Exam 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity

(a)Draw a figure,using the Keynesian IS-LM framework,of an economy in recession. (b)Now suppose the IS curve shifts up and to the right far enough that if the real interest rate is unchanged,output will increase beyond full employment.If the Fed'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 Fed can act,that the government announces a restrictive fiscal policy,shifting the IS curve down and to the left relative to its position in part (b)What is the Fed 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)?

A situation in which expansionary monetary policy has no effect on the economy is known as

According to the menu cost theory,firms will be slow in changing their prices because

-A Keynesian economy is described by the following equations. (a)Calculate the values of the real interest rate,the price level,consumption,and investment for the economy in general equilibrium. (b)Now suppose government purchases increase to 350 with no change in taxes.What will be the real interest rate,the price level,output,consumption,and investment in the short run? (c)What will be the real interest rate,the price level,output,consumption,and investment in the long run?

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?

For each of the following changes,what happens to the real interest rate and output in the long run,after the price level has adjusted to restore general equilibrium? How would the results differ,if at all,between the classical and Keynesian model? Draw a diagram for each part to illustrate your result. (a)Wealth rises. (b)Money supply rises. (c)The future marginal productivity of capital increases. (d)Expected inflation declines. (e)Future income declines.

A firm is a price taker if it

In the efficiency wage model,if the real wage is higher than the market-clearing wage so that there is an excess supply of labor,

Easy monetary policy and tight fiscal policy lead to

According to the efficiency wage model,firms will pay the real wage that

Because of price stickiness in the Keynesian model,a decline in investment demand will not cause the

Suppose the economy's production function is Y = A(300N - N2).The marginal product of labor is MPN = A(300 - 2N).Suppose that A = 10.The supply of labor is NS = 0.05w + 0.005G. (a)If G is 26,000,what are the real wage,employment,and output? (b)If G rises to 26,400,what are the real wage,employment,and output? (c)If G falls to 25,600,what are the real wage,employment,and output? (d)In cases (b)and (c),what is the government purchases multiplier; that is,what is the change in output divided by the change in government purchases?

According to the efficiency wage model,during a recession,firms will not reduce real wages because

The theory that firms will be slow to change their products' prices in response to changes in demand because there are costs to changing prices is called

In the Keynesian model in the long run,a decrease in the money supply will cause

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

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

According to Nakamura and Steinsson's research,prices are ________ sticky than Bils and Klenow found because the latter failed to account for ________.

Assuming no change in the effort curve of employees,the efficiency wage model implies that

You are the liaison between the Federal Reserve Board and the U.S.Treasury Department.Your goal is to coordinate policy efforts to achieve full-employment output in the economy while keeping a fixed real interest rate.You must recommend tightening or easing both monetary and fiscal policies to do this.What would your recommendation be in each of the following situations? (a)People decide to increase saving. (b)Expected inflation declines. (c)The future marginal productivity of capital declines. (d)There's an adverse oil price shock in which the LM curve moves farther to the left than does the FE line.