Chapter 12 (from pg 305) Review – Flashcards
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The new classical cycle theory predicts that an unexpected incease in aggregate demand ______ create a business cycle and an unexpected increase in aggregate demand _____create a business cycle.
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will; will not
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Evidence indicates that a recession occurs about the same time as a decrease in investment. According to the monetarist theory, the decrease in investment is attributable to:
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a decline in the growth rate of the quantity of money.
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NOT one of the criticisms of real business cycle theory:
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The theory is built on weak microeconomic foundations
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Suppose that manager forecast a large decline in expected sales and profits and so their confidence plummets. According to _______, this forecast might start a business cycle.
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Keynesian cycle theory
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In the real business cycle framework, a technology shock that increases investment demand and the demand for loanable funds leads to a _______ level of saving and a ______real interest rate.
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higher; higher
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Order of events which they occur in the business cycle, using the monetarist model:
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1. The Federal Reserve decreases the growth rate of the quantity of money. 2. The AD curve shifts leftward 3. Money wages fall and the SAS curve shifts rightward
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People make rational expectations about aggregate demand is one assumption of the __________.
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New Classical model
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The key difference between the new classical theory of the business cycle and the new Keynesian theory of the business cycle is that the new classical theory believes that ______while the new Keynesian theory believes that ______.
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only unexpected changes in aggregate demand will change real GDP; both expected and unexpected changes in aggregate demand will change real GDP
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Critics of the real business cycle argue that:
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labor supply is only weakly related to the real interest rate.
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Which theory maintains that the money wage rate always adjusts freely?
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real business cycle theory
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The Keynesian explanation of the business cycle rests on several concepts, including
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rigid money wage rates.
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For monetarists, the main cause of economic fluctuations is changes in:
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the growth rate of the quantity of money
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Suppose that the Federal Reserve is expected to expand the quantity of money by 5 percent but ends up expanding by only 2 percent. If the new Keynesian theory is correct, which of the following describes the effect on the economy?
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A recession will ensue.
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Which of the following is NOT an aggregate demand, mainstream theory of the business cycle?
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real business cycle theory
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In ______ cycle theory, fluctuations in investment driven by fluctuations in business confidence are the main source of fluctuations in aggregate demand.
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Keynesian
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In _____cycle theory, fluctuations in both investment and consumption expenditure, driven by fluctuations in the growth rate of the quantity of money, are the main sources of fluctuations in aggregate demand.
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monetarist
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In ____ cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate demand, determines the money wage rate and the position of the SAS curve.
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new classical
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In _____ cycle theory, past relational expectations of the current price level influence the money wage rate and the position of the SAS curve.
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new Keynesian
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In an expansion, an increase in the rate of technological change _____investment demand, ______ the demand for labor, and ______ the supply of labor. The real interest rate _______.
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increases; increases; increases rises
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Changes in the growth rate of the quantity of money affect aggregate demand.
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monetarist theory
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In RBC theory, all of the following events can be sources of fluctuation in productivity EXCEPT:
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changes in the growth rate of money
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Which are business cycle theories that regard fluctuations in aggregate demand as the factor creating business cycles?
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Keynesian cycle theory monetarist cycle theory
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"Intertemporal substitution" in labor supply describes changes in labor supply in response to changes in
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the real interest rate.
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In RBC theory, the lower the real interest rate, other things remaining the same, the ______today.
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smaller is the supply of labor.
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Keynes used the term "animal spirits" to represent
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fluctuations in business confidence
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Which of the following pieces of evidence is most consistent with the real business cycle theory?
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Productivity and GDP move closely together
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New Keynesian economists believe that _______ is influenced by _______.
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today's money wage rate; yesterday's rational expectations of the price level.
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According to the RBC theory, a change in the quantity of money leads to
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a change in the price level but no change in real GDP
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In RBC theory, a decrease in productivity leads to all of the following events EXCEPT:
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a rise in the real wage rate
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Based on the Keynesian theory of the business cycle, if the economy is at its full-employment equilibrium and aggregate demand increases then
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the price level and real GDP BOTH increase.
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According to RBC theory, the sources of the business cycle is _____, which result mainly from _____.
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fluctuations in productivity; fluctuations in the pace of technological change
