ch 11 hw
In the Keynesian model, how does a temporary increase in government purchases affect the following? Output SR: Output LR: Real Interest rate SR: Real Interest rate LR: Consumption Expenditure: Investment Expenditure:
increase, remains unchanged, increase, increase, decrease, decrease
According to the Keynesian IS-LM model, increase tax incentives for investment Output SR: output LR: Real ir SR: real ir LR: employment SR: employment LR: Price Level SR: price level LR:
increase, unchanged, increase, increase, increase, unchanged, unchanged, increase
How is full-employment output determined in the Keynesian model with efficiency wages?
the amount of output produced by firms with employment determined by the labor demand curve at the point where the marginal product of labor equals the efficiency wage
Menu costs are, by definition
the costs of changing prices
What happens in the long run if policymakers increase government purchases appropriately?
the price level will be unchanged and employment will return to its full-employment level
What happens in the long run if policymakers increase the money supply appropriately?
the price level will be unchanged and employment will return to its full-employment level
According to the Keynesian analysis, in what two ways does an adverse supply shock reduce output?
the supply shock reduces the marginal product of labor and shifts the LM curve up and to the left
Price stickiness is:
the tendency of prices to adjust slowly to changes int eh economy
According to the Keynesian IS-LM model, a temporary beneficial supply shock, output SR: real ir SR: employment SR: price level SR:
unchanged, unchanged, decrease, unchanged
Describe three alternative responses available to policymakers when the economy is in recession.
1) make no change in macroeconomic policy, (2) increase the money supply, or (3) increase government purchases.
Suppose that the Fed has a policy of increasing the money supply when it observes that the economy is in recession. However, suppose that about six months are needed for an increase in the money supply to affect aggregate demand, which is about the same amount of time needed for firms to review and reset their prices. What effects will the Fed?s policy have on output and price stability?
A lag in the impact of policy of six months, which is about the time it takes firms to adjust prices, could cause policy to be destabilizing
In this model, how is full-employment output affected by changes in productivity (supply shocks)?
A productivity shock affects the marginal product of labor, so employment changes
Does your answer change if (a) the Fed has some ability to forecast recessions or (b) price adjustment takes longer than six months?
If the Fed could forecast recessions well, or if the Fed's policy takes effect before firms adjust prices, it could stabilize the economy by using monetary policy appropriately before a recession begins.
What does the Keynesian model predict about monetary neutrality?
In the short run, changes in the money supply will affect output and the real interest rate while in the long run, these changes will only affect the price level .
How is full-employment output affected by changes in labor supply?
Labor supply changes have no effect on the efficiency wage or employment; so they have no impact on full-employment output.
What does the Keynesian model predict about the cyclical behavior of average labor productivity?
The Keynesian theory assumes that demand shocks cause most cyclical fluctuations. This means that during expansions when employment rises, average labor productivity declines, so it is countercyclical.
How does the idea of labor hoarding help bring the prediction of the model into conformity with the business cycle facts?
The business cycle fact is that average labor productivity is mildly procyclical. If labor hoarding occurs, so that a given measured amount of employment produces less output during recessions and more output during expansions, then measured average labor productivity would be procyclical.
How does your answer depend on (a) the direct benefits of the government spending program and (b) the speed with which prices adjust in the absence of fiscal stimulus?
The more beneficial are government purchases, and the longer the free market takes to restore equilibrium, the more likely such a program is to increase economic welfare.
Classical economists argue that using fiscal policy to fight a recession doesn?t make workers better off. Suppose, however, that the Keynesian model is correct. Relative to a policy of doing nothing, does an increase in government purchases that brings the economy to full employment make workers better off?
Yes, because full employment is restored quickly, whereas if the price level must adjust, it may take a long time for full employment to be restored.
What happens in the long run if policymakers make no change in macroeconomic policy?
he price level will be lower and employment will return to its full-employment level
The efficiency wage is:
an amount that maximizes effort or efficiency per dollar of real wages.
An assumption about worker behavior behind the efficiency wage theory is that effort is ___________related to the worker compensation.
directly
What problems do supply shocks create for Keynesian stabilization policies?
policy can do nothing to affect the location of the FE line; and using expansionary policy risks worsening the already-high rate of inflation
The efficiency wage is likely to result in a _______ of labor.
surplus