Question 1

Which explanation for persistent unemployment used by the original Keynesian model is no longer needed in the new Keynesian model?

Accepted Answer

The original Keynesian model relied on the assumption of a fixed nominal wage to explain persistent unemployment. New Keynesian models, however, incorporate various reasons for wage and price stickiness, making the assumption of a fixed nominal wage unnecessary for explaining unemployment.

Question 2

While much of New Classical macroeconomics is being refuted by the evidence,at least one part of it may be a permanent legacy to all economists.It is the insistence on a certain aspect of macroeconomic policy:

Accepted Answer

The New Classical macroeconomics theory emphasized the importance of policy anticipation by the public. According to this theory, people will try to anticipate macroeconomic policies and take actions accordingly, especially in the case of monetary policy. This idea has become a permanent legacy and has been widely accepted by economists.

Question 3

According to the original Keynesian model,there would be counter-cyclical movements of the real wage rate in response to changes in aggregate demand because

Accepted Answer

The answer of According to the original Keynesian model,there would...

Question 4

The New Classical assumption of how quickly markets clear is actually most appropriate in the analysis of

Accepted Answer

The New Classical assumption of rapid market clearing is most appropriate for financial markets because these markets are highly liquid and can adjust prices quickly in response to new information, ensuring that supply and demand are balanced in a short period of time.

Question 5

According to the new Keynesian economists,SAS adjusts slowly to a change in AD because of

Accepted Answer

The combination of high menu costs, staggered overlapping wage contracts, and efficiency wages all contribute to slow adjustments in SAS according to new Keynesian economists.

Question 6

Under the assumptions of the new Keynesian model,an increase in aggregate demand will

Accepted Answer

The new Keynesian model suggests that in the short run, an increase in aggregate demand will lead to higher prices and output due to price and wage stickiness. This also results in a decrease in unemployment as firms hire more to meet the increased demand. In the long run, the nominal wage rate adjusts. Therefore, all of the statements are correct in the context of the new Keynesian model.

Question 7

When there is extremely high and volatile inflation in an economy,the decision-making of firms leads to a very ________ SAS curve and thus relatively ________ cycles in real GDP.

Accepted Answer

The answer of When there is extremely high and volatile...

Question 8

The new Keynesian economists argue that prices are relatively rigid because of

Accepted Answer

The new Keynesian economists argue that prices are relatively rigid because of a combination of menu costs, overlapping staggered contracts, and efficiency wages. Menu costs refer to the costs that firms face in changing their prices, such as the cost of printing new menus or updating computer systems. Overlapping staggered contracts refer to the fact that contracts between firms and workers or suppliers often have different start and end dates, which can make it difficult for firms to adjust prices in response to changes in demand. Finally, efficiency wages occur when firms pay workers higher wages than the market equilibrium in order to increase productivity or reduce turnover, which can make it more difficult for firms to adjust prices downward in response to changes in demand.

Question 9

The flaw of the Classical model of the business cycle is that it

Accepted Answer

The Classical model of the business cycle is criticized for assuming away output fluctuations, essentially suggesting that the economy is always at or near full employment and that markets, including the labor market, clear through price and wage adjustments. This overlooks the possibility of significant output fluctuations and the reality of economic cycles.

Question 10

Gordon believes that the new Keynesian approach as opposed to other business cycle theories is preferred because

Accepted Answer

The New Keynesian approach is preferred by some because it explains wage and price stickiness by assuming that firms and workers are rational, but face constraints that make it difficult to adjust wages and prices quickly. This contrasts with other theories that might rely on less rational explanations for economic behaviors.

Question 11

While much of New Classical macroeconomics is being refuted by the evidence,at least one part of it may be a permanent legacy to all macroeconomists: the assumption of

Accepted Answer

Rational expectations have been widely accepted and integrated into macroeconomic models even outside of the New Classical framework.

Question 12

A principle difference between the original Keynesian model and the new Keynesian model is that in the new version

Accepted Answer

The original Keynesian model assumed that wages and prices were rigid and did not adjust quickly to changes in market conditions. The new Keynesian model also assumes this, but it also incorporates the traditional assumptions of profit maximization and the effectiveness of monetary policy. Therefore, options A and B are incorrect, making option C the correct answer.

Question 13

Assuming that workers will be pushed off their labor supply curve in response to a change in aggregate demand is part of which of the following theories?

Accepted Answer

This assumption is part of the Keynesian theory, which emphasizes the role of aggregate demand in determining employment levels and thus assumes that workers will not always adjust their wages downward to maintain full employment in response to a decrease in aggregate demand. In contrast, the Classical and New Classical theories assume that wages and prices are flexible, and that markets will clear through adjustments in prices and wages, leading to full employment in the long run.

Question 14

In the non-market-clearing model,"involuntary" unemployment results because

Accepted Answer

In the non-market-clearing model, wages and prices are assumed to be sticky, meaning they do not adjust immediately to changes in supply and demand. As a result, when there is a decrease in aggregate demand, firms are unable to sell all of their goods and services at the current price level. In response, they reduce production and lay off workers, resulting in involuntary unemployment even though the real wage may not be too high.

Question 15

The new Keynesian models,are examples of

Accepted Answer

New Keynesian models are characterized by non-market-clearing and wage rigidity, incorporating elements like price stickiness to explain why markets don't always clear.

Question 16

According to the Keynesian model,real wages should

Accepted Answer

The answer of According to the Keynesian model,real wages should
...

Question 17

One clear triumph for New Classical macroeconomics is its contribution to the analysis of hyperinflation.In bringing extremely rapid inflation to a halt by radical changes in policy,there is generally ________ loss of output,which ________ the Policy Ineffectiveness Proposition.

Accepted Answer

New Classical macroeconomics has been successful in bringing hyperinflation to a halt by making radical policy changes. This achievement has been made with only a modest loss of output, which supports the mild form of the Policy Ineffectiveness Proposition.

Question 18

Information on money growth is available to the public with ________ lags,causing difficulty for the ________ of the New Classical approach.

Accepted Answer

The answer of Information on money growth is available to...

Question 19

Countries with stable inflation rates tend to have ________ SAS curves.

Accepted Answer

Countries with stable inflation rates tend to have flat SAS curves because there is little pressure for firms to increase prices, and as a result, the level of output remains relatively stable regardless of changes in demand levels.

Question 20

Which of the following countries has a flat SAS curve?

Accepted Answer

The answer of Which of the following countries has a...

Quiz 17: New Classical Macro and New Keynesian Macro