Chapter 12 (from pg 305) Review

question

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.
answer

will; will not
question

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:
answer

a decline in the growth rate of the quantity of money.
question

NOT one of the criticisms of real business cycle theory:
answer

The theory is built on weak microeconomic foundations
question

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.
answer

Keynesian cycle theory
question

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.
answer

higher; higher
question

Order of events which they occur in the business cycle, using the monetarist model:
answer

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
question

People make rational expectations about aggregate demand is one assumption of the __________.
answer

New Classical model
question

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 ______.
answer

only unexpected changes in aggregate demand will change real GDP; both expected and unexpected changes in aggregate demand will change real GDP
question

Critics of the real business cycle argue that:
answer

labor supply is only weakly related to the real interest rate.
question

Which theory maintains that the money wage rate always adjusts freely?
answer

real business cycle theory
question

The Keynesian explanation of the business cycle rests on several concepts, including
answer

rigid money wage rates.
question

For monetarists, the main cause of economic fluctuations is changes in:
answer

the growth rate of the quantity of money
question

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?
answer

A recession will ensue.
question

Which of the following is NOT an aggregate demand, mainstream theory of the business cycle?
answer

real business cycle theory
question

In ______ cycle theory, fluctuations in investment driven by fluctuations in business confidence are the main source of fluctuations in aggregate demand.
answer

Keynesian
question

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.
answer

monetarist
question

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.
answer

new classical
question

In _____ cycle theory, past relational expectations of the current price level influence the money wage rate and the position of the SAS curve.
answer

new Keynesian
question

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 _______.
answer

increases; increases; increases rises
question

Changes in the growth rate of the quantity of money affect aggregate demand.
answer

monetarist theory
question

In RBC theory, all of the following events can be sources of fluctuation in productivity EXCEPT:
answer

changes in the growth rate of money
question

Which are business cycle theories that regard fluctuations in aggregate demand as the factor creating business cycles?
answer

Keynesian cycle theory monetarist cycle theory
question

“Intertemporal substitution” in labor supply describes changes in labor supply in response to changes in
answer

the real interest rate.
question

In RBC theory, the lower the real interest rate, other things remaining the same, the ______today.
answer

smaller is the supply of labor.
question

Keynes used the term “animal spirits” to represent
answer

fluctuations in business confidence
question

Which of the following pieces of evidence is most consistent with the real business cycle theory?
answer

Productivity and GDP move closely together
question

New Keynesian economists believe that _______ is influenced by _______.
answer

today’s money wage rate; yesterday’s rational expectations of the price level.
question

According to the RBC theory, a change in the quantity of money leads to
answer

a change in the price level but no change in real GDP
question

In RBC theory, a decrease in productivity leads to all of the following events EXCEPT:
answer

a rise in the real wage rate
question

Based on the Keynesian theory of the business cycle, if the economy is at its full-employment equilibrium and aggregate demand increases then
answer

the price level and real GDP BOTH increase.
question

According to RBC theory, the sources of the business cycle is _____, which result mainly from _____.
answer

fluctuations in productivity; fluctuations in the pace of technological change

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