Chapter 12 (part 2)

question

According to the new Keynesian cycle theory of the business cycle, what can trigger a business cycle expansion?
answer

an unexpected increase in the quantity of money, an expected increase in the quantity of money, and an expected increase in government expenditures
question

In ________ cycle theory, fluctuations in investment driven by fluctuations in business confidence are the main source of fluctuations in AD In _______ cycle of theory, fluctuations in both investment and consumption expenditure, driven by fluctuation in the growth rate of the quantity of money, are the main sources of fluctuations in AD
answer

Keynesian; monetarist
question

In _______ cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected AD, determines the money wage rate and position of the SAS curve In _______ cycle theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve
answer

new classical; new keynesian
question

According to the RBC theory, the main source of economic fluctuations is a decrease in _______, which ________ investment demand, ________ the demand for loanable funds, and _________ the real interest rate
answer

producitivity growth; decreases; decreases; lowers
question

The decrease in productivity growth also _______ the demand for labor, _______ the supply of labor, _______ employment, and _______ the real wage rate
answer

decreases; decreases; decreases; lowers
question

True or False 1. Monetarists assume that the quantity of money increases at a constant rate 2. Fluctuations in interest rates cause business cycles 3. Change in the growth rate of the quantity of money affect AD
answer

false; false; true
question

What is the key difference between the new classical theory of the business cycle and the new keynesian theory
answer

NCT believes that only unexpected changes in AD will change real GDP and the new Keynesian theory believes that both expected and unexpected changes in AD will change real GDP
question

In monetarist business cycle theory, increases in money growth temporarily _________ real GDP and ________ the price level
answer

increase; rise
question

According to the RBC theory, technological change ________
answer

happens at an uneven pace
question

MBC theory is that _______ grows at a steady rate while ________ grows at a fluctuating rate In the MBC theory, the money wage rate is _________ If AD grows faster than potential GDP, __________ gap emerges and if it grows more slowly than potential GDP, ________ gap emerges
answer

potential GDP; aggregate demand sticky; a recessionary; an inflationary
question

A recession in the monetarist model would start with what kind of shift?
answer

leftward shift in the AD curve
question

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

the real interest rate
question

Based on the Keynesian theory, if the economy is at full-employment equilibrium and AD increases then __________
answer

the price level and real GDP both increase
question

According to the RBC theory, what happens to the graph when productivity increases?
answer

rightward shift of the demand for loanable funds curve
question

According to the MBC theory, ________ grows at a steady rate and _________ grows at a fluctuating rate
answer

potential GDP; AD
question

The new classical theory predicts that an unexpected increase in AD _________ create a business cycle and an expected increase in AD _________ create a business cycle
answer

will; will not
question

Using the RBC theory….an advance in technology increases productivity Then when-to-work decision depends on the real interest rate. The ________ the real interest rate, other things remaining the same, the _________ is the supply of labor today RBC theorists believe the when-to-work effect is ________
answer

higher; larger; large
question

Which one is incorrect? 1. Productivity fluctuations are correlated with real GDP fluctuations 2. The impulse in RBC theory is the growth rate of productivity that results from technological change 3. Economists have not been able to isolate the RBC theory impulse 4. The impulse in RBC theory is generated mainly by the process of research and development
answer

3
question

The key ripple effect in RBC theory is the _________ decision and it depends on the _________
answer

when-to-work; real interest rate
question

Which theory maintains that the money wage rate always adjusts freely 1. RBC theory 2. Both new classical and new keynesian theory 3. Keynesian cycle theory 4. Monetarist cycle theory
answer

1
question

Which is false about the main criticisms of RBC theory? 1. RBC theory relies too heavily on the role of money in the economy to make its predictions 2. Intertemporal substitution is too weak a force to account for large fluctuation in labor employment with small real wage rate changes 3. the money wage rate is sticky, and to assume otherwise is at odds with a clear fact 4. productivity shocks are as likely to be caused by changes in AD as by technological change
answer

1
question

Which is true about claims made by the defenders of RBC theory? 1. RBC theory is consistent with labor supply and labor demand decisions 2. RBC theory explains the macro facts about the business cycle and is consistent with the facts about economic growth 3. RBC theory is consistent with investment demand decisions and information on the distribution of income between labor and capital
answer

all of them
question

Which of the following business cycle theories regard fluctuations in AD as the factor creating business cycles 1. Keynesian cycle theory 2. RBC theory 3. Monetarist cycle theory
answer

1 and 3
question

New Keynesian economists believe that _______ is influenced by ____________
answer

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

Critics of the RBC theory claim that ________
answer

the intertemporal substitution effect is too weak to account for changes in labor supply
question

Keynes used the term “animal spirits” to represent ________
answer

fluctuations in business confidence
question

According to RBC theory, the source of the business cycle is ________, which result mainly from ________
answer

fluctuations in productivity; fluctuations in the pace of technological change
question

Which of the following describes the Keynesian approach to the business cycle? 1. Unanticipated shocks to AS drive expansions and recessions 2. The keynesian theory is a RBC model of the economy 3. A decrease in business confidence can trigger a recession
answer

3
question

According to the ________ theory, technological change can be so rapid that some existing capital becomes obsolete and ___________
answer

RBC; productivity falls
question

Using the monetarist model, place the following events in the order in which they occur in a business cycle 1. Money wages fall and the SAS curve shifts rightward 2. The Federal Reserve decreases the growth rate of the quantity of money 3. The AD curve shifts leftward
answer

2, 3, 1
question

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

rigid money wage rates
question

According to the MBC theory, money wage rate is __________ and consequently if _________ grows faster than ___________, and _________ gap emerges
answer

sticky; AD; potential GDP, inflationary
question

A larger than expected increase in AD will lead to _________ in the ___________ of the business cycle
answer

an expansion; new classical cycle theory
question

Suppose the growth rate of the quantity of money increased from 5 percent/yr to 8 percent/yr According to the __________, this event would trigger a business cycle expansion
answer

monetarist cycle model
question

When a recession started, the growth of government expenditures on goods/services doubled from the previous year According to the AD theories of the business cycle _________
answer

government expenditure was not a cause of the recession
question

One assumption of the new classical model is that _________
answer

people make rational expectations about AD
question

According to the RBC theory, the immediate effects from a change in productivity include which of the following? 1. Investment demand changes 2. Demand for labor changes 3. Government expenditures change
answer

1 and 2
question

In RBC theory, all of the following events can be sources of fluctuations in productivity except….. 1. climate fluctuations 2. changes in the growth rate of money 3. the pace of technological change 4. natural disasters
answer

2
question

Which of the following pieces of evidence is most consistent with the monetarist theory? 1. Productivity and GDP move closely together 2. Labor supply decisions do not seem to depend on real interest rates 3. Money wage rates take some time to adjust to price changes 4. Changes in real GDP and the quantity of money move closely together
answer

4
question

Both the new classical and new keynesian business cycle theories agree that __________
answer

the money wage rate is influenced by rational expectations of the price level
question

In an expansion, an increase in the rate of technological change ________ investment demand. The real interest rate _________
answer

increases; rises

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