Deck 14: New Keynesian Economics: Sticky Prices

Question 1

In the Basic New Keynesian model, there are two curves

A)the output demand curve and the Phillips curve.
B)the money supply curve and the Phillips curve.
C)the output supply curve and the money demand curve.
D)the output demand curve and the labour supply curve.
E)the output supply curve and the Phillips curve.

Answer 1

A

Question 2

In practice, the Bank of Canada

A)targets inflation, but clearly cares about real economic activity too.
B)cares only about the path for the money supply.
C)has a dual mandate, just like the U.S. central bank.
D)does not target inflation.
E)targets anticipated future inflation.

Answer 2

A

Question 3

The Phillips curve was first noticed in data for

A)the United Kingdom.
B)Canada.
C)the United States.
D)Zimbabwe.
E)Russia.

Answer 3

A

Question 4

Neo-Fisherism

A)is widely accepted.
B)involves thinking about radical new models.
C)was introduced Keynes.
D)was introduced by Irving Fisher in the 1920s.
E)involves understanding how conventional macroeconomic models work.

Question 5

The Bank of Canada commenced inflation targeting in

A)1981.
B)1995.
C)1991.
D)2008.
E)1960.

Question 6

In the Basic New Keynesian model, when there is a liquidity trap, if the central bank promises higher inflation in the future, then

A)output rises and inflation falls.
B)output and inflation stay the same.
C)output rises and inflation rises.
D)output falls and inflation falls.
E)output falls and inflation rises.

Question 7

In the New Keynesian Rational Expectations model, when the nominal interest rate is constant forever

A)in the long run, the inflation rate explodes.
B)in the long run, the inflation rate equals minus the natural real rate of interest plus the nominal interest rate.
C)in the long run, the inflation rate equals the natural real rate of interest minus the nominal interest rate.
D)in the long run, the inflation rate equals minus the natural real rate of interest minus the nominal interest rate.
E)in the long run, the inflation rate equals the natural real rate of interest plus the nominal interest rate.

Question 8

The Neo-Fisherian result that increasing the nominal interest rate increases inflation is a startling one because

A)it is wrong.
B)it also holds in the Basic New Keynesian model.
C)this result is obtained in a New Keynesian model that is usually used to justify conventional central banking ideas.
D)Keynes would agree with it.
E)Steve Poloz supports Neo-Fisherism.

Question 9

The central bank loss function can be represented in a graph with output on the horizontal axis, and inflation on the vertical axis as

A)a set of circles.
B)a set of triangles.
C)a set of convex indifference curves.
D)a set of ellipses.
E)a set of straight lines.

Question 10

For the central bank, loss increases as

A)the output gap increases.
B)the Phillips curve gets steeper.
C)inflation gets closer to the inflation target.
D)the output gap decreases.
E)the output demand curve becomes less steep.

Question 11

In 1981, inflation in Canada reached

A)13%.
B)5%.
C)2%.
D)200%.
E)20%.

Question 12

In the New Keynesian Rational Expectations model with a Taylor rule, if the central bank follows the Taylor principle

A)there is one steady state.
B)there are three steady states.
C)there are many steady states.
D)there is no steady state.
E)there are two steady states.

Question 13

In the New Keynesian Rational Expectations Model, in the output demand relationship

A)the difference between current output and future output increases when the actual real interest rate increases.
B)the difference between current output and future output increases when anticipated future inflation decreases.
C)output increases when the nominal interest rate increases.
D)the difference between current output and future output increases when the natural real interest rate increases.
E)the difference between current output and future output increases when the nominal interest rate increases.

Question 14

Forward guidance, in the Basic New Keynesian model, is

A)a commitment guide the public in the future.
B)a promise concerning future inflation.
C)always a promise of no future inflation.
D)a promise about future fiscal policy.
E)a guide in the forward to the central bank statement.

Question 15

In the Basic New Keynesian model, if the central bank is initially achieving its goals, and the natural rate of interest rises, the central bank should

A)increase the nominal interest rate by the amount of the natural real interest rate increase.
B)reduce the nominal interest rate by the amount of the natural real interest rate increase.
C)reduce the nominal interest rate by less than the amount of the natural real interest rate increase.
D)do nothing.
E)increase the nominal interest rate by less than the amount of the natural real rate of interest increase.

Question 16

The following is a suggested cause of the long-term decline in real interest rates

A)secular growth.
B)low savings in China.
C)sticky prices.
D)the global investment glut.
E)an increase in financial market frictions.

Question 17

In the Basic New Keynesian Model, an unconventional policy that works in a liquidity trap is

A)a money supply increase.
B)a reduction in the real interest rate.
C)a reduction in the nominal interest rate.
D)an increase in the nominal interest rate.
E)forward guidance.

Question 18

In the Basic New Keynesian model, the Phillips curve specifies that, when the anticipated future rate of inflation increases, inflation

A)increases less than one-for-one.
B)stays the same.
C)decreases.
D)increases one-for-one.
E)increases more than one-for-one.

Question 19

Taylor's simplified 1993 rule states that

A)the zero lower bound is irrelevant.
B)the nominal interest rate increases one-for-one with the inflation rate.
C)the nominal interest rate increases less than one-for-one with the inflation rate.
D)the nominal interest rate increases one-for-one with the natural real rate of interest.
E)the nominal interest rate should not depend on the natural real rate of interest.

Question 20

In the New Keynesian Rational Expectations model, an increase in the nominal interest rate

A)has no effect on output.
B)causes output to decrease.
C)causes inflation to rise.
D)has no effect on inflation.
E)causes inflation to fall.

Question 21

In the United States, the Federal Reserve has

A)no goals.
B)the same arrangement as the Bank of Canada has with the Canadian government.
C)an inflation target of 2% mandated by Congress.
D)an inflation target, which has been in place since 1991.
E)a dual mandate.

Question 22

In the Basic New Keynesian model, if anticipated future inflation increases, the central bank should

A)reduce the nominal interest rate less than one-for-one with the decrease in the anticipated future inflation rate.
B)hold the nominal interest rate constant.
C)reduce the nominal interest rate one-for-one with the decrease in the anticipated future inflation rate.
D)increase the nominal interest rate less than one-for-one with the decrease in the anticipated future inflation rate.
E)increase the nominal interest rate one-for-one with the decrease in the anticipated future inflation rate.

Question 23

"Secular stagnation" is an idea popularized by

A)John Maynard Keynes.
B)Lawrence Summers.
C)Larry Winters.
D)Ben Bernanke.
E)Milton Berle.

Question 24

To make forward guidance work

A)the central bank must follow through on its promises.
B)it is important that the central bank surprise the public.
C)fiscal policy must support monetary policy.
D)the central bank must not follow through on its promises.
E)consumers cannot be forward-looking.

Question 25

In 2018, Venezuelan inflation approached

A)-20%.
B)13%.
C)2%.
D)80,000%.
E)10,000%.

Question 26

In the Basic New Keynesian model, a firm that cannot change its price

A)chooses output optimally.
B)produces what the government says it should.
C)must satisfy the demand for its product.
D)earns zero profits.
E)will not produce.

Question 27

The central bank's policy goals can be represented by

A)a Phillips curve.
B)the output demand curve.
C)the output supply curve.
D)a loss function.
E)a vertical line.

Question 28

Real interest rates have declined

A)only in Europe.
B)only in the United States.
C)only in Canada and the United States.
D)worldwide.
E)only in Canada.

Question 29

In the Basic New Keynesian model, a decrease in the natural rate of interest causes the following effect

A)output declines and inflation goes down.
B)output increases and inflation goes up.
C)output increases and inflation goes down.
D)nothing.
E)output declines and inflation goes up.

Question 30

In the Basic New Keynesian model, if anticipated future inflation decreases

A)output falls and inflation falls.
B)output rises and inflation rises.
C)output stays the same and inflation falls.
D)output rises and inflation falls.
E)output and inflation stay the same.

Question 31

When firms are subject to Calvo pricing

A)they can never change their prices.
B)they change their prices every other year.
C)they price their output at the Calvo lower bound.
D)they can change their prices at will.
E)when they change their prices is determined at random.

Question 32

Inflation costs do NOT arise because of

A)unexpectedly high inflation redistributing wealth from lenders to borrowers.
B)people economizing on currency holdings because of anticipated inflation.
C)unexpectedly low inflation redistributing wealth from borrowers to lenders.
D)sticky prices.
E)sticky wages.

Question 33

Rational expectations implies

A)that consumers can be systematically fooled.
B)that the central bank always foresees what the fiscal authority will do.
C)that the consumers and firms in models do the best they can in forecasting future economic variables.
D)that in models with aggregate shocks, consumers and firms always correctly forecast inflation.
E)that models in which we make this assumption are always right.

Question 34

There are costs associated with

A)unbelievable inflation.
B)uncharted inflation.
C)unrealized inflation.
D)unanticipated inflation.
E)incipient inflation.

Question 35

In the Basic New Keynesian model, the Phillips curve specifies that inflation

A)decreases when taxes increase.
B)increases when the efficient level of output increases.
C)decreases when output increases.
D)increases when the anticipated future rate of inflation decreases.
E)increases when the difference between output and efficient output increases.

Question 36

The Fisher relation states that

A)the real interest rate equals the nominal interest rate plus the anticipated future inflation rate.
B)the anticipated future inflation rate equals the nominal interest rate plus the real interest rate.
C)the real interest rate equals minus the anticipated future inflation rate plus the nominal interest rate.
D)the nominal interest rate equals the anticipated future inflation rate minus the real interest rate.
E)the nominal interest rate equals the real interest rate.

Question 37

An example of an arrangement that helps to enforce commitment by a central bank is

A)New Zealand's Policy Targets Agreement.
B)the Bank of Canada's interest rate target.
C)an independent central bank.
D)deposit insurance.
E)the lender of last resort.

Question 38

A low natural real interest rate might result in

A)a liquidity trap.
B)a secular glut.
C)a liquidity shortage.
D)a global savings shortage.
E)an investment trap.

Question 39

In the New Keynesian Rational Expectations Model, in the Phillips curve relationship

A)inflation increases more than one-for-one with anticipated future inflation.
B)inflation increases one-for-one with anticipated future inflation.
C)inflation decreases when anticipated future inflation increases.
D)inflation does not depend on anticipated future inflation.
E)inflation increases less than one-for-one with anticipated future inflation.

Question 40

Neo-Fisherians assert

A)that the central bank cannot control inflation.
B)that Irving Fisher was wrong.
C)that traditional central bankers have inflation control wrong.
D)that the New Keynesian model is wrong.
E)that Stanley Fisher is right.

Question 41

The Bank of Canada's inflation target is

A)1%.
B)3%.
C)0%.
D)2%.
E)5%.

Question 42

In the New Keynesian Rational Expectations model with a Taylor rule, if the central bank follows the Taylor principle, in the steady state in which nominal interest rate is zero

A)inflation is higher than the central bank's target.
B)inflation is greater than zero.
C)inflation is lower than the central bank's target.
D)inflation is zero.
E)the central bank hits its inflation target.

Question 43

In the New Keynesian Rational Expectations model, when the nominal interest rate is constant forever

A)there are many equilibria, but each equilibrium satisfies the Fisher relation in the long run.
B)there is one equilibrium, which does not satisfy the long-run Fisher relation.
C)there are two equilibria, both of which satisfy the long-run Fisher relation.
D)there are many equilibria, none of which satisfy the long-run Fisher relation.
E)there is one equilibrium, and it satisfies the long-run Fisher relation.

Question 44

Discuss the key ideas in Neo-Fisherism. Discuss how Neo-Fisherism departs from conventional ideas about
how central banking works, and why central bankers may have trouble accepting Neo-Fisherian ideas.

Question 45

In the New Keynesian Rational Expectations model with a Neo-Fisherian Monetary Policy Rule

A)the central bank only undershoots its inflation target in the zero lower bound steady state.
B)the central bank exceeds its inflation target forever.
C)the central bank undershoots its inflation target for, at most, one period.
D)there are two steady states.
E)the central bank undershoots its inflation target forever.

Question 46

Thomas Sargent studied hyperinflations that occurred when?

A)during the Great Depression
B)in the 1920s
C)during the Great Recession
D)during the 1970s
E)in the 19th century

Question 47

The Phillips curve had a recent resurgence in

A)Neo-Fisherian economics.
B)New Monetarist economics.
C)real business cycle theory.
D)New Sticky economics.
E)New Keynesian economics.

Question 48

The idea of a "savings glut" was put forward by

A)Steve Poloz.
B)Lawrence Summers.
C)Ben Bernanke.
D)Lawrence Bernanke.
E)Milton Friedman.