EC 302 ch 11
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. 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 B. A lag in the impact of policy of six months, which is less than the time it takes firms to adjust prices, could cause policy to be destabilizing C. A lag in the impact of policy of six months, which is less than the time it takes firms to adjust prices, allows policy to be stabilizing D. A lag in the impact of policy of six months, which is about the time it takes firms to adjust prices, allows policy to be stabilizing
A. 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
How is full-employment output determined in the Keynesian model with efficiency wages? A. 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 B. the amount of output produced by firms with employment determined by the labor demand curve at the point where the unemployment rate is zero C. the amount of output produced by firms with employment determined by the labor supply curve at the point where workers do not shirk D. the amount of output produced by firms with employment determined where the labor demand curve intersects the labor supply curve
A. 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
The Keynesian theory is consistent with the business cycle fact that inflation is A. procyclical and leading. B. procyclical and lagging. C. countercyclical and lagging. D. countercyclical and leading.
B. procyclical and lagging.
If firms are price setters, a small decline in the demand for their outputs will cause them to A. increase price in the short run to offset the effect on profits of a decline in output. B. reduce output in the short run, but reduce price in the long run. C. reduce price in the short run, but reduce output only in the long run. D. reduce price and reduce the level of output produced.
B. reduce output in the short run, but reduce price in the long run.
What happens in the long run if policymakers make no change in macroeconomic policy? A. the price level will be unchanged and employment will return to its full-employment level B. the price level will be lower and employment will return to its full-employment level C. the price level will be lower and employment will be lower D. the price level will be unchanged and employment will be lower
B. the price level will be lower and employment will return to its full-employment level
What happens in the long run if policymakers increase government purchases appropriately? A. the price level will be lower and employment will return to its full-employment level B. the price level will be unchanged and employment will return to its full-employment level C. the price level will be lower and employment will be lower D. the price level will be unchanged and employment will be lower
B. 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? A. the supply shock increases the marginal product of labor and shifts the LM curve up and to the left B. the supply shock reduces the marginal product of labor and shifts the LM curve up and to the left C. the supply shock reduces the marginal product of labor and shifts the LM curve down and to the right D. the supply shock increases the marginal product of labor and shifts the LM curve down and to the right
B. the supply shock reduces the marginal product of labor and shifts the LM curve up and to the left
Describe three alternative responses available to policymakers when the economy is in recession. A. (1) make no change in macroeconomic policy, (2) decrease the money supply, or (3) increase government purchases. B. (1) make no change in macroeconomic policy, (2) increase the money supply, or (3) increase government purchases. C. (1) make no change in macroeconomic policy, (2) increase the money supply, or (3) decrease government purchases. D. (1) make no change in macroeconomic policy, (2) decrease the money supply, or (3) decrease government purchases.
B. (1) make no change in macroeconomic policy, (2) increase the money supply, or (3) increase government purchases.
In the Keynesian model, the real wage is mildly procyclical because A. firms take advantage of recessions to pay slightly lower wages, since there's excess labor supply. B. workers' effort may depend on the unemployment rate and the real wage. C. demand for labor fluctuates with the demand for final goods. D. the supply of labor fluctuates with the business cycle
B. workers' effort may depend on the unemployment rate and the real wage
In this model, how is full-employment output affected by changes in productivity (supply shocks)? A. A productivity shock does not affect the marginal product of labor, so employment does not change B. A productivity shock changes the efficiency wage, since it affects work effort, so employment changes C. A productivity shock affects the marginal product of labor, so employment changes D. A productivity shock does not lead to a change in the efficiency wage, so employment does not change
C. A productivity shock affects the marginal product of labor, so employment changes
How is full-employment output affected by changes in labor supply? A. Labor supply changes affect the efficiency wage and employment; so they change full-employment output. B. Labor supply changes have no effect on the efficiency wage but they change employment; so they affect full-employment output. C. Labor supply changes have no effect on the efficiency wage or employment; so they have no impact on full-employment output. D. Labor supply changes have no effect on employment, despite changing the efficiency wage; so they have no impact on full-employment output.
C. Labor supply changes have no effect on the efficiency wage or employment; so they have no impact on full-employment output.
The efficiency wage is: A. the equilibrium wage rate determined in competitive labor markets. B. an amount that maximizes effort or efficiency per dollar of money wages. C. an amount that maximizes effort or efficiency per dollar of real wages. D. an amount equal to or just above the minimum wage.
C. an amount that maximizes effort or efficiency per dollar of real wages.
Using the Keynesian model, the effect of a decrease in the effective tax rate on capital would be to cause ________ in the real interest rate and ________ in output in the long run. A. an increase; an increase B. a decrease; no change C. an increase; no change D. no change; a decrease
C. an increase; no change
The existence of labor unions could contribute to realminuswage rigidity, except that in the United States A. unions are interested in benefits, not wages. B. labor unions are outlawed. C. most workers aren't in unions. D. unions try to increase employment rather than negotiating over wages.
C. most workers aren't in unions.
In the Keynesian model, money is A. neutral in both the short run and the long run. B. neutral in the short run, but not in the long run. C. neutral in the long run, but not in the short run. D. neutral in neither the short run nor the long run.
C. neutral in the long run, but not in the short run.
According to Keynesians, the primary reason money is not neutral is A. rational expectations. B. reverse causation. C. price stickiness. D. misperceptions over the aggregate price level.
C. price stickiness.
Keynesians believe that the difference between using an increase in the money supply compared with an increase in government spending to increase aggregate demand in the event of a recession is that if government spending is increased, _____ will be _____ than if the money supply is increased. A. real interest rate; lower B. the price level; higher C. real interest rate; higher D. the price level; lower
C. real interest rate; higher
In practice, one of the principal problems with aggregate demand management is that A. changes in aggregate demand do not affect output. B. changes in aggregate demand are highly inflationary. C. stabilization policies could increase aggregate demand too much and at the wrong times. D. changes in aggregate demand cannot reduce unemployment.
C. stabilization policies could increase aggregate demand too much and at the wrong times.
In the efficiency wage model with the efficiency wage above the market-clearing wage, when employment is at its full-employment level A. there could be either an excess demand for, or an excess supply of, labor. B. there is an excess demand for labor. C. there is an excess supply of labor. D. labor supply equals labor demand.
C. there is an excess supply of labor.
In the Keynesian model in the short run, a decrease in government purchases causes output to ________ and the real interest rate to ________. A. fall; rise B. rise; rise C. fall; fall D. rise; fall
C. fall; fall
In the Keynesian model, the difference between no intervention by the government during a recession and intervention using expansionary monetary or fiscal policy is that no intervention will return the economy to its equilibrium level of output A. faster than intervention will and at a lower price level. B. slower than intervention will and at a higher price level. C. faster than intervention will and at a higher price level. D. slower than intervention will and at a lower price level.
D. slower than intervention will and at a lower price level.
In the Keynesian model, the full-employment level of output is the amount of output produced when A. the quantity of labor demanded equals the quantity of labor supplied. B. the market wage exceeds the efficiency wage. C. the real wage exceeds the nominal wage. D. labor is paid an efficiency wage, and the real wage equals the marginal product of labor.
D. labor is paid an efficiency wage, and the real wage equals the marginal product of labor
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 A. cost-benefit theory. B. gift exchange theory. C. transactions cost theory. D. menu cost theory.
D. menu cost theory.
In the efficiency wage model, an increase in productivity will cause A. a decrease in the real wage. B. an increase in both the real wage and the level of employment. C. an increase in the real wage. D. no change in the real wage.
D. no change in the real wage.
What problems do supply shocks create for Keynesian stabilization policies? A. policy can do nothing to affect the location of the FE line; and using expansionary policy poses no danger for worsening the already-high rate of inflation. B. policy can affect the location of the FE line; and using expansionary policy poses no danger for worsening the already-high rate of inflation C. policy can affect the location of the FE line; but using expansionary policy risks worsening the already-high rate of inflation D. policy can do nothing to affect the location of the FE line; and using expansionary policy risks worsening the already-high rate of inflation
D. policy can do nothing to affect the location of the FE line; and using expansionary policy risks worsening the already-high rate of inflation
What happens in the long run if policymakers increase the money supply appropriately? A. the price level will be lower and employment will return to its full-employment level B. the price level will be lower and employment will be lower C. the price level will be unchanged and employment will be lower D. the price level will be unchanged and employment will return to its full-employment level
D. the price level will be unchanged and employment will return to its full-employment level
In the Keynesian model, short-run equilibrium occurs A. where the IS curve intersects the FE line. B. where the LM curve intersects the FE line. C. where the IS curve, LM curve, and FE lines intersect. D. where the IS and LM curves intersect.
D. where the IS and LM curves intersect.
In the long run in the Keynesian model, a beneficial supply shock would leave the economy with a higher level of output, but also a ________ real interest rate and a ________ price level. A. lower; higher B. higher; lower C. higher; higher D. lower; lower
D. lower; lower
The effort curve is A. horizontal, because work effort is independent of the real wage. B. negatively sloped, because of diminishing marginal returns to labor. C. positively sloped, because of the law of increasing cost. D. s-shaped, because a small increase in the real wage will increase work effort more at an intermediate wage than at a low wage or at a high wage.
D. s-shaped, because a small increase in the real wage will increase work effort more at an intermediate wage than at a low wage or at a high wage.
An assumption about worker behavior behind the efficiency wage theory is that effort is ___ related to the worker compensation. - directly - inversely - not
directly
