Exam 17: New Classical Macro Confronts New Keynesian Macro

Suppose a worker signs a contract containing a 7 percent nominal wage increase with inflation expected to be 5 percent. Inflation turns out to be 10 percent, but the contract also contains 50 percent COLA protection. The worker's real wage under the contract

After a drop in nominal aggregate demand, if menu costs prevent firms from reducing prices, this is considered ________ act by firms ________ a "macroeconomic externality."

Switzerland has experienced the lowest rate of price increases in the post World War II period. Consequently, Lucas would predict

The basic RBC model predicts ________ movements in the price level, which in fact occur ________ in the U.S. economy.

A positive "price surprise" will result in a

In New Keynesian analysis, firms are assumed to be

American automobile manufacturers and dealers appear to adjust the price (sticker prices plus financing charges) by periodically changing interest rates and by using rebates and surcharges as opposed to directly changing sticker prices. Assuming that they maximize their profits, this pricing approach may reflect

A variable that RBC theory is simply not interested in and seldom attempts to explain or predict is

A primary difference between the original and New Keynesian approaches is that in the original model nominal wages are ________, while for the New Keynesians nominal wages are ________.

The assumption of imperfect information is critical to

Business cycles disappear when firms

A principle difference between the original Keynesian model and the new Keynesian model is that in the new version

If the markets in the economy are characterized by rational expectations then

The "real business cycle" (RBC) model adapts the Lucas model by replacing its assumption of

Gordon argues that individual workers and firms prefer long-term contracts, but that such contracts

The natural real GDP will ________ following a rise in energy prices because

Because efficiency wage theory deals with the consequences of a change in a firm's ________ wage, if all wages were indexed to nominal aggregate demand the theory would be ________.

RBC theorists claim that adverse supply shocks can take forms other than rising raw materials prices. One such shock comes from government policy:

The "New Keynesian" macroeconomics centered on

In Figure 17-4, below, initial demand, marginal cost, and marginal revenue curves (none of them shown) caused the firm to produce the profit-maximizing quantity Y₀ at a price of P0. Now the demand and marginal cost curves have moved to those shown, with the marginal revenue curve running through point L. Figure 17-4 -If the firm in the figure above maintains its set price of P0, its profit is