Question 1

Suppose that an economy were initially producing at potential and perfectly balanced inflation were then to proceed for a year without effecting relative prices. In that case, the information-based theory predicts
A) a positive correlation between the actual/potential GDP gap and prices.
B) a negative correlation between the actual/potential GDP gap and prices.
C) absolutely no gap between actual and potential GDP by year's end.
D) nothing at all because its assumption of altered relative prices is moot.
E) that monetary policy would be much stronger than fiscal policy in moving actual GDP toward potential GDP in the short run.

Accepted Answer

C) absolutely no gap between actual and potential GDP by year's end.

Question 2

According to standard micro theory, a firm produces up to the point where
A) price equals the markup over marginal cost.
B) marginal revenue equals marginal cost.
C) price is less than marginal cost by an amount equal to the return to capital.
D) price exceeds marginal cost by an amount equal to the return to capital.
E) none of the above.

Accepted Answer

In standard microeconomic theory, a firm maximizes profit by producing up to the point where marginal revenue (MR) equals marginal cost (MC). This principle is fundamental to understanding how firms decide on the quantity of output to produce.

Question 3

Let aggregate demand rise in a world characterized by a Lucas aggregate supply curve where price level changes are accurately perceived. In that case, you expect to see
A) a large change in GDP coupled with a small increase in prices.
B) a large change in GDP coupled with a small reduction in prices.
C) a small change in GDP coupled with a large increase in prices.
D) a small change in GDP coupled with a small reduction in prices.
E) a small change in GDP coupled with a large reduction in prices.

Accepted Answer

In a Lucas aggregate supply curve, if price level changes are accurately perceived, an increase in aggregate demand will primarily lead to a rise in prices rather than output, resulting in a small change in GDP and a large increase in prices.

Question 4

^{Let the supply schedule for a firm be}^Yi ^{= 15}^Pi ^-^P^e⁾^{+ 7, where the best} guess of the expected price P^eis related to the forecast price P^{^}according to^P^e⁼^P^{^}^{+ 0.7}^Pi ^-^{P^}⁾^{. If there are 200 firms and the forecast price matches}^the Actual price, then output must equal A) 7. B) 15. C) 700. D) 1,400. E) 2,000.

Accepted Answer

Given that the forecast price matches the actual price, the expected price $P_e$ is equal to the actual price $P$. The supply function simplifies to $S = 15P + 7$. With 200 firms, total output is $200 \times (15P + 7)$. If $P = P^ = P_e$, the term $15P + 7$ is constant for all firms, implying that the output is directly proportional to the number of firms. Since the specific output per firm isn't given directly, but we know it scales with the number of firms, and the choices provided are numbers, we infer the calculation involves multiplying the per firm output by the number of firms. Given the information does not directly lead to a specific numerical answer without knowing $P$, but the logic of scaling by the number of firms suggests looking for an answer that reflects an aggregate outcome. The correct choice must be inferred based on the structure of the question rather than a direct calculation from the given formula. The mention of 200 firms hints at a larger total output, making 1,400 a plausible aggregate output if we were to assume a specific value for $P$ that aligns with the choices given. This explanation is based on interpreting the question's structure and the logical implications of the supply function and the number of firms, rather than a straightforward calculation from the provided information.

Question 5

Let aggregate demand fall in a world characterized by a Lucas aggregate supply curve where price level changes are accurately perceived. You, in that case, expect
A) a large change in GDP coupled with a small increase in prices.
B) a large change in GDP coupled with a small reduction in prices.
C) a small change in GDP coupled with a large increase in prices.
D) a small change in GDP coupled with a small reduction in prices.
E) a small change in GDP coupled with a large reduction in prices.

Accepted Answer

The answer of Let aggregate demand fall in a world...

Question 6

Let the Fed announce a 3.3 percent increase in the money supply after a period of economic stability at Y* = $5,000 and some price index
P = 100. Which of the following is a possible result, assuming a usual, Lucas-type supply curve?
A) GDP climbing to $5,167 with P = 100
B) GDP staying at $5,000 with P = 100
C) GDP staying at $5,000 with P climbing to 103.3
D) GDP climbing to $5,167 with P climbing as well to 103.3
E) none of the above

Accepted Answer

The answer of Let the Fed announce a 3.3 percent...

Question 7

The tendency for the principle of money neutrality not to hold in the short
A) David Hume.
B) John Maynard Keynes.
C) Milton Friedman.
D) Robert Lucas.
E) none, all of the above were interested in this issue.

Accepted Answer

All of the economists listed have contributed to discussions or theories where the principle of money neutrality does not hold in the short run, indicating their interest in the issue. David Hume and John Maynard Keynes explicitly discussed the non-neutrality of money in the short term. Milton Friedman, while often associated with the idea that money is neutral in the long run, acknowledged short-run fluctuations. Robert Lucas, through his work on rational expectations, also contributed to understanding how monetary policy can have real effects in the short run.

Question 8

^{Let price expectations be represented by}^P^e⁼^P^{^}⁺^b^Pi ^-^P^{^}⁾^{, with}^P^e Representing firms' expected general price indicators, representing some General forecast of overall prices, and P_i _r^{epresenting firms'own prices. If}the firms' own prices were thought to have no effect on general prices, then A) b < 0. B) b = 0. C) b > 0.5. D) b = 1. E) b > 1.

Accepted Answer

The answer of ^{Let price expectations be represented by}^P^e^...

Question 9

Let the supply schedule for a single firm be Yi = 15Pi - Pe) + 7 and the best
^ guess for the expected price level Pe be related to the forecasted price P according to Pe = P^ + 0.7Pi - P^). If 200 firms are in the industry, which of
the following is the Lucas supply schedule?
A) Yi = 4.5Pi - P ) + 7
B)  Yi= 4.5Pi  - P^) + 700
C)  Y = 900P - P^) + 700
D) Yi = 900P - P^) + 1,400
E) Yi= 900P - P^) + 1,400

Accepted Answer

The answer of Let the supply schedule for a single...

Question 10

Which of the following is an assumption of the information-based model of supply developed by Lucas?
A) Prices and wages are assumed to be flexible.
B) People are not fully informed about what is going on in the economy.
C) A positive correlation between supply price and quantity is assumed for firms' individual supply curves.
D) All of the above are accurate.
E) None of the above is accurate.

Accepted Answer

The information-based model of supply developed by Lucas assumes that prices and wages are flexible (A), people are not fully informed about what is going on in the economy (B), and there is a positive correlation between supply price and quantity for firms' individual supply curves (C). These assumptions are fundamental to understanding how information or the lack thereof affects economic decisions and market outcomes in the model.

Question 11

Two classes of explanations, imperfect information and sticky prices or nominal wage contracts, have been advanced to explain the phenomenon we call price rigidity. Which of the following statements regarding price rigidity is not correct?
A) Both are necessary for a complete understanding of price rigidity.
B) Price rigidity determines, to a large extent, the efficacy of monetary policy.
C) Microeconomic underpinnings such as these help clarify the effects of monetary policy.
D) Macroeconomists disagree about the relevance of price rigidity to effective monetary policy.
E) All of the above statements are correct.

Accepted Answer

Macroeconomists generally agree that price rigidity is relevant to effective monetary policy.

Question 12

Given an increase in the price of the product of some arbitrarily selected firm, you would expect to see that firm
A) increase output regardless of other economic indicators.
B) increase output in most instances depending on economic circumstances that cannot be defined.
C) increase output if its own price increases faster than the general price level including imports.
D) reduce output regardless of other economic indicators.
E) reduce output if its own price increases faster than the general price level excluding imports.

Accepted Answer

The answer of Given an increase in the price of...

Question 13

If the price of a firm's product rose faster than the overall pace of inflation, then you would expect to see that firm's output
A) increase.
B) decrease.
C) remain unchanged.
D) move steadily in a direction dictated by circumstances not described in this question.
E) move erratically around a predetermined target whose specification would be unaffected by general inflation.

Accepted Answer

If the firm's product price rises faster than inflation, the firm's product becomes relatively more expensive compared to others, potentially increasing its profitability and incentivizing the firm to increase output to capitalize on higher prices.

Question 14

Let all prices increase at an annual rate of 10 percent. Suppose, however, that it takes each firm six months to find out that any price but its own has changed. Lucas would expect firms in this environment, in the short run at least, to produce
A) more than they would if they could observe other price adjustments more promptly.
B) less than they would if they could observe other price adjustments more promptly.
C) just as much as they would if they could observe other price adjustments more promptly.
D) just as much as they would if they could observe other price adjustments more promptly only if monetary policy were unaffected.
E) none of the above.

Accepted Answer

Firms may perceive the increase in their own prices as an increase in demand for their products, leading them to produce more in the short run until they realize that all prices have increased.

Question 15

^{Given the Lucas formulation of supply}^Yi ⁼^h^[^Pi ^-^P^{] +}^Yi^,^where^Yi A) positive because prices are sticky going down. B) negative because the lack of pricing information is positively correlated with output. C) positive because, when the relative price of their product rises, firms increase their output. D) negative because firms' implicit demand curves are assumed to be negatively sloped. E) none of the above.

Accepted Answer

The Lucas supply function implies that output increases when the relative price of a firm's product increases, as firms are more willing to produce more when they can sell their products at higher prices relative to others. This is a basic principle of supply in economics, where higher prices lead to an increase in the quantity supplied, assuming other factors remain constant.

Question 16

The neoclassical models of macroeconomics
A) replace the flexible price assumption with an assumption of automatic price adjustments.
B) keep the flexible price assumption but incorporate informational difficulties into the representation of their adjustment.
C) keep the flexible price assumption but incorporate a measure of price inertia exerted from the foreign sector.
D) keep the flexible price assumption but modify the model of the money market to incorporate disequilibrium dynamics.
E) none of the above.

Accepted Answer

Neoclassical models of macroeconomics maintain the flexible price assumption but incorporate informational difficulties into the representation of their adjustment, acknowledging that prices do not adjust instantly due to imperfect information among other factors.

Question 17

Let a firm, under normal circumstances, produce 100,000 units of some good Y. If the price of Y were to increase at a rate that matched the overall inflation of 10 percent, then the Lucas model would predict that the firm would produce
A) less than 100,000 units.
B) more than 100,000 units.
C) exactly 100,000 units.
D) more or less than 100,000 units depending on the real rate of interest.
E) more or less than 100,000 units depending on unspecified economic conditions.

Accepted Answer

The Lucas model suggests that if the price increase matches the overall inflation rate, the firm would not change its production level, as the real price remains unchanged.

Question 18

^{Let price expectations be represented by}^P^e⁼^P^{^}⁺^b^Pi ^-^P^{^}⁾^{, with}^P^e representing firms' expected general price indicators, representing some^general^forecast^of^future^prices,^and^Pi ^representing^the^firms'^own^prices.^If^b1 ^{were the}^b^{coefficient for some large firm in a primary industry like steel and}^b2 ^{were the}^b^coeff^{icient for a small firm in an unimportant, endproduct} industry, then you would expect that A) ^b1 ^>^b2^. B) ^b1 ^<^b2^. C) ^b1 ⁼^b2^. D) any of the above could hold depending on the foreign trade significance of the two industries. E) any of the above could hold depending on unspecified economic circumstance.

Accepted Answer

The larger firm in the primary industry is more likely to be affected by general price changes, so its price expectations will be more closely tied to the general forecast of future prices.

Question 19

Under the assumptions of a Lucas supply curve,
A) firms do not respond significantly to changes in their own relative prices.
B) firms generally respond significantly to changes in their own relative prices.
C) firms generally respond significantly to changes in aggregate prices.
D) firms generally ignore changes in aggregate prices.
E) none of the above.

Accepted Answer

Under the assumptions of a Lucas supply curve, firms generally respond significantly to changes in their own relative prices. This is because they interpret these changes as relative price changes rather than changes in the overall price level, leading to adjustments in their supply.

Question 20

Let the usual price expectations relationship hold so that it can be^represented^{mathematically}^by^P^e⁼^P^{^}⁺^b^Pi ^-^P^{^}⁾^.^As^the^coefficient^b^gets Larger, the Lucas supply curve A) must get steeper. B) must get flatter. C) may get steeper or flatter depending on price variability. D) must shift out from the vertical axis. E) must shift in toward the vertical axis.

Accepted Answer

As the coefficient $b$ in the price expectations relationship gets larger, it implies that suppliers' responsiveness to the difference between actual and expected prices increases. This makes the Lucas supply curve steeper because suppliers are more sensitive to price differences, adjusting their supply more aggressively in response to changes in actual versus expected prices.

Quiz 15: The Microeconomic Foundations of Price Rigidity

Suppose that an economy were initially producing at potential and perfectly balanced inflation were then to proceed for a year without effecting relative prices. In that case, the information-based theory predicts

According to standard micro theory, a firm produces up to the point where

Let aggregate demand rise in a world characterized by a Lucas aggregate supply curve where price level changes are accurately perceived. In that case, you expect to see

Let aggregate demand fall in a world characterized by a Lucas aggregate supply curve where price level changes are accurately perceived. You, in that case, expect

Let the Fed announce a 3.3 percent increase in the money supply after a period of economic stability at Y* = $5,000 and some price index P = 100. Which of the following is a possible result, assuming a usual, Lucas-type supply curve?

The tendency for the principle of money neutrality not to hold in the short

Let the supply schedule for a single firm be Yi = 15Pi - Pe) + 7 and the best ^ guess for the expected price level Pe be related to the forecasted price P according to Pe = P^ + 0.7Pi - P^) . If 200 firms are in the industry, which of the following is the Lucas supply schedule?

Which of the following is an assumption of the information-based model of supply developed by Lucas?

Two classes of explanations, imperfect information and sticky prices or nominal wage contracts, have been advanced to explain the phenomenon we call price rigidity. Which of the following statements regarding price rigidity is not correct?

Given an increase in the price of the product of some arbitrarily selected firm, you would expect to see that firm

If the price of a firm's product rose faster than the overall pace of inflation, then you would expect to see that firm's output

Let all prices increase at an annual rate of 10 percent. Suppose, however, that it takes each firm six months to find out that any price but its own has changed. Lucas would expect firms in this environment, in the short run at least, to produce

^{Given the Lucas formulation of supply}^Yi ⁼^h^[^Pi ^-^P^{] +}^Yi^,^where^Yi

The neoclassical models of macroeconomics

Let a firm, under normal circumstances, produce 100,000 units of some good Y. If the price of Y were to increase at a rate that matched the overall inflation of 10 percent, then the Lucas model would predict that the firm would produce

Under the assumptions of a Lucas supply curve,

Let the usual price expectations relationship hold so that it can be^represented^{mathematically}^by^P^e⁼^P^{^}⁺^b^Pi ^-^P^{^}⁾^.^As^the^coefficient^b^gets Larger, the Lucas supply curve