Deck 26: Rational Expectations Redux: Monetary Policy Implications

Question 1

During the Revolutionary War in the United States, lack of commitment to lower budget deficits led to higher inflation.

Answer 1

True

Question 2

In the new classical framework, anti-inflationary monetary policy could lead to an increase in output if the policy change was more aggressive than expected.

Answer 2

False

Question 3

To fight inflation, central banks must hold the line on AS.

Answer 3

False

Question 4

The inflationary effect of anticipated EMP is less in the new Keynesian model than in the traditional AS-AD model.

Question 5

Under rational expectations, shifts in AS take less time.

Question 6

Central bank independence is the only factor affecting the credibility of anti-inflation policy.

Question 7

Starting from the natural rate, if prices are sticky, anticipated EMP will raise equilibrium output and inflation.

Question 8

If prices (and wages) are flexible and all policy changes are anticipated, there is no distinction between the long run and the short run.

Question 9

In the new classical framework, inflation can be lowered with a credible commitment by monetary policymakers without any decrease in output.

Question 10

Compared to the standard IS-LM model, the new Keynesian model implies that policy changes move equilibrium value in the same direction but at different magnitudes.

Question 11

The short-run effect of unanticipated policy changes is the same for the traditional AS-AD, new Keynesian and new classical models.

Question 12

In the new classical framework, fiscal policy is ineffective as long as policy is anticipated.

Question 13

New Keynesians believe that anticipated policies have some short-term effects due to wage and price stickiness.

Question 14

Longer term contracts between firms and suppliers would tend to make EMP less effective.

Question 15

Unlike new Keynesian models, new classical models assume rational expectations.

Question 16

In the new Keynesian model, a credible commitment to lower inflation will cause output to rise.

Question 17

Credibility of the monetary policymaker is important according to the new Keynesian model.

Question 18

If expectations are rational, the credibility of an anti-inflation announcement reduces the resulting fall in employment.

Question 19

New Keynesian economists believe that EMP cannot increase output above the natural rate in the short run.

Question 20

New classical economists tend to favor non-activist policies.

Question 21

The new Keynesian model assumes price and wages are flexible.

Question 22

Sargent is one of a number of economists who introduced rational expectations into macroeconomic models.

Question 23

If an increase in the money supply is less than what was expected, output will rise.

Question 24

Reputation plays a role in the credibility of a central banker.

Question 25

Lucas stressed the importance of fiscal policy for stabilizing the real economy.

Question 26

Wages and prices adjustments are slow.

Question 27

In Bolivia, the creation of an independent central bank was the key factor in reducing inflation in the late 1980s.

Question 28

Unanticipated EMP has ____ effect on output in the new Keynesian model compared to the standard version.

A) a greater
B) less of an
C) the same
D) cannot be determined

Question 29

If an increase in the federal funds rate is less than what was expected, prices could rise.

Question 30

A large change in expectations can cause EMP to lead to a reduction in output if the shift in _____ is not sufficiently large.

A) IS
B) LM
C) AD
D) none of the above

Question 31

Activist policy is NOT effective according to which model?

A) standard Keynesian
B) new classical
C) new Keynesian
D) It is effective for all of them.

Question 32

A primary cause of inflation during the Revolutionary War was

A) a lack of commitment to reduce budget deficits.
B) a commitment to the gold standard.
C) the government's reputation for allowing high inflation.
D) all of the above.

Question 33

An open market sale of bonds could lead to an increase in equilibrium output if the change in the federal funds rate is less than expected.

Question 34

According to the new Keynesian model, expansionary monetary policy can be effective if it is

A) anticipated.
B) unanticipated.
C) both of the above.
D) neither of the above.

Question 35

Anticipated EMP has ____ effect on output in the new Keynesian model compared to the standard version.

A) a greater
B) less of an
C) the same
D) cannot be determined

Question 36

In the new Keynesian framework, disinflation policies are costly in terms of lowered output, since expectations are not rational.

Question 37

When a central bank announces that it will lower inflation, it is attempting to influence

A) IS.
B) AD.
C) AS.
D) money demand.

Question 38

Unanticipated monetary policy designed to reduce inflation would lead to a reduction in employment under which model?

A) standard Keynesian
B) new classical
C) new Keynesian
D) all of the above

Question 39

One danger of using monetary policy to end a recession is that

A) sticky wages will have the purchasing power eroded.
B) prices will rise and workers will demand higher wages.
C) it might not be possible for AD to shift enough.
D) none of the above.

Question 40

U.S. economy in the early 1980s gave support for the key assumptions of the new Keynesian model.

Question 41

If autonomous consumption rises more than expected, then output rises under the

A) new classical model.
B) new Keynesian model.
C) both of the above.
D) none of the above.

Question 42

Credibility of an inflation reduction policy does NOT matter in which of the following models?

A) standard Keynesian
B) new classical
C) new Keynesian
D) all of the above

Question 43

If the federal funds rates falls less than expected, then output falls under the

A) new classical model.
B) new Keynesian model.
C) both of the above.
D) none of the above.

Question 44

Assuming flexible prices, if the currency depreciates more than anticipated, then equilibrium output should _____ and the equilibrium price level should _____ in the short run.

A) rise, rise
B) rise, fall
C) fall, rise
D) fall, fall

Question 45

In the new Keynesian model, the cost of disinflation due to lower employment depends on

A) the rationality of expectations.
B) the flexibility of prices.
C) laws regarding unionization.
D) all of the above.

Question 46

If government spending rises more than anticipated, then equilibrium output should _____ and the equilibrium price level should _____ in the short run.

A) rise, rise
B) rise, fall
C) fall, rise
D) fall, fall

Question 47

In the new classical model, if the money supply falls less than expected, then the shift to the _____ by AD will be _____ than the shift to the _____ by AS in the short run.

A) left, greater, right
B) left, less, right
C) right, greater, left
D) right, less, left

Question 48

What is the major element introduced to macroeconomics models by new classical economists?

Question 49

The credibility of an anti-inflation announcement depends on

A) the independence of the central bank.
B) past behavior of the central bank.
C) government budget deficits.
D) all of the above.

Question 50

If government spending rises less than expected, then the equilibrium price level rises under the

A) new classical model.
B) new Keynesian model.
C) both of the above.
D) none of the above.

Question 51

Inflation can be reduced by

A) announcing the policy.
B) taking steps to ensure its credibility.
C) both of the above.
D) none of the above.

Question 52

The disinflation policies of the early 1980s were not costly due to

A) central bank independence.
B) sticky prices.
C) high government budget deficits.
D) all of the above.

Question 53

Unanticipated policy changes do NOT affect equilibrium output in which of the following models?

A) standard Keynesian
B) new classical
C) new Keynesian
D) Output is unaffected in all of the above.

Question 54

Anticipated policy changes have no effect on unemployment in which of the following models?

A) standard Keynesian
B) new classical
C) new Keynesian
D) all of the above

Question 55

Central bankers can increase their credibility by

A) making the banks more independent.
B) promising to lower taxes.
C) promising to fight inflation.
D) all of the above.

Question 56

Assuming flexible prices, if the federal funds rate rises more than expected, then the shift to the _____ by AD will be _____ than the shift to the _____ by AS in the short run.

A) left, greater, right
B) left, less, right
C) right, greater, left
D) right, less, left

Question 57

What are the implications about the long run under new classical assumptions?

Question 58

Assuming flexible prices, if the federal funds rate falls less than expected, then the shift to the _____ by AD will be _____ than the shift to the _____ by AS in the short run.

A) left, greater, right
B) left, less, right
C) right, greater, left
D) right, less, left

Question 59

If output was above the natural rate and the central bank raised interest rates to shift AD left so output fell back to the natural rate, the AS curve would respond by

A) shifting to the right.
B) shifting to the left.
C) not shifting at all.
D) rotating right

Question 60

If taxes rise more than expected, then the shift to the _____ by AD will be _____ than the shift to the _____ by AS in the short run.

A) left, greater, right
B) left, less, right
C) right, greater, left
D) right, less, left

Question 61

Why do new classical economists say that activist policy might be not just ineffective but mistaken?

Question 62

Show a graph of AS-AD where expansionary monetary policy that does not meet expectations leads to a reduction in output.

Question 63

At the beginning of the Reagan administration, AS shifted in spite of the Fed's commitment to lower inflation. What does this imply about the labor market and the validity of the new classical assumptions?

Question 64

Some countries use price indexation, meaning many contracts are adjusted for inflation automatically. How would full indexation of all contracts and agreements affect the effectiveness of EMP?

Question 65

Use an AS-AD graph to show difference in the short-run effect of EMP in a standard Keynesian and a new Keynesian model.

Question 66

Starting from the natural rate of output on an AS-AD diagram, show and explain how a new classical economist would recommend using monetary policy to lower the equilibrium price.

Question 67

If output starts below the natural rate, and the central bank reduces the interest rate to shift AD and raise output back to the natural rate, what is the difference in the response of AS under the new Keynesian and new Classical models?

Question 68

Explain why the new Keynesian model is less optimistic about curbing inflation.

Question 69

What is a major difference in the conduct of the Fed and the ECB that might affect their credibility as inflation fighters?