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