Question 1

The key difference between Keynesian and Classical economists is

Accepted Answer

A) Keynesians believe that monetary and fiscal policies are detrimental to the economy. 
B) Keynesians believe wages and prices are perfectly flexible. 
C) Keynesians favour a role for government in managing the economy. 
D) Classical economists propose a "menu cost" model. 
E) Classical economists favour a role for government in managing the economy.

Question 2

When the central bank targets the interest rate

Accepted Answer

A) the target interest rate must be changed eight times a year. 
B) the money supply is sticky. 
C) it does so by adjusting the money supply. 
D) the money supply is fixed. 
E) the money supply is reduced.

Question 3

Menu cost models

Accepted Answer

A) explain the cost of menus. 
B) are identical to real business cycle models. 
C) are models in which prices can be changed at a cost. 
D) were constructed by John Maynard Keynes. 
E) are models of the restaurant industry.

Question 4

A traditional liquidity trap is problematic for a New Keynesian policy maker because there is a

Accepted Answer

A) strong incentive to create inflation in the long run. 
B) strong incentive to create deflation in the long run. 
C) negative output gap but the interest rate target remains too low. 
D) negative output gap but the interest rate cannot go below zero. 
E) positive output gap but the interest rate cannot go below zero.

Question 5

The Keynesian transmission mechanism for monetary policy asserts that changes in the money supply

Accepted Answer

A) affect the price level, which affects the level of aggregate supply. 
B) affect the price level, which affects the IS curve. 
C) affect the price level, which affects the level of aggregate demand. 
D) affect real interest rates, which affect the level of aggregate supply. 
E) affect real interest rates, which affect the level of aggregate demand.

Question 6

An increase in the demand for investment goods causes

Accepted Answer

A) a decrease in real interest rates. 
B) an increase in real interest rates. 
C) a decrease in the real wage. 
D) a leftward shift of the output demand curve. 
E) a rightward shift of the output demand curve.

Question 7

In the real business cycle model, a persistent increase in total factor productivity

Accepted Answer

A) has no effect on the real interest rate. 
B) has a theoretically ambiguous effect on the nominal interest rate. 
C) unambiguously increases the real interest rate. 
D) unambiguously decreases the real interest rate. 
E) has a theoretically ambiguous effect on the real interest rate.

Question 8

The Keynesian view implies that there is a role for monetary and fiscal policy in stabilizing the economy in response to aggregate shocks because

Accepted Answer

A) money is neutral. 
B) business cycles have many causes. 
C) these policies are highly effective in raising total factor productivity. 
D) prices and wages are slow to clear markets. 
E) comovement of aggregate variables does not generally happen during the business cycle.

Question 9

The observed correlation between the price level and real GDP may be low because

Accepted Answer

A) the central bank acts to target the price level. 
B) consumption is procyclical. 
C) Milton Friedman has passed away. 
D) money demand does not depend on income. 
E) money demand increases when the nominal interest rate rises.

Question 10

In the New Keynesian model, an increase in the money supply

Accepted Answer

A) decreases the real interest rate, increases real aggregate output, increases the real wage rate, and decreases employment. 
B) increases the real interest rate, decreases real aggregate output, decreases the real wage rate, and increases employment. 
C) decreases the real interest rate, increases real aggregate output, decreases the real wage rate, and increases employment. 
D) decreases the real interest rate, decreases real aggregate output, decreases the real wage rate, and increases employment. 
E) decreases the real interest rate, increases real aggregate output, increases the real wage rate, and increases employment.

Question 11

In comparing the outcomes of increasing government spending to reduce Keynesian unemployment as opposed to increasing the money supply, the increase in government spending
Results in

Accepted Answer

A) higher consumption and higher output. 
B) lowers consumption and the real wage rate. 
C) lower consumption and higher output. 
D) higher consumption and lower output. 
E) lower consumption and lower output.

Question 12

An important critique of real business cycle theory is that during a recession

Accepted Answer

A) there is underutilization of labour and the real wage decreases. 
B) there is overutilization of labour and overutilization of the aggregate capital stock. 
C) there is overutilization of labour and the wage rate is constant. 
D) there is underutilization of labour and total factor productivity increases. 
E) there is underutilization of labour and underutilization of the aggregate capital stock.

Question 13

The New Keynesian model has the property that in the short run

Accepted Answer

A) money is neutral. 
B) government policy is neutral. 
C) total factor productivity is neutral. 
D) the Bank of Canada is neutral. 
E) money is not neutral.

Question 14

The advantage of government intervention when a shock hits an economy is

Accepted Answer

A) the composition of output changes. 
B) the real interest rate remains unchanged. 
C) the real interest rate rises. 
D) an efficient outcome is achieved faster. 
E) the price level rises.

Question 15

The phenomenon of underutilization of labour during a recession is called

Accepted Answer

A) investing in human capital. 
B) labour stockpiling. 
C) retraining labour. 
D) labour force stabilization. 
E) labour hoarding.

Question 16

According to the New Keynesian model, in a liquidity trap

Accepted Answer

A) neither monetary or fiscal policy is effective. 
B) monetary policy is more effective than fiscal policy. 
C) fiscal policy is more effective than monetary policy. 
D) fiscal and monetary policy are equally effective. 
E) fiscal policy has little role.

Question 17

To support the argument for an active role for government in stabilizing the economy, it must be TRUE that

Accepted Answer

A) consumers are not rational and that not all wages and prices are flexible. 
B) consumers are not rational and shocks to the economy are primarily due to aggregate demand. 
C) government must be able to react quickly enough and that shocks to the economy be primarily due to aggregate supply shocks. 
D) shocks to the economy be primarily due to aggregate supply shocks and that consumers are not rational. 
E) not all wages and prices are flexible and that government must be able to react quickly enough.

Question 18

In the real business cycle model, a persistent increase in total factor productivity

Accepted Answer

A) increases the real wage and decreases the price level. 
B) decreases the real wage and increases the price level. 
C) results in no change in the real wage and the price level. 
D) increases the real wage and increases the price level. 
E) decreases the real wage and decreases the price level.

Question 19

In the New Keynesian model, if there are shocks to government spending, and the central bank always reduces the output gap to zero

Accepted Answer

A) the model replicates the key business cycle facts. 
B) investment is procyclical. 
C) employment is countercyclical. 
D) consumption is countercyclical. 
E) the money supply is constant.

Question 20

A government policy that is consistent with real business cycle theory would be for

Accepted Answer

A) the monetary authority to expand and contract the nominal money supply in response to shocks to total factor productivity. 
B) government to smooth out tax distortions over time. 
C) government to vary its spending in response to shocks to total factor productivity. 
D) government to vary its spending and taxation decreases in response to shocks that affect the price level. 
E) government to vary its lump-sum tax collections in response to changes in total factor productivity.

Exam 13: Business Cycle Models With Flexible Prices and Wages

The key difference between Keynesian and Classical economists is

When the central bank targets the interest rate

Menu cost models

A traditional liquidity trap is problematic for a New Keynesian policy maker because there is a

The Keynesian transmission mechanism for monetary policy asserts that changes in the money supply

An increase in the demand for investment goods causes

In the real business cycle model, a persistent increase in total factor productivity

The Keynesian view implies that there is a role for monetary and fiscal policy in stabilizing the economy in response to aggregate shocks because

The observed correlation between the price level and real GDP may be low because

In the New Keynesian model, an increase in the money supply

In comparing the outcomes of increasing government spending to reduce Keynesian unemployment as opposed to increasing the money supply, the increase in government spending Results in

An important critique of real business cycle theory is that during a recession

The New Keynesian model has the property that in the short run

The advantage of government intervention when a shock hits an economy is

The phenomenon of underutilization of labour during a recession is called

According to the New Keynesian model, in a liquidity trap

To support the argument for an active role for government in stabilizing the economy, it must be TRUE that

In the real business cycle model, a persistent increase in total factor productivity

In the New Keynesian model, if there are shocks to government spending, and the central bank always reduces the output gap to zero

A government policy that is consistent with real business cycle theory would be for