chapter 11

The use of macroeconomic policies to smooth or moderate the business cycle is known as

aggregate demand management.

According to Keynesians, the primary source of business cycle fluctuations is

aggregate demand shocks.

In the Keynesian model, the difference between using monetary and fiscal policy to eliminate a recession is that

an expansionary monetary policy will leave the economy with a lower real interest rate than an expansionary fiscal policy.

In the Keynesian model in the long run, an increase in taxes causes the price level to ________ and the real interest rate to ________.

fall; fall

In the Keynesian model in the short run, a decrease in government purchases causes output to ________ and the real interest rate to ________.

fall; fall

The cost to a firm of producing one more unit of output

is the firm's marginal cost.

Worries about the zero bound from 2002 to 2005 led the Fed to

keep the Federal funds rate below the inflation rate.

The idea that, in order to avoid the costs of hiring and training, firms in a recession retain some workers they would otherwise lay off, is called

labor hoarding.

If the menu cost theory is true, then firms that change prices less frequently than other firms are likely to be in

less competitive industries.

Easy monetary policy and tight fiscal policy lead to

low real interest rates.

Suppose the government decided to ease monetary policy and then increase taxes. In the short run in the Keynesian model, the effect of these policies would be to ________ the real interest rate and ________ the level of output

lower; have an ambiguous effect on

Suppose the government decided to ease monetary policy and then increase taxes. In the short run in the Keynesian model, the effect of these policies would be to ________ the real interest rate and ________ the level of output.

lower; have an ambiguous effect on

In the short run in the Keynesian model, a sharp increase in oil prices would leave the economy with a ________ level of output and a ________ real interest rate.

lower; higher

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.

lower; lower

In setting the price of its product, a monopolistic competitor sets the price equal to its marginal cost plus an amount called the

markup.

When the demand for an imperfect competitor's product is greater than it planned, the firm will

meet the demand at its set price.

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

menu cost theory.

In the Keynesian model, firms are best characterized as

monopolistically competitive.

In the Keynesian model, money is

neutral in the long run, but not in the short run.

In the Keynesian model in the long run, a decrease in the money supply will cause

no change in either the real interest rate or output.

In the Keynesian model in the long run, a decrease in the money supply will cause ________ in the real interest rate and ________ in the price level.

no change; a decrease

In the Keynesian model in the short run, the amount of employment is determined by the effective labor demand curve and the level of

output.

According to Keynesians, the primary reason money is not neutral is

price stickiness.

The Keynesian theory is consistent with the business cycle fact that inflation is

procyclical and lagging.

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

slower than intervention will and at a lower price level.

Because of price stickiness in the Keynesian model, a decline in investment demand will not cause the

LM curve to shift down and to the right in the short run.

A situation in which expansionary monetary policy has no effect on the economy is known as

a liquidity trap.

Recent research by Keynesians and classicals has led to

a reconciliation of the types of models they use.

According to the menu cost theory, firms will be slow in changing their prices because

the cost of changing the price might exceed the additional profit the price change would generate.

A problem with the use of aggregate demand management to stabilize the business cycle is that

the precise amount that output will change in response to monetary or fiscal policy isn't known.

In the Keynesian model in the long run, an increase in the money supply will raise

the price level but not the level of output.

The distinguishing feature that determines whether an analysis is classical or Keynesian is

the speed of price adjustment.

The 1980s were characterized by ________ monetary policy and ________ fiscal policy.

tight; easy

Bernanke suggested methods for monetary policy to deal with the lower bound, including all of the following EXCEPT

tightening monetary policy more aggressively.

In the Keynesian model, short-run equilibrium occurs

where the IS and LM curves intersect.

In the 1990s, nominal interest rates in Japan were approximately

0%.

In the Keynesian model, when the economy is not in long-run equilibrium, then the short-run equilibrium point is not on which curve?

FE

In the Keynesian model in the short run, a decrease in the money supply will cause

a decrease in output and an increase in the real interest rate.

Using the Keynesian model, the effect of an increase in the effective tax rate on capital would be to cause ________ in the real interest rate and ________ in output in the short run.

a decrease; a decrease

Using the Keynesian model, the effect of a government-imposed ceiling on interest rates paid on personal checking accounts that is lower than the current market interest rate would be to cause ________ in the real interest rate and ________ in output in the short run.

a decrease; an increase

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.

an increase; no change

Suppose the government decided to tighten monetary policy and decrease government expenditures. In the short run in the Keynesian model, the effect of these policies would be to ________ the real interest rate and ________ the level of output.

have an ambiguous effect on; decrease

A model in which individual producers act as price setters, because there are only a few sellers and the product they sell is not standardized, is called

imperfect competition.

In the Keynesian model, an increase in government purchases affects output by

increasing aggregate demand as national saving declines.