Question 1

In the new classical model, ________.

Accepted Answer

A)  wages and prices are sticky with respect to expected changes in the price level 
B)  a rise in the expected price level results in an immediate and equal rise in wages and prices 
C)  an anticipated increase in the money supply will increase aggregate output temporarily 
D)  unanticipated policy has no effect on aggregate output and unemployment 
A)  wages and prices are sticky with respect to expected changes in the price level 
B)  a rise in the expected price level results in an immediate and equal rise in wages and prices 
C)  an anticipated increase in the money supply will increase aggregate output temporarily 
D)  unanticipated policy has no effect on aggregate output and unemployment B

Question 2

-In the new classical model in the figure above, an anticipated increase in aggregate demand that is less than expected ________.

Accepted Answer

A)  moves the economy from point 1 to point 2 to point 3 
B)  moves the economy from point 1 to point 5 to point 3 
C)  moves the economy from point 1 to point 4 to point 3 
D)  moves the economy from point 1 to point 3 
A)  moves the economy from point 1 to point 2 to point 3 
B)  moves the economy from point 1 to point 5 to point 3 
C)  moves the economy from point 1 to point 4 to point 3 
D)  moves the economy from point 1 to point 3 B

Question 3

In the new classical model, show graphically and explain how an expected monetary expansion that is less than expected reduces real output in the short run. What is the long-run result?

Accepted Answer

See figure below.
   Demand does not increase as much as expected, so aggregate supply decreases more than the increase in aggregate demand. The result in the short run is a lower aggregate output. In the long-run, AS adjusts to the actual increase in demand with higher inflation and no increase in output.

Question 4

In the new classical model, ________.

Accepted Answer

A)  all wages and prices are perfectly flexible with respect to expected changes in the price level 
B)  a fall in the expected price level results in an immediate and equal rise in wages and prices 
C)  only unanticipated policy can affect aggregate output and unemployment 
D)  A and C only 
A)  all wages and prices are perfectly flexible with respect to expected changes in the price level 
B)  a fall in the expected price level results in an immediate and equal rise in wages and prices 
C)  only unanticipated policy can affect aggregate output and unemployment 
D)  A and C only

Question 5

Explain and show graphically why continuous monetary growth is needed to generate inflation. Describe how the inflation process is generated.

Accepted Answer

Only continuous monetary growth can caus

Question 6

When nominal interest rates are above zero, the MP curve has a ________ slope because when the inflation rate increases the monetary authorities will ________ the real interest rate.

Accepted Answer

A)  negative; raise 
B)  negative; lower 
C)  positive; raise 
D)  positive; lower 
A)  negative; raise 
B)  negative; lower 
C)  positive; raise 
D)  positive; lower

Question 7

-In the new classical model in the figure above, the initial impact of an anticipated increase in aggregate demand that is less than expected ________.

Accepted Answer

A)  increases output from Yn to Y2, and the inflation rate from P1 to P2 
B)  decreases output from Yn to Y5, and increases the inflation rate from P1 to P5 
C)  decreases output from Yn to Y4, and increases the inflation rate from P1 to P4 
D)  does not change output and increases the inflation rate from P1 to P3 
A)  increases output from Yn to Y2, and the inflation rate from P1 to P2 
B)  decreases output from Yn to Y5, and increases the inflation rate from P1 to P5 
C)  decreases output from Yn to Y4, and increases the inflation rate from P1 to P4 
D)  does not change output and increases the inflation rate from P1 to P3

Question 8

Demonstrate graphically and explain the short-run and long-run effects of an anticipated monetary expansion in the new classical model.

Accepted Answer

For anticipated policies, AS s

Question 9

Demand-pull inflation can result when ________.

Accepted Answer

A)  policymakers set an unemployment target that is too high 
B)  a persistent budget deficit is financed by selling bonds to the public 
C)  a persistent budget deficit is financed by selling bonds to the central bank 
D)  workers get numerous wage increases 
A)  policymakers set an unemployment target that is too high 
B)  a persistent budget deficit is financed by selling bonds to the public 
C)  a persistent budget deficit is financed by selling bonds to the central bank 
D)  workers get numerous wage increases

Question 10

The time it takes to pass legislation to implement a particular policy is called ________.

Accepted Answer

A)  the data lag 
B)  the recognition lag 
C)  the legislative lag 
D)  the implementation lag 
E)  the effectiveness lag 
A)  the data lag 
B)  the recognition lag 
C)  the legislative lag 
D)  the implementation lag 
E)  the effectiveness lag

Question 11

In the new classical model, an anticipated increase in the money stock will cause ________.

Accepted Answer

A)  the price level and aggregate output to increase 
B)  aggregate output to increase 
C)  the price level to increase 
D)  no effect on either the price level or aggregate output 
A)  the price level and aggregate output to increase 
B)  aggregate output to increase 
C)  the price level to increase 
D)  no effect on either the price level or aggregate output

Question 12

-In the new classical model in the figure above, an unanticipated contractionary monetary policy ________.

Accepted Answer

A)  shifts the economy from point 1 to point 2 to point 3 
B)  shifts the economy from point 1 to point 4 to point 3 
C)  shifts the economy from point 1 to point 3 
D)  shifts the economy from point 3 to point 4 to point 1 
A)  shifts the economy from point 1 to point 2 to point 3 
B)  shifts the economy from point 1 to point 4 to point 3 
C)  shifts the economy from point 1 to point 3 
D)  shifts the economy from point 3 to point 4 to point 1

Question 13

Activists of the policies believe that ________.

Accepted Answer

A)  the self-correcting mechanism through wage and price adjustment is very slow 
B)  wages and prices are sticky 
C)  the government needs to pursue active policy to eliminate high unemployment when it develops 
D)  all of the above 
A)  the self-correcting mechanism through wage and price adjustment is very slow 
B)  wages and prices are sticky 
C)  the government needs to pursue active policy to eliminate high unemployment when it develops 
D)  all of the above

Question 14

In the new classical model, an unanticipated increase in the money supply will cause ________.

Accepted Answer

A)  output to increase in the short run, but not in the long run 
B)  an increase in the price level 
C)  government budget deficits to increase 
D)  A and B only 
A)  output to increase in the short run, but not in the long run 
B)  an increase in the price level 
C)  government budget deficits to increase 
D)  A and B only

Question 15

-In the new classical model in the figure above, an anticipated monetary expansion ________.

Accepted Answer

A)  increases output from Yn to Y2, and the inflation rate from P1 to P2 
B)  decreases output from Yn to Y4, and the inflation rate from P3 to P4 
C)  does not change output and increases the inflation rate from P1 to P3 
D)  does not change output and decreases the inflation rate from P3 to P1 
A)  increases output from Yn to Y2, and the inflation rate from P1 to P2 
B)  decreases output from Yn to Y4, and the inflation rate from P3 to P4 
C)  does not change output and increases the inflation rate from P1 to P3 
D)  does not change output and decreases the inflation rate from P3 to P1

Question 16

Explain why the self-correcting mechanism is on longer operational when nominal interest rates are at the zero lower bound.

Accepted Answer

The self-correcting mechanism normally w

Question 17

-In the new classical model in the figure above, the long-run effects of an anticipated increase in aggregate demand that is less than expected ________.

Accepted Answer

A)  increases output from Yn to Y2, and the inflation rate from P1 to P2 
B)  decreases output from Yn to Y5, and increases the inflation rate from P1 to P5 
C)  does not change output and increases the inflation rate from P1 to P3 
D)  does not affect the levels of real output or inflation 
A)  increases output from Yn to Y2, and the inflation rate from P1 to P2 
B)  decreases output from Yn to Y5, and increases the inflation rate from P1 to P5 
C)  does not change output and increases the inflation rate from P1 to P3 
D)  does not affect the levels of real output or inflation

Question 18

If aggregate output is below the natural rate level, nonactivists of policies would recommend that the government ________.

Accepted Answer

A)  do nothing 
B)  try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right 
C)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right 
D)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left 
A)  do nothing 
B)  try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right 
C)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right 
D)  try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left

Question 19

Why a cost-push inflation is a monetary phenomenon? Use the appropriate graph to support your answer.

Accepted Answer

Students must use a graph similar to the

Question 20

In the new classical model, an anticipated policy of a continually increasing money supply ________.

Accepted Answer

A)  causes the aggregate demand curve to shift continually to the right 
B)  causes the aggregate demand curve to shift continually to the left 
C)  is shown as a movement along the aggregate demand curve 
D)  B and C only 
A)  causes the aggregate demand curve to shift continually to the right 
B)  causes the aggregate demand curve to shift continually to the left 
C)  is shown as a movement along the aggregate demand curve 
D)  B and C only

Exam 24: Monetary Policy Theory

In the new classical model, ________.

-In the new classical model in the figure above, an anticipated increase in aggregate demand that is less than expected ________.

In the new classical model, show graphically and explain how an expected monetary expansion that is less than expected reduces real output in the short run. What is the long-run result?

In the new classical model, ________.

Explain and show graphically why continuous monetary growth is needed to generate inflation. Describe how the inflation process is generated.

When nominal interest rates are above zero, the MP curve has a ________ slope because when the inflation rate increases the monetary authorities will ________ the real interest rate.

-In the new classical model in the figure above, the initial impact of an anticipated increase in aggregate demand that is less than expected ________.

Demonstrate graphically and explain the short-run and long-run effects of an anticipated monetary expansion in the new classical model.

Demand-pull inflation can result when ________.

The time it takes to pass legislation to implement a particular policy is called ________.

In the new classical model, an anticipated increase in the money stock will cause ________.

-In the new classical model in the figure above, an unanticipated contractionary monetary policy ________.

Activists of the policies believe that ________.

In the new classical model, an unanticipated increase in the money supply will cause ________.

-In the new classical model in the figure above, an anticipated monetary expansion ________.

Explain why the self-correcting mechanism is on longer operational when nominal interest rates are at the zero lower bound.

-In the new classical model in the figure above, the long-run effects of an anticipated increase in aggregate demand that is less than expected ________.

If aggregate output is below the natural rate level, nonactivists of policies would recommend that the government ________.

Why a cost-push inflation is a monetary phenomenon? Use the appropriate graph to support your answer.

In the new classical model, an anticipated policy of a continually increasing money supply ________.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

When nominal interest rates are above zero, the MP curve has a slope because when the inflation rate increases the monetary authorities will the real interest rate.