Question 1

In the New Keynesian model, suppose that the output gap is initially zero, there is an increase in money demand, and the central bank wants to keep the output gap at zero. What happens?
A)Investment goes down.
B)Output goes up.
C)Money supply goes up.
D)Consumption goes up.
E)Employment goes down.

Accepted Answer

When there is an increase in money demand and the central bank aims to keep the output gap at zero, it would typically increase the money supply to accommodate the higher demand for money. This action helps to maintain economic stability and prevents the output gap from deviating from its target.

Question 2

A key criticism of New Keynesian models is
A)monetary policy is irrelevant.
B)they don't explain why prices are sticky.
C)old Keynesian models are better.
D)they do not fit the data as well as real business cycle models.
E)they are never used in practice.

Accepted Answer

A key criticism of New Keynesian models is that while they attempt to explain why prices are sticky, they do not provide a convincing explanation for why this stickiness occurs. This undermines the central premise of the model and its ability to accurately explain real-world economic phenomena.

Question 3

A classical objection to Keynesian sticky price models is that
A)nominal wages are always fixed.
B)real shocks are more important than nominal shocks.
C)it is easier for firms to change prices rather than change output.
D)it is cheaper for firms to change output rather than change prices.
E)sticky price models are internally inconsistent.

Accepted Answer

The classical objection is that it is easier for firms to change prices rather than change output, which contradicts the Keynesian assumption that prices are sticky and do not adjust immediately in response to changes in demand. This objection suggests that firms have more flexibility in adjusting prices than the sticky price models allow for, and therefore the models are not entirely accurate in describing how the economy operates.

Question 4

In the New Keynesian model, the central bank's policy target is
A)aggregate output.
B)the interest rate.
C)unemployment.
D)the money supply.
E)money demand.

Accepted Answer

In the New Keynesian model, the central bank's policy target is typically the interest rate as a tool for regulating aggregate demand and stabilizing the economy. By setting the policy interest rate, the central bank can influence borrowing, investment, and consumption decisions by households and firms, and thus affect overall economic activity and inflation. The model assumes that prices and wages are sticky in the short run, so monetary policy can have real effects on output and employment.

Question 5

The key difference between Keynesian and Classical economists is
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.

Accepted Answer

The key difference between Keynesian and Classical economists is that Keynesians favour a role for government in managing the economy, while Classical economists believe that the economy is best left to regulate itself without government intervention. Keynesians believe that government intervention, through monetary and fiscal policies, is necessary to manage unemployment and stabilize the economy during periods of recession or inflation. Classical economists, on the other hand, believe that wages and prices are perfectly flexible and will adjust to changes in supply and demand without the need for government intervention.

Question 6

In the New Keynesian model, an increase in the money supply
A)increases output and increases the real interest rate.
B)increases output and decreases the real interest rate.
C)decreases output and increases the real interest rate.
D)decreases output and increases the real wage rate.
E)decreases output and decreases the real interest rate.

Accepted Answer

In the New Keynesian model, an increase in the money supply causes an increase in aggregate demand, which leads to an increase in output. However, as firms respond to higher demand by raising prices, the central bank responds by increasing the nominal interest rate to keep inflation in check. This increase in the nominal interest rate leads to a decrease in the real interest rate, which further stimulates aggregate demand and output. Therefore, an increase in the money supply in the New Keynesian model increases output and decreases the real interest rate.

Question 7

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

Accepted Answer

Government intervention can help to stabilize an economy during a shock by implementing policies that can mitigate the negative effects of the shock. This can help to achieve an efficient outcome faster than if the market was left to adjust on its own. For example, government spending can stimulate the economy and help prevent a recession, while monetary policy can lower interest rates and encourage investment and consumption. Overall, government intervention can help to reduce the severity of a shock and speed up the recovery process.

Question 8

In the New Keynesian model, an increase in the money supply
A)causes a reduction in the price level.
B)causes an equiproportional increase in the price level.
C)has no effect on the price level.
D)causes a less than proportional increase in the price level.
E)causes a more than proportional increase in the price level.

Accepted Answer

The answer of In the New Keynesian model, an increase...

Question 9

If the central bank in a New Keynesian model can always reduce the output gap to zero
A)the price level will be procyclical.
B)investment will be procyclical if there are total factor productivity shocks.
C)consumption will be countercyclical if there are total factor productivity shocks.
D)the price level will be countercyclical.
E)this would be inefficient.

Accepted Answer

In a New Keynesian model, if the central bank can always reduce the output gap to zero, investment would be procyclical in the presence of total factor productivity shocks. This is because positive productivity shocks would lead to higher output and income, encouraging more investment.

Question 10

The Yd(IS)curve is downward sloping to reflect the
A)positive relationship between aggregate output and employment.
B)negative relationship between aggregate output and the real wage rate.
C)positive relationship between aggregate output and the real wage rate.
D)negative relationship between aggregate output and the real interest rate.
E)positive relationship between aggregate output and total factor productivity.

Accepted Answer

The Yd(IS) curve, also known as the IS curve in macroeconomics, is downward sloping because it represents a negative relationship between aggregate output (or income) and the real interest rate. When the real interest rate decreases, investment spending increases, leading to a higher level of aggregate output or income.

Question 11

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

Accepted Answer

In the New Keynesian model, when the money supply increases, it lowers the nominal interest rate. However, in the short run, prices are fixed so the real interest rate decreases. This leads to an increase in aggregate demand, output, and employment. Since the labor market is not fully flexible in the short run, a decrease in the real interest rate leads to a decrease in the real wage rate, which in turn increases employment.

Question 12

According to real business cycle theorists, the tendency of money to lead output may be due to
A)the tendency for bank loans to expand in advance of real activity that will occur at a later date and the Bank of Canada's use of all available information in trying to stabilize the price
Level.
B)the Bank of Canada's use of all available information in trying to stabilize the price level and the Bank of Canada's use of all available information in trying to stabilize the level of
Economic activity.
C)the Bank of Canada's use of all available information in trying to stabilize the level of economic activity and government spending shocks, which lead to later changes in
Economic activity.
D)government spending shocks, which lead to later changes in economic activity, and the tendency for bank loans to expand in advance of real activity that will occur at a later date.
E)the Bank of Canada's use of all available information in trying to stabilize business cycle fluctuations and the price level.

Accepted Answer

Real business cycle theorists suggest that money tends to lead output because of anticipatory actions in the financial sector and proactive measures by central banks. Banks often expand loans in anticipation of future economic activity, and central banks, like the Bank of Canada, use available information to try to stabilize the price level, both of which can precede changes in real economic output.

Question 13

The behaviour of the Solow residual suggests that when current total factor productivity increases
A)such increases are temporary, so we can draw no conclusions about the likely behaviour of future total factor productivity.
B)are typically temporary and have no influence on future levels of aggregate real GDP.
C)it becomes more difficult to predict future total factor productivity.
D)future total factor productivity is likely to decrease.
E)future total factor productivity is also likely to increase.

Accepted Answer

The Solow residual measures the portion of economic growth not explained by changes in capital and labor inputs, which is attributed to total factor productivity. Therefore, an increase in current total factor productivity suggests that there is a higher likelihood that future total factor productivity will also increase. Option A and B are incorrect as they suggest that these increases are temporary and have no influence on the future, which is not necessarily true. Option C is incorrect as an increase in total factor productivity would not necessarily make it more difficult to predict future levels. Option D is incorrect for the same reason as option A and B.

Question 14

In the New Keynesian model, the output demand curve represents combinations of
A)the real interest rate and the level of output at which the goods market and the labour market are in equilibrium.
B)the real interest rate and the price level at which the goods market is in equilibrium.
C)the price level and the level of output at which the goods market is in equilibrium.
D)the real interest rate and the level of output at which the goods market is in equilibrium.
E)the price level and the level of output at which the goods market and the labour market are in equilibrium.

Accepted Answer

The output demand curve in the New Keynesian model represents combinations of the real interest rate and the level of output at which the goods market is in equilibrium. This is because the model assumes that prices are sticky in the short run and firms adjust their output to meet demand at a given price level. Therefore, the level of output that firms produce depends on the real interest rate, which affects consumption and investment, as well as other factors that affect aggregate demand. The equilibrium level of output is where the goods market is in equilibrium, meaning that supply equals demand for goods and services. The output demand curve shows the relationship between the real interest rate and the equilibrium level of output.

Question 15

In 1936, Keynes described his views on the economy in
A)Macroeconomic Stabilization Policy in Canada.
B)Some Evidence on the Importance of Sticky Prices.
C)The General Theory of Employment, Interest, and Money.
D)Essays in Positive Economics.
E)Mr. Keynes and the Classics; A Suggested Interpretation.

Accepted Answer

The General Theory of Employment, Interest, and Money is a widely recognized book written by Keynes in 1936, which presents his views on macroeconomics and the role of government in managing economic recessions.

Question 16

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

Accepted Answer

The central bank targeting the price level can stabilize prices, reducing the observed correlation between price level and real GDP.

Question 17

The phenomenon of underutilization of labour during a recession is called
A)investing in human capital.
B)labour stockpiling.
C)retraining labour.
D)labour force stabilization.
E)labour hoarding.

Accepted Answer

Labour hoarding refers to the practice of firms retaining their existing employees during a recession, but reducing their work hours, rather than laying them off. This leads to an underutilization of labour as firms are not utilizing their employees to their full potential.

Question 18

Two business cycle facts that are less easily explained by the real business cycle are that
A)the nominal money supply is procyclical and leads the business cycle.
B)the nominal money supply is procyclical and is a leading indicator.
C)the nominal money supply is procyclical and is coincident with the business cycle.
D)the nominal money supply is procyclical and lags the business cycle.
E)money and prices are both acyclical.

Accepted Answer

The answer of Two business cycle facts that are less...

Question 19

According to the New Keynesian model, after a negative shock to output
A)the government increases expenditures and the central bank increases its target rate.
B)the government decreases expenditures and the central bank decreases its target rate.
C)the government decreases expenditures and the central bank increases its target rate.
D)the government leaves expenditures unchanged and the central bank increases its target rate.
E)the government increases expenditures and the central bank decreases its target rate.

Accepted Answer

In response to a negative shock to output, according to the New Keynesian model, the government is likely to increase expenditures to stimulate the economy, while the central bank decreases its target interest rate to make borrowing cheaper, encouraging investment and spending.

Question 20

According to real business cycle theorists, an increase in total factor productivity could lead to an increase in the nominal money supply due to
A)the cyclical behaviour of tax collections and attempts by the Bank of Canada to stabilize real output.
B)Bank of Canada attempts to stabilize the price level and banking sector expansion of deposit money.
C)Bank of Canada attempts to stabilize real output and the price level.
D)Bank of Canada attempts to stabilize business cycle fluctuations.
E)banking sector expansion of deposit money and the cyclical behaviour of tax collections.

Accepted Answer

According to real business cycle theorists, an increase in total factor productivity would lead to an increase in the nominal money supply due to the banking sector expansion of deposit money, as banks would be able to increase lending and create more money in response to increased productivity. The Bank of Canada may also attempt to stabilize the price level, which could further increase the money supply. However, attempts to stabilize real output or business cycle fluctuations would not necessarily lead to an increase in the money supply. The cyclical behaviour of tax collections is also unlikely to be a significant factor in this case.

Quiz 13: Business Cycle Models With Flexible Prices and Wages

In the New Keynesian model, suppose that the output gap is initially zero, there is an increase in money demand, and the central bank wants to keep the output gap at zero. What happens?

A key criticism of New Keynesian models is

A classical objection to Keynesian sticky price models is that

In the New Keynesian model, the central bank's policy target is

The key difference between Keynesian and Classical economists is

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

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

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

If the central bank in a New Keynesian model can always reduce the output gap to zero

The Yd(IS) curve is downward sloping to reflect the

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

According to real business cycle theorists, the tendency of money to lead output may be due to

The behaviour of the Solow residual suggests that when current total factor productivity increases

In the New Keynesian model, the output demand curve represents combinations of

In 1936, Keynes described his views on the economy in

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

The phenomenon of underutilization of labour during a recession is called

Two business cycle facts that are less easily explained by the real business cycle are that

According to the New Keynesian model, after a negative shock to output

According to real business cycle theorists, an increase in total factor productivity could lead to an increase in the nominal money supply due to