be wrong with any of their price expectations 
B) are never surprised by unannounced money supply changes 
C) never supply more labor even if their nominal wage rate increases 
D) have adaptive expectations 
E) have rational expectations

Question 20

In the Lucas model, monetary policy is neutral even in the short run

Accepted Answer

A) since nominal wages are completely rigid 
B) as long as monetary changes are fully anticipated 
C) since people never make forecast errors 
D) as long as real wages can adjust in proportion to money supply 
E) since the short-run AS-curve is assumed to be vertical 
A) since nominal wages are completely rigid 
B) as long as monetary changes are fully anticipated 
C) since people never make forecast errors 
D) as long as real wages can adjust in proportion to money supply 
E) since the short-run AS-curve is assumed to be vertical

Exam 24: Advanced topics

The rational expectations equilibrium approach

According to the real business cycle theory, a decrease in labor productivity will

The rational expectations equilibrium approach

If we compare the models of Lucas and Mankiw we realize that

If the central bank announces a decrease in money supply but actually leaves money supply unchanged, what will happen in the short run according to the Lucas aggregate supply model?

In a case where price expectations are rational but wages nonetheless adjust very slowly

The real business cycle theory asserts that output can vary significantly over a business cycle even if real wage rate changes are relatively small because

The real business cycle theory

The new Keynesian theories which are based on microeconomic foundations assert that

The random walk of GDP theory argues that if the effect of a shock to the economy is permanent, it must come from

Assume that people have rational expectations and wages are fixed by long-term contracts.If prices of goods can change fairly quickly, we should still expect that

According to Lucas' rational expectations approach, what will happen if the Fed announces and implements a 4% decrease in money supply?

According to the random walk of GDP model, when trying to investigate business cycles, it is very important to

Which of the following is FALSE regarding the dynamic stochastic general equilibrium models?

The rational expectations approach differs from the perfect foresight approach, since it assumes that

An important feature of the inflation-expectations augmented aggregate supply curve is that

The rational expectations model asserts that the monetary policy multiplier

The imperfect-information model of the Lucas aggregate supply curve assumes that

When individuals form expectations using information efficiently and without systematic errors, then they

In the Lucas model, monetary policy is neutral even in the short run

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

Filters