Exam 12: Keynesian Business Cycle Analysis: Non-Market-Clearing Macroeconomics

Suppose the government decided to ease monetary policy, then increase taxes. In the short run in the Keynesian model, the effect of these policies would be to ________ the real interest rate and ________ the level of output.

In the long run in the Keynesian model, a beneficial supply shock would leave the economy with a higher level of output, but also a ________ real interest rate and a ________ price level.

In the Keynesian model,

Consider the following short run aggregate supply equation: Y= $\hat{\mathrm{Y}}$ + b (P - P^e), where Y is the real output, $\hat{\mathrm{Y}}$ is the full employment output, P and P^e are the actual and expected price levels, respectively^. Which of the following is correct?

Describe the effects of an oil price shock in a Keynesian model; why are such supply shocks difficult to handle using macroeconomic stabilization policies?

If the menu cost theory is true, then firms that change prices less frequently than other firms are likely to be in

In the Keynesian model in the long run, an increase in the money supply will

Japan experienced a near zero, even negative, economic growth for most of the 1990s. One of the solutions suggested by the Keynesian economists to the deep Japanese recession was to use an expansionary monetary policy. Japanese government followed this advice by announcing increasing money supply and lowering the interest rates to a near zero. Unfortunately, the economy did not recover. Using the IS-LM model, explain why the expansionary monetary policy did not work in Japan? What are the alternative Keynesian solutions to the Japanese recession?

In the Keynesian model in the short run, a decrease in government purchases causes output to ________ and the real interest rate to ________.

In the Keynesian model in the long run, an increase in the money supply will cause

In the Keynesian model, the difference between using monetary and fiscal policy to eliminate a recession is that

Keynesian business cycle theory cannot account for the procyclical behaviour of

Which of the following is true about the short run effects of a contractionary monetary policy in Keynesian model?

A monopolistically competitive firm prices its product using the markup pricing formula P = 1.25MC, where MC is the marginal cost of producing an additional unit. Suppose the demand for the firm's product is given by Q = 2000 - 0.1P, so the revenue from selling Q units of the product is PQ = 2000P - 0.1P². a. If the marginal cost of producing each unit of the product is $10,000, calculate the price of the product, the quantity produced, and the firm's revenues, costs, and profits. b. Now suppose the marginal cost rises to $11,000. The firm can keep the price of the product unchanged, or it can change the product's price at a total cost of $700,000. Calculate the price, quantity, revenues, costs, and profits as in part (a) both for changing the price and leaving the price unchanged. Should the firm change the price of its product?

Keynesians explain the procyclical behaviour of average labour productivity by introducing the concept of

In the short run in the Keynesian model, an oil price shock would leave the economy with a ________ level of output and a ________ real interest rate.

You are the governor of the Central Bank of Atlantis. You believe in a Keynesian model of the economy, and your goal is to keep the economy at the full-employment level of output. How would you respond (tightening or easing policy) in each of the following cases? a. Government purchases increase. b. Corporate tax rates increase. c. Expected inflation increases. d. There's a beneficial oil price shock (and the LM curve shifts more to the right than the FE line).

In the Keynesian model, the economy can be off the FE line and the LRAS in the short run, because

Suppose the government decided to tighten monetary policy and decrease government expenditures. In the short run in the Keynesian model, the effect of these policies would be to ________ the real interest rate and ________ the level of output.

a. Draw a figure, using the Keynesian IS-LM framework, of an economy in recession. b. Now suppose the IS curve shifts to the right far enough that if the real interest rate is unchanged, output will increase beyond full employment. If the Central Bank's goal is to move output to its full-employment level, what must happen to the real interest rate? What is the effect on the price level? c. Suppose, before the Bank can act, that the government announces a restrictive fiscal policy, shifting the IS curve to the left relative to its position in part (b). What is the Bank likely to do (relative to what it would do if fiscal policy wasn't restrictive) if its goal is to target full-employment output? What happens to the real interest rate relative to what it is in part (b)?