Deck 17: New Classical Macro and New Keynesian Macro

Question 1

According to Gordon which of the following statements about Friedman's fooling model is accurate?

A)The demand for labor depends on the nominal wage.
B)As prices increase,firms will offer higher real wages;these higher wages will bring forth an increase in the supply curve of labor.
C)The supply curve of labor depends on the expected real wage.
D)All of the above statements are accurate.

Answer 1

All of the above statements are accurate.

Question 2

One of the major weaknesses of the original Keynesian approach to the business cycle was

A)the assumption that firms were perfectly competitive.
B)the failure to explain why wages were rigid.
C)the denial of the existence of the Pigou effect.
D)the assumption that the demand for labor depended on the real wage.

Answer 2

the failure to explain why wages were rigid.

Question 3

Which of the following is an important assumption about the labor market that is shared by both the original Keynesian model and the Friedman "Fooling Model?"

A)The supply of labor depends on expected real wages.
B)The demand for labor is a function of nominal wages.
C)Workers can be "off" their labor supply function in the short-run equilibrium.
D)Firms can be "off" their labor demand function in the short-run equilibrium.

Answer 3

Workers can be "off" their labor supply function in the short-run equilibrium.

Question 4

The actual real wage must be below the equilibrium real wage in order to encourage firms to produce at any output level above the natural rate.Once workers realize this situation,their expected price level will gradually rise and they will demand a higher nominal wage.This description of a business cycle adjustment is part of which of the following theories?

A)Classical model
B)original Keynesian model
C)Friedman fooling model
D)the RBC model

Question 5

In the fooling model,should an expansion of aggregate demand cause fooling,the actual real wage ________ while the expected real wage ________.

A)rises,rises
B)rises,remains constant
C)falls,falls
D)falls,remains constant
E)falls,rises

Question 6

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

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 7

In the "fooling" model,it is assumed that ________ can have inaccurate perceptions of the price level in the economy.

A)workers
B)firms
C)workers and firms
D)neither workers nor firms

Question 8

In the fooling model's AD/SAS/LAS diagram,short-run equilibria to the left of the LAS curve require the price level to be

A)above what workers expect.
B)above what firms expect.
C)below what workers expect.
D)below what firms expect.

Question 9

In the fooling model,suppose that from an initial AD/SAS/LAS equilibrium a sudden expansion of aggregate demand occurs.With fooling,we would find employment and the actual real wage in the labor market diagram by moving

A)"northeast" along the labor supply curve.
B)"northwest" along the labor demand curve.
C)"southeast" along the labor demand curve.
D)"southwest" along the labor supply curve.

Question 10

A principle difference between the new Classical and the new Keynesian models has to do with the choices made by business firms.We find that

A)new classical business firms choose the output level given the price level,while new Keynesian firms choose the price level given the level of output.
B)new classical business firms choose the price level given the output level,while new Keynesian firms choose the output level given the level of output.
C)both new classical and new Keynesian firms select the price level,but only new classical firms select the output level.
D)both new classical and new Keynesian firms select the output level,but only Keynesian firms select the price level.

Question 11

The "fooling" model was developed by economist

A)Milton Friedman.
B)Edward Prescott.
C)Robert Lucas,Jr.
D)John Maynard Keynes.
E)Charles Bogle.

Question 12

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

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 contraction fools them.

Question 13

In the fooling model's AD/SAS/LAS diagram,short-run equilibria to the right of the LAS curve require the price level to be

A)above what workers expect.
B)above what firms expect.
C)below what workers expect.
D)below what firms expect.

Question 14

In the fooling model,what is held constant along a SAS curve?

A)the expected price level
B)the nominal wage rate
C)the expected price level and the nominal wage rate
D)the real wage rate
E)the nominal and real wage rates

Question 15

Figure 17-1

In the Friedman "Fooling Model" if P(e)is less than P then the labor supply curve in Figure 17-1 above

A)shifts leftward when workers realize their error.
B)always shifts rightward.
C)initially remains the same.
D)Both A and C are correct.

Question 16

Which of the following assumptions is found in Friedman's model but not in the new classical model?

A)Supply of labor depends on expected real wage.
B)Workers gradually adapt their expectations of the price level to the actual price level.
C)imperfect information
D)market-clearing labor market

Question 17

The assumption of imperfect information is critical to

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 18

Figure 17-1

In the Friedman "Fooling Model" a ________ causes the labor supply curve to shift,and in Figure 17-1 above,if the initial equilibrium is at point C then,the new level of price expectations,POe is ________ than the initial level of Pe.

A)change in the money supply;less than
B)change in real wages;less than
C)change in nominal wages;greater than
D)change in price expectations;greater than

Question 19

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

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 contraction fools them.
D)what firms think is happening to real wages if an aggregate demand expansion fools them.

Question 20

Which of the following are NOT included among Gordon's criticisms of Friedman's fooling model?

A)Workers buy many goods on a weekly basis and thus could discover quite quickly that prices had risen.
B)Workers could discover movements in the aggregate price level fairly easily.
C)The model relied on a non-market-clearing explanation of the labor market.
D)Workers would predict higher prices if policies that led to higher prices in the past were used again.

Question 21

A macroeconomic model obeys the "natural rate hypothesis" by incorporating

A)the assumption of nominal wage stickiness.
B)a vertical LAS curve.
C)imperfect information.
D)a vertical AD curve.

Question 22

According to the theory of rational expectations,the "fooling" of workers in Friedman's model

A)is rational,since sudden unforeseeable changes in aggregate demand can and do occur.
B)is rational,since workers are always on their labor supply curve.
C)is not rational,since workers should learn to immediately link unexpected wage changes to wrongly-forecast price levels.
D)is not rational,since workers are often thrown off of their labor supply curve.

Question 23

Which of the following theories of business cycles implies that efficient markets,characterized by perfect information and by rational business firms and households,will still be characterized by business cycles?

A)Lucas's rational expectation model
B)the natural rate hypothesis
C)the real business cycle model
D)classical theory

Question 24

In the fooling model,real wages

A)are countercyclical.
B)are procyclical.
C)are constant.
D)show no clear cyclical pattern.

Question 25

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

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

Question 26

Economist Edward Prescott is associated with the

A)early spread of the old Keynesian approach.
B)creation of the "fooling" model.
C)creation of the first "New Classical" approach.
D)creation of the "real business cycle" model.

Question 27

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

A)demand shocks as primary generators of cycles.
B)adaptive expectations.
C)continuous market-clearing.
D)slow wage and price adjustment.

Question 28

The downfall of the fooling model is that it assumes an implausibly ________ level of perception about price on the part of ________.

A)high,firms
B)high,workers
C)low,firms
D)low,workers

Question 29

In the fooling model,AD/SAS equilibria to the right of LAS are unstable because ________ nominal wages shift ________.

A)falling,AD downward
B)falling,SAS downward
C)rising,AD upward
D)rising,SAS upward

Question 30

According to the Real Business Cycle model real wages should

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

Question 31

In the RBC model,supply shocks

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 32

Robert Lucas Jr.adapted the fooling model to his own way of thinking by replacing that model's assumption of

A)continuous market-clearing.
B)imperfect information.
C)the natural rate hypothesis.
D)the gradual correction of expectational errors.

Question 33

Which of the following best describes the policy ineffectiveness proposition?

A)Monetary policy cannot change real GDP in a regular or predictable way.
B)Policymakers can be effective in changing real GDP only if people's expectations are correct.
C)Monetary policy can change real GDP only if the Fed pursues a consistent,stable growth rate of the real money supply.
D)Fiscal policy is totally ineffective in changing real GDP in both the short run and the long run.

Question 34

In the fooling model,AD/SAS equilibria to the left of LAS are unstable because ________ nominal wages shift ________.

A)falling,AD downward
B)falling,SAS downward
C)rising,AD upward
D)rising,SAS upward

Question 35

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

A)small supply responses to variations in the inflation rate.
B)large supply responses to variations in the inflation rate.
C)small demand responses to variations in the inflation rate.
D)large demand responses to variations in the inflation rate.

Question 36

In the RBC model,actual real GDP is

A)never equal to the natural real GDP.
B)equal to the natural real GDP when P = Pe.
C)equal to the natural real GDP when P is equal to or greater than Pe.
D)always equal to the natural real GDP.

Question 37

Which of the following statements best describes the rational expectations hypothesis?

A)Individuals will not enter into long-term agreements unless they are certain about the payments they will receive.
B)It is likely that individuals will consistently make errors.
C)Individuals will make random errors,independent of previous errors.
D)It is reasonable to expect individuals to consistently underestimate the level of inflation.

Question 38

The "information barrier" that is the root cause of business cycles in the Lucas model is that

A)workers observe the prices of what they personally buy,but cannot observe the general price level.
B)workers do not know when changes in the price level mean changes in the prices of the goods they buy.
C)firms do not know when changes in the price of the good they sell matches changes in the price level and thus their marginal cost.
D)firms do not know if a change in the price level will have any effect on their marginal cost and thus their willingness to supply.

Question 39

Of the four models of the business cycle,which model's implication concerning the change in real wages during recessions is consistent with actual observed changes in real wages during recessions?

A)the Real Business Cycle theory
B)the Friedman-Phelps-Lucas Model
C)the Keynesian Model
D)None of the above.

Question 40

Which of the following is NOT a basic assumption of the "Lucas" model?

A)slow adjustment of wages and prices
B)rational expectations
C)imperfect information
D)market-clearing

Question 41

The RBC approach has workers allocating their labor effort over blocks of time,with periods of intense activity when wages are high alternating with slack periods of vacation and leisure.This makes the labor supply curve rather ________,with unemployment an entirely ________ phenomenon.

A)steep,voluntary
B)steep,involuntary
C)flat,voluntary
D)flat,involuntary

Question 42

It is reasonable to assume that in a developed economy technological shocks occur ________ across industries,which ________ the RBC theory of business cycles.

A)randomly,opposes
B)randomly,supports
C)uniformly,opposes
D)uniformly,supports

Question 43

The RBC model tells us that

A)as the real wage rate rises,the amount of labor supplied and thus output produced falls.
B)as the price level rises,the real wage rises,thus raising the amounts of labor supplied and output produced.
C)as the real interest rate rises,the amount of labor supplied and thus output produced rises.
D)as the price level rises above the expected price level,actual output rises above the natural real GDP.

Question 44

Consider an adverse supply shock in the RBC model.The central bank knows that the pre-shock level of output

A)can be maintained only by reducing the money supply.
B)can be maintained only by holding constant the money supply,
C)can be maintained only by increasing the money supply.
D)cannot be maintained by any monetary policy.

Question 45

The flaw of the Real Business Cycle model is that it

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 46

In the United States since the 1920s,there has been only one decade that appears to accord fairly well with the RBC theory of business cycles:

A)the 1930s.
B)the 1960s.
C)the 1970s.
D)the 1980s.

Question 47

RBC theory leads to ________ government macro-stabilization policy,due to the theory's assumption of ________.

A)a rationale for,slow wage and price adjustment
B)a rationale for,continuous market-clearing
C)a rejection of,slow wage and price adjustment
D)a rejection of,continuous market-clearing

Question 48

An adverse supply shock shifts the production function curve ________ and the labor demand curve ________.

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

Question 49

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

A)predictable changes cause neither the AD nor the SAS curves to shift.
B)predictable changes in monetary policy are ineffective in changing output.
C)unpredictable monetary policy is ineffective in changing prices.
D)unpredictable fiscal policy is ineffective in changing prices.

Question 50

A recent development in the RBC literature is the growing admission of the possible importance of

A)nominal variables.
B)real demand shocks.
C)favorable supply shocks.
D)changes in monetary policy.
E)technological changes.

Question 51

In the short-run,a supply shock will lead to

A)movement of prices and output in the same direction.
B)movement of prices and output in opposite directions.
C)a sustained inflation.
D)a movement in prices,but not output.

Question 52

In the RBC model,the importance of "intertemporal substitution" of labor supply is ________,which results in a rather ________ labor supply curve.

A)denied,flat
B)denied,steep
C)emphasized,flat
D)emphasized,steep

Question 53

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

A)reductions in government expenditure.
B)increases in tax rates.
C)more rigorous environmental regulation.
D)reductions in the money growth rate.

Question 54

According to the classical model,real wages should

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

Question 55

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

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

Question 56

In the RBC model,an adverse supply shock causes the decrease in natural real GDP to be minimized when the labor supply curve is

A)downward sloping and extremely flat.
B)upward-sloping and extremely flat.
C)upward-sloping and extremely steep.
D)vertical.

Question 57

The basic RBC model produces ________ movements in the real wage,which in fact are ________ in the statistical evidence.

A)countercyclical,found
B)countercyclical,not found
C)procyclical,found
D)procyclical,not found

Question 58

A positive "price surprise" will result in a

A)leftward shift in the short-run SAS curve.
B)leftward shift in the short-run AD curve.
C)rightward shift in the short-run AD curve.
D)rightward shift in the short-run SAS curve.

Question 59

In the RBC model,an adverse supply shock causes the decrease in natural real GDP to be maximized when the labor supply curve is

A)relatively steep.
B)relatively flat.
C)vertical.
D)horizontal.

Question 60

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

A)employment.
B)the real interest rate.
C)the real wage rate.
D)the price level.

Question 61

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

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

Question 62

Suppose the AD and SAS curves shift upward by the same amount.Real GDP would ________ while the price level ________.

A)remain unchanged,rises
B)remain unchanged,remains unchanged
C)remain unchanged,falls
D)rise,remain unchanged
E)fall,rises

Question 63

Figure 17-3

In Figure 17-3 above,SAS0 must shift to SAS₁ when

A)the actual price level rises.
B)the expected price level rises.
C)AD₀ shifts to AD₁.
D)the nominal money supply rises.

Question 64

What all "New Classical" models have in common is the assumption of

A)imperfect information.
B)continuous clearing of product and labor markets.
C)the primary importance of technological and supply shocks in causing business cycles.
D)downward nominal wage rigidity.
E)countercyclical real wages.

Question 65

Figure 17-3

In Figure 17-3 above,suppose we are working under the assumption of the Lucas model.The Fed has been following an announced policy of "zero money growth for an indefinite period." Suddenly and without warning it produces positive money growth and a "money surprise." This would result in a movement between points

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

Question 66

If a macroeconomic model consists of upward-sloping short-run aggregate supply and downward-sloping aggregate demand,can it possibly generate a constant real GDP with no business cycles over time?

A)No,only a vertical short-run aggregate supply curve can produce that result.
B)No,only a horizontal short-run aggregate supply curve can produce that result.
C)Yes,but the short-run aggregate supply curve must never shift.
D)Yes,if the aggregate demand and short-run aggregate supply curves shift in perfect unison.

Question 67

Which of the following theories fails to explain persistent unemployment?

A)classical theory
B)Friedman and Phelps fooling theory
C)new Keynesian theory
D)Both A and B are correct.

Question 68

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

A)rise;labor productivity increases.
B)fall;labor productivity increases.
C)fall;real wages are flexible and employment is less attractive relative to leisure.
D)B and C are both correct.

Question 69

After a shift from AD₀ to AD₁,which of the following patterns of adjustment is consistent with the Lucas model?

A)A to B to E
B)A to F to E
C)A to C to E
D)A to C to A

Question 70

After a shift from AD₀ to AD₁,which of the following patterns of adjustment is consistent with the "Price Fooling" model?

A)A to B to E
B)A to F to E
C)A to C to E
D)A to C to A

Question 71

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

A)rise;labor productivity increases.
B)fall;labor productivity declines.
C)rise;employment is more attractive relative to leisure.
D)A and C are both correct

Question 72

A supply shock,such as the OPEC oil-price increases in the 1970s,

A)can lead to accelerating inflation,if an accommodation policy tries to maintain the pre-shock level of real GDP.
B)will cause lower real wages in long-run equilibrium.
C)will reduce the natural level of real GDP.
D)both B and C

Question 73

Figure 17-3

In Figure 17-3 above,suppose we are working under assumptions of the Lucas model.With an expansionary monetary policy,the "policy ineffectiveness proposition" is shown as a movement between points

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

Question 74

An adverse supply shock with a vertical supply of labor curve will

A)raise the price level and leave unemployment unchanged.
B)raise unemployment and lower the price level.
C)raise both unemployment and the price level.
D)lower both unemployment and the price level.

Question 75

The more that firms in an economy believe that the demand for their goods is mainly influenced by "local conditions" and not the aggregate level of demand,the ________ is the SAS curve and thus the ________ are cycles in real GDP.

A)steeper,larger
B)steeper,smaller
C)flatter,larger
D)flatter,smaller

Question 76

Which of the following is NOT a reason why natural GDP might fall as a result of a supply shock?

A)The production function shifts downward.
B)There might be a voluntary decline in the supply of labor in response to the decline in real wages.
C)The supply of labor is a function of the expected wage rate.
D)none of the above

Question 77

The more that firms in an economy believe that the demand for their goods is mainly influenced by the aggregate level of demand and not "local conditions," the ________ is the SAS curve and thus the ________ are cycles in real GDP.

A)steeper,larger
B)steeper,smaller
C)flatter,larger
D)flatter,smaller

Question 78

Classical macroeconomic theory was discredited and gave way to the first Keynesian approach as a result of

A)the collapse of the gold standard at the outset of World War I.
B)the Great Depression of the 1930s.
C)the wage-price controls of World War II.
D)the rapid inflation of the late 1960s.
E)the switch from fixed to flexible exchange rates in the early 1970s.

Question 79

A supply shock that reduces labor productivity

A)causes accelerating inflation if the Fed attempts to maintain the original output level.
B)will increase real wages if nominal wages are flexible.
C)will reduce the level of output at the natural level of real GDP even if employment does not decline.
D)A and C.

Question 80

Figure 17-3

In Figure 17-3 above,suppose we are working under the assumption of the Lucas model.It is the year of the presidential election,and fiscal policy becomes more expansionary.If every firm is convinced that its price increase is being duplicated across the economy,we would picture this as a movement between points

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