Deck 11: New Classical Economics

Question 1

In the new classical model,an anticipated increase in the money stock would cause

A)the price level and level of real output to rise.
B)the price level to rise with no effect on real output.
C)real output to rise with no effect on the price level.
D)no change in the price level or level of real output.

Answer 1

B

Question 2

The concept of "rational expectations" is consistent with the notion of

A)utility maximization.
B)profit maximization.
C)strong mechanisms towards equilibrium in markets
D)auction markets.
E)all of the above.

Answer 2

E

Question 3

Define the concept of "rational expectations".Do rational expectations mean that individuals do not make mistakes when forming their expectations?

Answer 3

According to the rational expectations hypothesis,expectations are formed on the basis of all the available relevant information concerning the variable being predicted.Furthermore,individuals understand how the observed variables will affect the variable they are trying to predict. Rational expectations do not mean that people do not make mistakes; it only means that they do not make predictable mistakes in one direction or another.

Question 4

Which of the following statements about the history of inflation in the U.S.is true?

A)Inflation averaged roughly 2% from 1950-19-65,but has fallen since then.
B)Inflation has averaged roughly 2% since 1950.
C)Inflation averaged roughly 2% from 1950-1965,rose until the early 1980s,and has fallen slowly since.
D)Inflation has gradually climbed since the 1950s.

Question 5

Explain the new classical proposition of "policy ineffectiveness".

Question 6

The Federal Reserve has increasingly become more open in their sharing of information about monetary policy.According to new classical theory,what impact should this openness have on their ability to stabilize output? Explain.

Question 7

Explain what is meant by an auction market.Is an auction market perfectly competitive?

Question 8

New classical macroeconomists believe that

A)markets clear each and every period.
B)the labor market does not clear.
C)individuals are locked into money wage constraints.
D)individuals face market constraints in their ability to act in their own self-interest.
E)none of the above.

Question 9

According to which of the following models are economic agents assumed to have perfect information?

A)The new classical model
B)The classical model
C)The monetarist model
D)The Keynesian model

Question 10

In the new classical model,an unanticipated increase in the money stock would cause

A)the price level and the level of real output to rise.
B)the price level to rise with no effect on real output.
C)real output to rise with no effect on the price level.
D)no change in the price level or level of real output.

Question 11

New classical economists

A)accept the monetarist notion that markets are perfectly competitive except for a lack of perfect information.
B)do accept the difference between the short-run and long-run results in the monetarist analysis of the effects of aggregate demand on output and employment.
C)accept the difference between the short-run and long- run results in the Keynesian analysis of the effects of aggregate demand on output and employment,but not in the monetarist analysis.
D)accept the difference between the short-run and long-run results in the monetarist analysis of the effects of aggregate demand on output and employment,but not in the Keynesian analysis.
E)Both a and b

Question 12

An unanticipated decline in investment demand within the new classical model will cause

A)the price level to fall with no effect on output.
B)output to fall with no effect on the price level.
C)both the price level and output to fall.
D)no change in either the level of price or output.

Question 13

If policy irrelevance holds in the new classical model,does that mean that monetary and fiscal policy can never impact output? Under what conditions could it impact output? Explain.

Question 14

Suppose that the Federal Reserve makes an announcement that it is going to permanently reduce the inflation rate to zero.Will inflation expectations immediately adjust? What will determine the extent to which they adjust?

Question 15

Explain the new classical theory explanation of the Great Depression.What is the Keynesian critique of this explanation?

Question 16

In the view of the new classical economists,an increase in the money stock will affect real output and employment only if the increase in the money stock

A)was caused by an aggregate supply shock.
B)is accompanied by an expansionary fiscal policy shift.
C)was anticipated.
D)was unanticipated.

Question 17

Aggregate supply in the new classical aggregate supply

A)is vertical in the short-run.
B)is horizontal in the short-run.
C)is upward sloping in the short-run.
D)None of the above

Question 18

In the new classical view,an anticipated decrease in government spending would be expected to

A)lower output and the price level.
B)lower output but leave the price level unchanged.
C)leave output unchanged and raise the price level.
D)leave output unchanged and lower the price level.
E)leave both output and the price level unchanged.

Question 19

According to new classical model,real wages

A)rise when income rises.
B)falls when income rises.
C)do not move within income.
D)fall if the expected price level is too high and rise if the expected price level is too low.
E)none of the above.

Question 20

Discuss the new classical critique of Keynesian stabilization policy.

Question 21

In the new classical model,stabilization policies

A)cannot affect output and employment in either the short run or the long run.
B)affect output and employment only in the short run.
C)have no effect on output and employment,even in the short run.
D)affect output and employment only in the long run.

Question 22

Monetarists and Keynesians agree that expectations are

A)backwards-looking.
B)rational.
C)unstable.
D)forwards-looking.

Question 23

When expectations are rational,

A)a foreseen expansionary policy action does not alter output.
B)there cannot be any inflation.
C)a foreseen expansionary policy action changes output.
D)there is zero unemployment.

Question 24

Keynesians disagree with the new classical model because

A)people are often irrational.
B)wages are often negotiated through contracts,not auctions.
C)people do not form expectations.
D)wages are set to clear auction markets in both the short run and long run.
E)all of the above

Question 25

In the rational expectations model

A)markets are perfectly competitive and in equilibrium.
B)markets may not clear even if wages and prices are otherwise perfectly flexible.
C)markets may temporarily be in disequilibrium.
D)only anticipated changes in aggregate demand affect output.

Question 26

If government policy makers become more secretive,then the short run aggregate supply curve should get

A)flatter.
B)more horizontal.
C)vertical.
D)steeper.

Question 27

According to the new classical theory,a monetary surprise will

A)shift the labor supply curve to the right in the short run.
B)shift the labor supply curve to the left in the short run.
C)not shift the labor supply curve in the short run.
D)shift the aggregate supply curve to the left in the short run.
E)shift the aggregate supply curve to the right in the short run.

Question 28

Like the monetarists,new classical economists favor

A)money growth aimed at achieving a nominal GDP target.
B)discretionary policy action.
C)a money growth rate that stabilizes output.
D)a money growth rule that guides monetary policy.

Question 29

"All available information" in the definition of rational expectations means that

A)agents use all possible information that could be out there.
B)agents use all possible public information that could be out there.
C)agents use all information that is relevant.
D)agents use all information that is available in which the marginal benefits of the information are greater than the marginal costs of gathering the information.

Question 30

According to new classical economists,

A)deficits should have a large and negative impact on output.
B)deficits should have no discernable impact on output.
C)deficits will have no impact on private consumption.
D)growth in the 1990s was driven by falls in the deficit.
E)None of the above

Question 31

According to Thomas Sargent and other new classical economists,

A)a credible policy to provide low stable money growth can exist with a fiscal policy that generates large deficits.
B)a credible policy to provide low stable money growth cannot coexist with a fiscal policy that generates large deficits.
C)there is no need for a credible,noninflationary monetary policy to control the government budgetary deficit.
D)None of the above

Question 32

In a move to increase its openness,the Fed has consistently increased the amount of information available to the public.According to the new classical model,the Phillips curve the Fed faces should become more:

A)horizontal.
B)very steep.
C)vertical.
D)unstable.

Question 33

One similarity between the policy recommendations of the new classical and monetarist models is that

A)both believe that monetary policy has much stronger employment effects than does fiscal policy.
B)are policy activists.
C)both believe in the natural rate of output.
D)both believe that discretion is preferable to rules.
E)none of the above.

Question 34

New classical economists like Robert Lucas argue that the Great Depression was primarily caused by

A)lots of mistaken expectations about the future.
B)significant falls in investment.
C)significant falls in the money supply.
D)significant increases in taxes.
E)all of the above.

Question 35

In an economy with higher and more variable inflation,the new classical model would predict that the short run aggregate supply curve would

A)be horizontal.
B)be more horizontal.
C)be steeper.
D)shift more rapidly.

Question 36

Which of the following would be evidence against rational expectations?

A)unpredictable changes in policy have real effects.
B)new information leads to changes in output.
C)the public never make mistakes with respect to price level predictions.
D)changes in stock prices change much more often than new information becomes available.

Question 37

Which of the following statements is (are)correct? Keynesians criticize the new classical theory because

A)the new classical model cannot explain changes in expectations.
B)of the contracting market characterization of the labor market.
C)the rational expectations assumption ascribes an extreme and unrealistic availability of information to market participants.
D)All of the above

Question 38

Regarding fiscal policy,the new classical economists

A)are in favor of stability.
B)attempt to avoid excessive and inflationary stimulus.
C)want to avoid erratic government deficit spending.
D)All of the above
E)None of the above

Question 39

According to the new classical model,the output cost of reducing inflation

A)is the costs of the revenue lost by printing less money.
B)is the lost income from the large recession that will occur as aggregate demand falls.
C)may be small if the policy to reduce inflation is seen as credible by the public.
D)will be zero if it is unanticipated.

Question 40

The theory of rational expectations states that

A)expected inflation will be no different from actual inflation,on average.
B)expectations are based on all possible information.
C)individuals always act optimally.
D)expected inflation will be lower than actual inflation.

Question 41

In the early 1980s,the disinflation in the United States

A)was accompanied by rapidly growing deficits.
B)was costless in terms of output and employment effects.
C)was the result of a well-publicized expansionary monetary policy.
D)did not result in a severe recession.

Question 42

Keynesians would argue that:

A)information is inherently limited.
C)people often make mistakes even with appropriate information.
D)all of the above.
D)individuals have limited ability to process information when making decisions.
E)none of the above.

Question 43

"Policy ineffectiveness" refers to the hypothesis that monetary and fiscal policy actions that change aggregate demand will

A)neither affect output nor employment even in the short run.
B)affect output and employment in both the short run and long run.
C)affect output but not employment in the short run.
D)not affect output but will affect employment in the long run.

Question 44

According the Lucas' misperception model,when prices unexpectedly rise,suppliers infer that their relative prices have _____,which induces them to _____ output.

A)decreased; increase.
B)increased; decrese.
C)decreased; decrease.
D)increased; increase.

Question 45

According to Lucas' misperception theory,countries with higher rates of inflation should have a _____new classical AS curve.

A)flatter.
B)steeper.
C)downward sloping
D)vertical.
E)none of the above.

Question 46

Which of the following statements is (are)correct? The new classical economics

A)questions the soundness of the Keynesian model,arguing that many of its relationships are not firmly based on individual optimizing behavior.
B)criticizes what it considers arbitrary assumptions of Keynesians concerning wage stickiness and consequent involuntary unemployment.
C)favors the rational expectations assumptions over formulations that assume that individuals form price expectations on the basis of past history of prices because the rational expectations hypothesis is consistent with individual optimizing behavior.
D)All of the above
E)None of the above

Question 47

The more limited information,the _____ the new classical AS curve.

A)flatter.
B)steeper.
C)horizontal.
D)downward sloping.
E)none of the above.

Question 48

Which of the following statements is (are)correct?

A)The central policy tenet of the new classical economics is that aggregate demand management cannot achieve stabilization of real variables.
B)According to the new classical view,systematic monetary policy actions that change aggregate demand will not affect output and employment even in the short run.
C)According to the classicists,systematic fiscal policy actions that change aggregate demand will not affect output and employment even in the short run.
D)All of the above
E)None of the above

Question 49

According to the new classical view,if the money supply and prices fall but output remains the same indicates that

A)expectations must be adaptive.
B)this change in the money supply was anticipated.
C)aggregate supply must have shifted upward.
D)none of the above can explain this.

Question 50

Which of the following statements is correct?

A)In the new classical view,the money wage is assumed to adjust quickly to clear the labor market whereas in the Keynesian view,the money wage is sticky in a downward direction.
B)In the new classical view,the money wage is sticky in a downward direction whereas the money wage is assumed to adjust quickly to clear the labor market in the Keynesian view.
C)In both the new classical and the Keynesian views,the money wage is assumed to adjust quickly to clear the labor market.
D)In both the new classical and the Keynesian views,the money wage is sticky in a downward direction.

Question 51

Compared to adaptive expectations,rational expectations would imply that the transition between the short-run and the long-run will take:

A)the same amount of time.
B)a longer period of time.
C)a variable period of time.
D)less time.