Macroeconomics, 3e (Williamson) Chapter 12 Keynesian Business Cycle Theory: The Sticky Price Model

1) A labor contract in which future wage increases are adjusted in the light of future inflation is called A) a union contract. B) an adjustable contract. C) an indexed contract. D) an inflation-adjusted contract. Answer: C

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2) In the Keynesian sticky wage model, Keynesian unemployment refers to the A) number of workers receiving unemployment compensation. B) number of workers who stop looking for work because they believe that they will not find work. C) difference between labor supply and labor demand at the sticky wage. D) difference between labor supply and labor demand at the market clearing wage. Answer: C

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3) In the Keynesian sticky wage model, the aggregate supply curve is upward sloping because, at the fixed nominal wage, an increase in the price level A) increases the real wage and increases labor supply. B) increases the real wage and increases labor demand. C) decreases the real wage and increases labor supply. D) decreases the real wage and increases labor demand. Answer: D

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4) In the Keynesian sticky wage model, an increase in the nominal wage shifts the aggregate A) supply curve to the right. B) supply curve to the left. C) demand curve to the right. D) demand curve to the left. Answer: B

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5) In the Keynesian sticky wage model, an increase in the price level A) shifts the aggregate supply curve to the right. B) shifts the aggregate supply curve to the left. C) does not shift the aggregate supply curve. D) shifts the aggregate supply curve in unpredictable ways. Answer: C

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6) In the Keynesian sticky wage model, an increase in government expenses A) shifts the aggregate supply curve to the right. B) shifts the aggregate supply curve to the left. C) does not shift the aggregate supply curve. D) shifts the aggregate supply curve in unpredictable ways. Answer: C

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7) In the Keynesian sticky wage model, a drop in current capital A) shifts the aggregate supply curve to the right. B) shifts the aggregate supply curve to the left. C) does not shift the aggregate supply curve. D) shifts the aggregate supply curve in unpredictable ways. Answer: B

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8) In the Keynesian sticky wage model, an increase in current total factor productivity shifts the aggregate A)

supply curve to the right. B) supply curve to the left. C) demand curve to the right. D) demand curve to the left. Answer: A

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9) The IS in IS curve means A) interest substitution. B) interest sticky. C) investment-savings. D) intertemporal substitution. Answer: C

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10) The IS curve in the Keynesian sticky wage model is identical to which of the following in the intertemporal monetary model? A) the output supply curve B)

the output demand curve C) the labor demand curve D) none of the above Answer: B

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11) The IS curve in the Keynesian sticky wage model represents output demand at different levels of A) the price level. B) the real interest rate. C) the nominal wage rate. D) total factor productivity. Answer: B

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12) What shifts the IS curve to the right? A) a decrease in government expenses B) a decrease in future total factor productivity C) an increase in current total factor productivity D) an increase in the money supply Answer: C

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13) The LM curve represents A) output-price level combinations at which money supply and money demand are equal. B) output-real interest rate combinations at which money supply and money demand are equal. C) real interest rate-price level combinations at which money supply and money demand are equal. D) none of the above. Answer: B

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14) The LM in LM curve means A)

long-run money. B) liquidity market. C) loan market. D) lifetime money. Answer: B

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15) The LM curve is upward sloping because A) money demand is positively related to output and negatively related to the interest rate. B) money demand is positively related to output and the real money supply is negatively related to the price level. C) money demand is negatively related to the interest rate and the real money supply is negatively related to the price level. D) none of the above Answer: A

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16) An increase in current government purchases shifts the A) IS curve to the right. B)

IS curve to the left. C) LM curve to the right. D) LM curve to the left. Answer: A

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17) An increase in the present value of taxes shifts the A) IS curve to the right. B) IS curve to the left. C) LM curve to the right. D) LM curve to the left. Answer: B

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18) An anticipated future increase in future income shifts the A) IS curve to the right. B) IS curve to the left. C)

LM curve to the right. D) LM curve to the left. Answer: A

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19) An increase in future total factor productivity shifts the A) IS curve to the right. B) IS curve to the left. C) LM curve to the right. D) LM curve to the left. Answer: A

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20) A decrease in the capital stock shifts the A) IS curve to the right. B) IS curve to the left. C) LM curve to the right. D) LM curve to the left.

Answer: A

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21) An increase in the money supply shifts the A) IS curve to the right. B) IS curve to the left. C) LM curve to the right. D) LM curve to the left. Answer: C

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22) An increase in the current price level shifts the A) IS curve to the right. B) IS curve to the left. C) LM curve to the right. D) LM curve to the left. Answer: D

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23) A positive shift in the money demand curve shifts the A) IS curve to the right. B) IS curve to the left. C) LM curve to the right. D) LM curve to the left. Answer: D

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24) In the Keynesian sticky wage model, the aggregate demand curve represents combinations of A) the price level and the level of output at which the goods market and the labor market are in equilibrium. B) the price level and the level of output at which the goods market and the money market are in equilibrium. C) the real interest rate and the level of output at which the goods market and the labor market are in equilibrium. D) the real interest rate and the level of output at which the goods market and the money market are in equilibrium. Answer: D

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25) In the Keynesian sticky wage model, an increase in current government spending shifts A) the aggregate supply curve to the right. B) the aggregate supply curve to the left. C) the aggregate demand curve to the right. D) the aggregate demand curve to the left. Answer: C

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26) In the Keynesian sticky wage model, an increase in future total factor productivity shifts the aggregate A) supply curve to the right. B) supply curve to the left. C) demand curve to the right. D) demand curve to the left. Answer: C

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27) In the Keynesian sticky wage model, an increase in the money supply shifts the aggregate A) supply curve to the right. B) supply curve to the left. C) demand curve to the right. D) demand curve to the left. Answer: C

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28) In the Keynesian sticky wage model, an increase in the money supply A)

has no effect on the price level. B) causes a less than proportional increase in the price level. C) causes an equiproportional increase in the price level. D) causes a more than proportional increase in the price level. Answer: B

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29) In the Keynesian sticky wage 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 decreases the real interest rate. Answer: B

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30) In the Keynesian sticky wage model, an increase in current government spending 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 decreases the real interest rate. Answer: A

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31) In the Keynesian sticky wage model, an increase in current total factor productivity 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 decreases the real interest rate. Answer: B

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32) In the Keynesian sticky wage model, an increase in future total factor productivity 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 decreases the real interest rate. Answer: A

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33) In the Keynesian sticky wage model, a rightward shift in the money demand schedule 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 decreases the real interest rate. Answer: C

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34) In the Keynesian sticky wage model, an increase in the money supply has which impact on output in the long run? A) an increase B) a decrease C) none D) It depends.

Answer: C

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35) When wages are sticky and there are only shocks to the money supply, money is A) procyclical. B) acyclical. C) countercyclical. D) It depends. Answer: A

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36) When wages are sticky and there are only shocks to the money supply, prices are A) procyclical. B) acyclical. C) countercyclical. D) It depends. Answer: A

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37) When wages are sticky and there are only shocks to current total factor productivity, money is A) procyclical. B) acyclical. C) countercyclical. D) It depends. Answer: B

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38) When wages are sticky and there are only shocks to current total factor productivity, prices are

A) procyclical.

B)

acyclical.

C)

countercyclical. D) It depends. Answer: C

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39) Changes in the money supply in the Keynesian sticky wage model is not a likely explanation of the typical business cycle because the model counterfactually predicts that A) consumption is procyclical and the price level is procyclical. B) the price level is procyclical and the real wage is countercyclical. C) the real wage is countercyclical and the real money supply is procyclical. D) the real money supply is procyclical and consumption is procyclical. Answer: B

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40) Changes in the money supply in the Keynesian sticky wage model are not a likely explanation of the typical business cycle because the model counterfactually predicts A)

that consumption is countercyclical. B) that the price level is procyclical. C) that the real wage is countercyclical. D) all of the above. Answer: D

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41) Investment demand shocks in the Keynesian sticky wage model are not a likely explanation of the typical business cycle because the model counterfactually predicts that A) consumption is procyclical, investment is procyclical, and average labor productivity is countercyclical. B) prices are procyclical, the real wage is countercyclical, and average labor productivity is countercyclical. C) prices are countercyclical, the real wage is countercyclical, and average labor productivity is countercyclical. D) employment is procyclical, prices are procyclical, and average labor productivity is countercyclical. Answer: B

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42) The recession that is best explained as a response to monetary policy is the recession of A) 1973-1974. B) 1981-1982. C) 1990-1991. D) 2000-2001. Answer: B

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43) The Keynesian transmission mechanism for monetary policy asserts that changes in the money supply A) affect real interest rates, which affect the level of aggregate demand. B) affect real interest rates, which affect the level of aggregate supply. C) affect the price level, which affects the level of aggregate demand. D) affect the price level, which affects the level of aggregate supply. Answer: A

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44) When there is Keynesian unemployment in the sticky wage model, a Pareto optimum can be reached by A) increasing the money supply or by increasing current government spending. B) increasing the money supply or by decreasing current government spending. C) decreasing the money supply or by increasing current government spending. D) decreasing the money supply or by decreasing current government spending. Answer: A

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45) 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 A) higher consumption and higher output. B) higher consumption and lower output. C) lower consumption and higher output. D) lower consumption and lower output. Answer: C

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46) To support the argument for an active role for government in stabilizing the economy, it must be true that A) consumers are not rational and that not all wages and prices are flexible. B) not all wages and prices are flexible and that government must be able to react quickly enough. 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. Answer: B

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47) Milton Friedman's assertion that the government abstain from stabilization policy can be supported by A) the fact that it takes time for the government to observe the true state of the economy. B) the fact that it takes time for the government to implement policy. C) the fact that it takes time for policy actions to affect the economy. D) all of the above facts. Answer: D

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48) When the demand for money is unstable, it is best for the central bank to A) target the price level. B) target the real interest rate. C) target the money supply. D) refrain from stabilization policy. Answer: B

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49) Keynesian sticky price models, as opposed to Keynesian sticky wage models, are typically called A) administered cost models. B) faulty pricing models. C) menu cost models. D) classical models. Answer: C

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50) How does the sticky wage model need to be modified to consider sticky prices? A)

The money supply is now endogenous. B) The LM curve is now vertical. C) The AS curve is now horizontal. D) Nothing changes, just the amplitude of the movements. Answer: C

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51) What do we need to assume about firms in the sticky price model? A) They supply any demand at the given price. B) They hire until the real wage equals the average labor productivity. C) They maximize only current profits. D) They adapt the price to current conditions. Answer: A

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52) A classical objection to Keynesian sticky price models is that A) it is easier for firms to change prices rather than change output. B)

it is cheaper for firms to change output rather than change prices. C) sticky price models are internally inconsistent. D) real shocks are more important than nominal shocks. Answer: A

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53) The Keynesian sticky price model has become less relevant over time because A) the Federal Reserve believes less in it. B) prices have become easier to adjust.. C) growth rates have increased. D) laissez-faire is better. Answer: B

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54) In response to a positive technology shock, which prediction of the sticky price model is difficult to reconcile with the data? A) Output increases. B) Employment decreases. C)

The price level decreases. D) Money is procyclical. Answer: A

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