ch 11 hw

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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


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