Question 1

In the RBC model,supply shocks

Accepted Answer

A) are always favorable by definition,but come at irregular intervals. 
B) are always adverse by definition,but come at irregular intervals. 
C) alternate between favorable and adverse shocks. 
D) follow demand shocks with the opposite effect on output.

Question 2

The assumption of imperfect information is critical to

Accepted Answer

A) the old Keynesian and all New Classical approaches. 
B) all New Classical approaches. 
C) the Friedman,Phelps,and Lucas New Classical approaches. 
D) the real business cycle approach.

Question 3

Which of the following is a New Keynesian explanation of wage and price stickiness must be discounted?

Accepted Answer

A) overlapping wage contracts 
B) menu costs 
C) efficiency wages 
D) all of the above

Question 4

A favorable supply shock shifts the production function curve ________ and the labor demand curve ________.

Accepted Answer

A) upward,upward 
B) upward,downward 
C) downward,upward 
D) downward,downward

Question 5

Evidence from the United States and Japan on "multifactor productivity" shows it to be highly ________,which is ________ with the RBC theory of technological shocks and their consequences for the business cycle.

Accepted Answer

A) procyclical,consistent 
B) procyclical,inconsistent 
C) countercyclical,consistent 
D) countercyclical,inconsistent

Question 6

Gordon suggests that full indexation of production costs to nominal AD would solve the macroeconomic externality.However,individual firms would be unlikely to extend full indexation to their workers because

Accepted Answer

A) its local customers may not buy its products at the new price level. 
B) its suppliers may reside in foreign countries and are therefore,not subject to indexation. 
C) other competitor firms will not index their wages. 
D) All of the above.

Question 7

In 1989,Sears and Roebuck closed its stores and remarked every price in its stores to reflect a new "lower everyday" pricing strategy.Sears must have believed at that time that

Accepted Answer

A) the profit from extra sales were less than additional menu costs. 
B) the menu costs were less than the gain in profits from additional sales. 
C) extra liquidity was more important than menu costs. 
D) B and C.

Question 8

Information on money growth is available to the public with ________ lags,causing difficulty for the ________ of the New Classical approach.

Accepted Answer

A) long,Friedman but not Lucas version 
B) long,Lucas but not Friedman version 
C) long,Friedman and Lucas versions 
D) short,Friedman and Lucas versions 
E) short,Friedman but not Lucas version

Question 9

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

Accepted Answer

A) countercyclical,only occasionally 
B) countercyclical,most of the time 
C) procyclical,only occasionally 
D) procyclical,most of the time

Question 10

In the fooling model's labor market diagram,from an initial intersection point of the labor supply and demand curves,tracing "northeast" up the labor supply curve shows

Accepted Answer

A) what happens to real wages and employment when aggregate demand expands. 
B) what happens to real wages and employment when aggregate demand contracts. 
C) what workers think is happening to real wages if an aggregate demand expansion fools them. 
D) what firms think is happening to real wages if an aggregate demand expansion fools them.

Question 11

According to the original Keynesian model,there would be counter-cyclical movements of the real wage rate in response to changes in aggregate demand because

Accepted Answer

A) firms react to nominal wages and workers respond to real wages. 
B) firms react to real wages and workers respond to the expected real wage. 
C) firms are on their labor demand curve and workers are off their labor supply curve. 
D) firms are off their labor demand curve and workers are on their labor supply curve.

Question 12

According to the Keynesian model,real wages should

Accepted Answer

A) remain constant. 
B) fall during recessions. 
C) rise during recessions. 
D) stay the same during recessions but rise during expansions.

Question 13

One fundamental difference between New Classical and the New Keynesian macroeconomics is that the New Keynesians model firms as ________ competitive price ________.

Accepted Answer

A) perfectly,setters 
B) perfectly,takers 
C) imperfectly,setters 
D) imperfectly,takers

Question 14

Figure 17-3
 
-In Figure 17-3 above,suppose we are working under the assumption of the Lucas model.Suddenly,monetary policy becomes more expansionary and every firm believes that the higher prices bid on their product is not being enjoyed by any other firm.We would picture this as a movement between points

Accepted Answer

A) A and C. 
B) A and B. 
C) D and B. 
D) D and A. 
E) A and D.

Question 15

A central concept of New Keynesian macroeconomics is that in setting prices and wages,self-interested firms and workers are acting

Accepted Answer

A) irrationally,since their self-interest is badly damaged by the ensuing business cycles. 
B) irrationally,since this imposes business cycles on everyone not part of their arrangements. 
C) rationally,since they do not bear a fully offsetting cost of business cycles. 
D) rationally,since the total welfare loss of business cycles must be small enough to justify the price and wage setting.

Question 16

Higher consumer prices caused by external forces would boost the wage costs of firms without any commensurate increase in the nominal demand for their products if

Accepted Answer

A) long-term contracts were in force. 
B) all labor contracts were one year in duration. 
C) there were no COLAs. 
D) there were full COLA protection.

Question 17

Which explanation for persistent unemployment used by the original Keynesian model is no longer needed in the new Keynesian model?

Accepted Answer

A) shifting IS curve 
B) a fixed nominal wage 
C) aggregate supply curve is a function of the nominal wage 
D) rigid wages and prices

Question 18

The flaw of the Classical model of the business cycle is that it

Accepted Answer

A) assumes away output fluctuations. 
B) assumes complete wage rigidity. 
C) assumes unrealistic fooling of workers. 
D) requires procyclical wage movements and continuous labor market equilibrium.

Question 19

According to the Real Business Cycle model real wages should

Accepted Answer

A) remain constant. 
B) fall during recessions. 
C) rise during recessions. 
D) stay the same during recessions but rise during expansions.

Question 20

Under the assumptions of the new Keynesian model,an increase in aggregate demand will

Accepted Answer

A) increase prices and output in the short-run. 
B) lead to a decrease in unemployment and an increase in prices in the short run. 
C) lead to an increase in the nominal wage rate in the long run and a decrease in unemployment in the short run. 
D) All of the above are correct.

Exam 17: New Classical Macro and New Keynesian Macro