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