ECON 2315 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, allows policy to be stabilizing C. 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 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 Does your answer change if​ (a) the Fed has some ability to forecast recessions or​ (b) price adjustment takes longer than six​ months? A. If the Fed could forecast recessions​ well, it could stabilize the economy by using monetary policy appropriately before a recession​ begins; but if the​ Fed's policy takes effect before firms adjust​ prices, it could not stabilize the economy. B. 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. C. 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; but if the Fed could forecast recessions​ well, it still could not stabilize the economy. D. If the Fed could forecast recessions​ well, or if the​ Fed's policy takes effect before firms adjust​ prices, it still could not stabilize the economy.

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. 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.

1.) What are microeconomic​ foundations, and how do they figure into the disagreement between classical and Keynesian​ economists? A. Models that incorporate microeconomic foundations explicitly include individual​ decision-making; they have historically been associated more with classical economics. B. Models that incorporate microeconomic foundations include policy​ parameters; they have historically been associated more with classical economics. C. Models that incorporate microeconomic foundations include policy​ parameters; they have historically been associated more with Keynesian economics. D. Models that incorporate microeconomic foundations explicitly include individual​ decision-making; they have historically been associated more with Keynesian economics. ​2.) Which of the following is not a feature of Keynesian thought that classical economists have come to incorporate into their models​ recently? A. Sticky prices. B. Imperfect competition. C. Efficiency wages. D. All of the above are regularly included. ​ 3.) Which of the following describes one way in which classical and Keynesian economists continue to differ from each​ other? A. Classical economists have more faith in the​ government's ability to stabilize the business cycle. B. Keynesians tend to think that government actions reduce welfare. C. Keynesians tend to think that prices are slow to adjust. D. Classical economists tend to think that wages adjust slowly.

A. Models that incorporate microeconomic foundations explicitly include individual​ decision-making; they have historically been associated more with classical economics. C. Efficiency wages. C. Keynesians tend to think that prices are slow to adjust.

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) decrease 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) increase government purchases. What happens in the long run if policymakers make no change in macroeconomic​ policy? A. the price level will be unchanged and employment will be lower B. the price level will be lower and employment will be lower C. the price level will be lower 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 What happens in the long run if policymakers increase the money supply​ appropriately? A. the price level will be unchanged and employment will be lower B. the price level will be lower and employment will be lower C. the price level will be unchanged and employment will return to its​ full-employment level D. 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 unchanged and employment will return to its​ full-employment level B. the price level will be unchanged and employment will be lower C. the price level will be lower and employment will be lower D. the price level will be lower and employment will return to its​ full-employment level

B. (1) make no change in macroeconomic​ policy, (2) increase the money​ supply, or​ (3) increase government purchases. C. the price level will be lower and employment will return to its​ full-employment level C. the price level will be unchanged and employment will return to its​ full-employment level A. the price level will be unchanged and employment will return to its​ full-employment level

Some labor economists argue that it is useful to think of the labor market as being divided into two​ sectors: a primary​ sector, where​ ?good? (high-paying,​ long-term) jobs are​ located, and a secondary​ sector, which has​ ?bad? (low-paying,​ short-term) jobs. Suppose that the primary sector has a high marginal product of labor and that​ (because effort is costly for firms to​ monitor) firms pay an efficiency wage. The secondary sector has a low marginal product of labor and no efficiency​ wage; instead, the real wage in the secondary sector adjusts so that the quantities of labor demanded and supplied are equal in that sector. Workers are​ alike, and all would prefer to work in the primary sector.​ However, workers who​ can?t find jobs in the primary sector work in the secondary sector. What are the effects of each of the following on the real​ wage, employment, and output in both​ sectors? a. Expansionary monetary policy increases the demand for primary sector output. A. Primary​ market: increase in employment and​ output, decrease in the real wage. Secondary​ market: decrease in employment and​ output, increase in the real wage. B. Primary​ market: increase in employment and​ output, no change in the real wage. Secondary​ market: decrease in employment and​ output, increase in the real wage. C. Primary​ market: increase in employment and​ output, increase in the real wage. Secondary​ market: decrease in employment and​ output, no change in the real wage. D. Primary​ market: increase in employment and​ output, no change in the real wage. Secondary​ market: decrease in employment and​ output, no change in the real wage. b. Immigration increases the labor force. A. Primary​ market: increase in employment and​ output, no change in the real wage. Secondary​ market: increase in employment and​ output, no change in the real wage. B. Primary​ market: no change in employment and​ output, no change in the real wage. Secondary​ market: increase in employment and​ output, decrease in the real wage. C. Primary​ market: increase in employment and​ output, increase in the real wage. Secondary​ market: decrease in employment and​ output, no change in the real wage. D. Primary​ market: increase in employment and​ output, decrease in the real wage. Secondary​ market: decrease in employment and​ output, increase in the real wage. c. The effort curve changes so that a higher real wage is needed to elicit the greatest effort per dollar in the primary sector. Effort exerted at the higher real wage is the same as before the change in the effort curve. A. Primary​ market: increase in employment and​ output, no change in the real wage. Secondary​ market: increase in employment and​ output, no change in the real wage. B. Primary​ market: increase in employment and​ output, increase in the real wage. Secondary​ market: decrease in employment and​ output, no change in the real wage. C. Primary​ market: increase in employment and​ output, increase in the real wage. Secondary​ market: decrease in employment and​ output, increase in the real wage. D. Primary​ market: decrease in employment and​ output, increase in the real wage. Secondary​ market: increase in employment and​ output, decrease in the real wage. d. There is a temporary productivity improvement in the primary sector. A. Primary​ market: increase in employment and​ output, no change in the real wage. Secondary​ market: increase in employment and​ output, no change in the real wage. B. Primary​ market: increase in employment and​ output, increase in the real wage. Secondary​ market: decrease in employment and​ output, no change in the real wage. C. Primary​ market: increase in employment and​ output, no change in the real wage. Secondary​ market: decrease in employment and​ output, increase in the real wage. D. Primary​ market: increase in employment and​ output, increase in the real wage. Secondary​ market: decrease in employment and​ output, increase in the real wage. e. There is a temporary productivity improvement in the secondary sector. A. Primary​ market: no change in employment and​ output, no change in the real wage. Secondary​ market: increase in employment and​ output, increase in the real wage. B. Primary​ market: increase in employment and​ output, no change in the real wage. Secondary​ market: increase in employment and​ output, no change in the real wage. C. Primary​ market: increase in employment and​ output, increase in the real wage. Secondary​ market: increase in employment and​ output, no change in the real wage. D. Primary​ market: increase in employment and​ output, decrease in the real wage. Secondary​ market: increase in employment and​ output, increase in the real wage.

B. Primary​ market: increase in employment and​ output, no change in the real wage. Secondary​ market: decrease in employment and​ output, increase in the real wage. B. Primary​ market: no change in employment and​ output, no change in the real wage. Secondary​ market: increase in employment and​ output, decrease in the real wage. D. Primary​ market: decrease in employment and​ output, increase in the real wage. Secondary​ market: increase in employment and​ output, decrease in the real wage. C. Primary​ market: increase in employment and​ output, no change in the real wage. Secondary​ market: decrease in employment and​ output, increase in the real wage. A. Primary​ market: no change in employment and​ output, no change in the real wage. Secondary​ market: increase in employment and​ output, increase in the real wage.

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 supply curve at the point where workers do not shirk B. 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 C. the amount of output produced by firms with employment determined by the labor demand curve at the point where the unemployment rate is zero D. the amount of output produced by firms with employment determined where the labor demand curve intersects the labor supply curve 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 affects the marginal product of​ labor, so employment changes C. A productivity shock does not lead to a change in the efficiency​ wage, so employment does not change D. A productivity shock changes the efficiency​ wage, since it affects work​ effort, so employment changes How is​ full-employment output affected by changes in labor​ supply? A. Labor supply changes have no effect on the efficiency wage but they change​ employment; so they affect​ full-employment output. B. Labor supply changes have no effect on the efficiency wage or​ employment; so they have no impact on​ full-employment output. C. Labor supply changes have no effect on​ employment, despite changing the efficiency​ wage; so they have no impact on​ full-employment output. D. Labor supply changes affect the efficiency wage and​ employment; so they change​ full-employment output.

B. 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. A productivity shock affects the marginal product of​ labor, so employment changes B. 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. an amount that maximizes effort or efficiency per dollar of money wages. B. an amount equal to or just above the minimum wage. C. an amount that maximizes effort or efficiency per dollar of real wages. D. the equilibrium wage rate determined in competitive labor markets. An assumption about worker behavior behind the efficiency wage theory is that effort is directly related to the worker compensation.

C. an amount that maximizes effort or efficiency per dollar of real wages.

Menu costs​ are, by definition A. a measure of inefficiency in an inflationary market economy. B. the variety of costs​ (or prices) of different goods and services. C. the costs of changing prices. D. the costs associated with reprinting menus in the restaurant industry.

C. the costs of changing prices.

Price stickiness​ is: A. the notion that prices never change over time. B. the tendency of prices to adjust in unison with changes in GDP. C. the tendency of prices to adjust slowly to changes in the economy D. the concept that prices only​ rise, but do not​ fall, over time.

C. the tendency of prices to adjust slowly to changes in the economy

What does the Keynesian model predict about the cyclical behavior of average labor​ productivity? A. The Keynesian theory assumes that supply shocks cause most cyclical fluctuations. This means that during expansions when employment​ rises, average labor productivity​ declines, so it is countercyclical. B. The Keynesian theory assumes that supply shocks cause most cyclical fluctuations. This means that during expansions when employment​ rises, average labor productivity​ increases, so it is procyclical. C. The Keynesian theory assumes that demand shocks cause most cyclical fluctuations. This means that during expansions when employment​ rises, average labor productivity​ increases, so it is procyclical. D. 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? A. 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. B. 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 countercyclical. C. The business cycle fact is that average labor productivity is mildly countercyclical. 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. D. The business cycle fact is that average labor productivity is mildly countercyclical. 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 countercyclical.

D. 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. A. 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.

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? A. No, because full employment is restored​ quickly, but changes in the price level would do the same. B. Yes, because even though full employment is restored​ slowly, if the price level must​ adjust, full employment may never be restored. C. No, because full employment is restored as slowly as would be the case if the price level had to adjust. D. 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. 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? A. The less 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. B. The more beneficial are government​ purchases, and the shorter the free market takes to restore​ equilibrium, the more likely such a program is to increase economic welfare. C. 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. D. The less beneficial are government​ purchases, and the shorter the free market takes to restore​ equilibrium, the more likely such a program is to increase economic welfare.

D. 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. C. 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.

1.) The Application is about Henry Ford and the Ford Motor Company and A. how unions can increase wages for workers. B. the efficiency gains that can result from having workers each specialize in a small part of the production process. C. how an increase in the price of a complement can decrease demand for a good. D. how an increase in wages can be good for profitability. ​2.) Which of the following is true about the results of​ Ford's $5​ day? A. Wages​ decreased, productivity​ decreased, and profitability decreased. B. Wages​ increased, productivity​ increased, and profitability increased. C. Wages​ increased, productivity​ decreased, and profitability decreased. D. Wages​ increased, productivity​ decreased, and profitability increased. ​ 3.) Which of the following was an observed effect of​ Ford's "efficiency​ wage?" A. Increased productivity. B. Increased worker slowdowns. C. Increased absenteeism. D. All of the above.

D. how an increase in wages can be good for profitability. B. Wages​ increased, productivity​ increased, and profitability increased. A. Increased productivity.

Menu costs​ are, by definition A. a measure of inefficiency in an inflationary market economy. B. the costs associated with reprinting menus in the restaurant industry. C. the variety of costs​ (or prices) of different goods and services. D. the costs of changing prices.

D. the costs of changing prices.

According to the Keynesian​ analysis, in what two ways does an adverse supply shock reduce​ output? A. the supply shock reduces the marginal product of labor and shifts the LM curve down and to the right B. the supply shock increases the marginal product of labor and shifts the LM curve down and to the right C. the supply shock increases the marginal product of labor and shifts the LM curve up and to the left D. the supply shock reduces the marginal product of labor and shifts the LM curve up and to the left 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 risks 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 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. D. policy can affect the location of the FE​ line; but using expansionary policy risks worsening the​ already-high rate of inflation

D. the supply shock reduces the marginal product of labor and shifts the LM curve up and to the left A. policy can do nothing to affect the location of the FE​ line; and using expansionary policy risks worsening the​ already-high rate of inflation

Price stickiness​ is: A. the notion that prices never change over time. B. the concept that prices only​ rise, but do not​ fall, over time. C. the tendency of prices to adjust in unison with changes in GDP. D. the tendency of prices to adjust slowly to changes in the economy

D. the tendency of prices to adjust slowly to changes in the economy