Macro Exam 3 - HW6

Active stabilization policy can be rationalized in the New Keynesian model because it allows a faster return to economic efficiency. it makes it possible to obtain zero inflation. the government knows best. it counteracts the influence of unions.

it allows a faster return to economic efficiency.

Suppose real output falls in the aggregate economy. Which is correct? A real business cycle theorist thinks that there was a negative shock to total factor productivity, and that the government should therefore increase expenditures. A New Keynesian thinks that the output gap has fallen, and central bank's interest rate target should rise. You Answered none of the above. A real business cycle theorist thinks that total factor productivity has fallen, and that the government should do nothing.

A real business cycle theorist thinks that total factor productivity has fallen, and that the government should do nothing.

What fundamental problem does the New Keynesian model have, when compared to the data, according to the Real Business Cycle economists? Investment fluctuates more than consumption. Prices do not fluctuate in the right way. Aggregate output demand does not matter. The real wage moves too little.

Prices do not fluctuate in the right way.

What do we need to assume about firms in the sticky price New Keynesian model? They hire until the real wage equals the average labor productivity. They accommodate any demand at the given price. They adapt the price to current conditions. They maximize only current profits.

They accommodate any demand at the given price.

Consider two alternative worlds: (i) the world works according the real business cycle model, and the central bank acts to stabilize the price level; (ii) the world works according to the New Keynesian sticky price model, and the central bank acts to make the output gap zero. Which is correct? in either world, the central bank is irrelevant. We would prefer to live in world (i) because there are no fluctuations. We would prefer to live in world (ii) because policy can smooth fluctuations. in either world, fiscal policy is irrelevant.

We would prefer to live in world (ii) because policy can smooth fluctuations.

According to New Keynesian theory, fluctuations in the target interest rate counterfactually predict that: labor is countercyclical. average labor productivity is countercyclical. consumption is constant. output is countercyclical.

average labor productivity is countercyclical.

According to real business cycle theorists, an increase in total factor productivity could lead to an expansion because firms hire currently more labor and try to increase future capital. because firms try to increase future employment and try to increase future capital. because firms hire currently more labor and buy currently more capital. because firms buy currently more capital and try to increase future employment.

because firms hire currently more labor and try to increase future capital.

In the New Keynesian model, the central bank achieves its interest rate target through money growth targeting. by closing the output gap. by supplying the quantity of money demanded at the target interest rate. by announcing it.

by supplying the quantity of money demanded at the target interest rate.

After a persistent decrease in total factor productivity we conclude through the real business cycle model that consumption and investment are procyclical variables. consumption is procyclical and investment countercyclical. consumption and investment are countercyclical variables. consumption is countercyclical and investment procyclical.

consumption and investment are procyclical variables.

After a persistent decrease in total factor productivity in the real business cycle model consumption and investment decrease. consumption and investment increase. consumption decreases and investment increases. consumption increases and investment decreases.

consumption and investment decrease.

Fluctuations in the target interest rate in the New Keynesian model lead to all of the following except countercyclical prices. procyclical employment. procyclical consumption. procyclical real wages.

countercyclical prices.

Under monetary stabilization policy in the New Keynesian model, following a drop in output, the central bank should increase the interest rate. decrease the price level. decrease the interest rate. increase the price level.

decrease the interest rate.

Stabilization policy is policy that seeks to maximize output. get zero inflation. eradicate unemployment. eliminate fluctuations.

eliminate fluctuations.

The behavior of the Solow residual suggests that when current total factor productivity increases future total factor productivity is also likely to increase. such increases are temporary, so we can draw no conclusions about the likely behavior of future total factor productivity. future total factor productivity is likely to decrease. it becomes more difficult to predict future total factor productivity.

future total factor productivity is also likely to increase.

In the real business cycle model, a persistent increase in total factor productivity has no impact on consumption demand. increases consumption demand. decreases consumption demand. has an ambiguous effect on consumption demand.

increases consumption demand.

In the real business cycle model, a persistent increase in total factor productivity has an ambiguous effect on investment demand. increases investment demand. has no impact on investment demand. decreases investment demand.

increases investment demand.

A central bank can bring output back up to efficient level in the New Keynesian model by increasing government expenses. decreasing the money supply. increasing the money supply. decreasing government expenses.

increasing the money supply.

A classical objection to Keynesian sticky price models is that real shocks are more important than nominal shocks. it is easier for firms to change prices rather than change output. it is cheaper for firms to change capital rather than change prices. sticky price models are internally inconsistent.

it is easier for firms to change prices rather than change output.

An important critique of real business cycle theory is the belief that cyclical movements in total factor productivity may, in part, be an artifact of measurement error. lead to imperceptible changes in labor demand. rarely occur. are too small to account for the size of fluctuations in real GDP.

may, in part, be an artifact of measurement error.

In the New Keynesian model, money is neutral. money is fixed. monetary policy has a real impact. prices are countercyclical.

monetary policy has a real impact.

Under a liquidity trap in the New Keynesian model, the economy is always efficient. fiscal policy is ineffective. monetary policy is ineffective. prices cannot be sticky.

monetary policy is ineffective.

To support the argument for an active role for government in stabilizing the economy, it must be true that shocks to the economy be primarily due to aggregate supply shocks and that consumers are not rational. consumers are not rational and that not all wages and prices are flexible. not all wages and prices are flexible and that government must be able to react quickly enough. government must be able to react quickly enough and that shocks to the economy be primarily due to aggregate supply shocks.

not all wages and prices are flexible and that government must be able to react quickly enough.

A price may be sticky in the New Keynesian model because of fiscal policy. of total factor productivity shocks. of the monetary illusion. of menu costs.

of menu costs

The central bank in the New Keynesian model pursues a policy of targeting the market interest rate. fixed money supply. zero inflation. inflation between 2 and 3%.

targeting the market interest rate.

According to real business cycle theory Federal Reserve actions need to be watched closely. technology shocks have a major role in business cycles. monetary policy is driving business cycles. cash-in-advance is necessarily to explain employment fluctuations.

technology shocks have a major role in business cycles.

According to real business cycle theorists, an increase in total factor productivity could lead to an increase in the nominal money supply due to the Federal Reserve's attempts to stabilize the price level. the cyclical behavior of tax collections and attempts by the Federal Reserve to stabilize real output. the cyclical behavior of tax collections and attempts by the Federal Reserve to stabilize the price level. banking sector expansion of deposit money and the cyclical behavior of tax collections.

the Federal Reserve's attempts to stabilize the price level.

Menu costs are the cost of changing prices. the relative cost of raw materials compared to finished goods. the cost of differentiating prices for different goods. very small costs

the cost of changing prices

The output gap is the difference between initial output and final output. the difference between target output and realized output. the difference between market-clearing output and actual output. the difference between forecasted output and past output.

the difference between market-clearing output and actual output.

If prices in the New Keynesian model were perfectly flexible, then the output gap would be positive. the output gap would be negative. there would be a role for monetary policy. the equilibrium real interest rate would be the natural rate of interest.

the equilibrium real interest rate would be the natural rate of interest.

Stabilization policy is to be applied if all of the following applies except policies can be applied quickly. markets are out of equilibrium. there is no output gap. authorities have good information about the state of the economy.

there is no output gap.