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Question 01

The equilibrium unemployment observed in a macroeconomy for which the neoclassic assumption is appropriate:

a) is positive because the trend demand for goods is less than the trend supply of goods.

b) desired demand (Y´C) is zero since all relative prices are assumed to be perfectly flexible so that all markets clear.

c) is positive because the collective bargaining real wage exceeds the real wage for the individual labour supply curve at each level of employment.

d) can be positive because prices are assumed to be sticky.

Question 02

We see in panel (c) that the IS, LM and S lines do not intersect in a single point. At point D supply falls short of demand for goods. Assuming the neoclassical assumption, what must occur so that equilibrium obtains in the goods, money, and labour markets at point A?

a) The price level must decrease so that the real money supply will rise which in turn will lead to the required decrease in interest rates.

b) The price level must increase so that the real money supply will increase which in turn will lead to the required increase in interest rates.

c) The price level must increase so that the real money supply will fall which in turn will lead to the required increase in interest rates.

d) The price level must decrease so that the real money supply will fall which in turn will lead to the required increase in interest rates.

Question 03

Under the neoclassical assumption, output is (A) _________ and there is no collectively involuntary unemployment. (B) _________ affect the real money supply.

a) (A) supply determined; (B) Price level adjustments

b) (A) supply determined; (B) Interest rate adjustments

c) (A) demand determined; (B) Price level adjustments

d) (A) demand determined ; (B) Interest rate adjustments

Question 04

When only disturbances such as changes in technology and tastes or in public spending and taxes can affect economic growth and employment, whereas changes in the money supply would not affect economic growth and employment, we have:

a) the Keynesian assumption.

b) the classical dichotomy.

c) sticky prices.

d) the neo-classical synthesis.

Question 05

Instead of relying on the price mechanism to match the supply and demand for goods, the Keynesian approach assumes:

a) the real money supply adjusts, changing interests rates to bring about the match between output and demand.

b) output adjusts to demand.

c) exogenous disturbances induce spending multiplier effects.

d) collective bargaining adjusts the real wage to bring about full-employment.

Question 06

Which of the following explanations does not help us understand why the price level is insensitive to aggregate demand in the short run?

a) Implicit and explicit contracts can lock firms into deliveries, times and prices.

b) Firms attempt to maintain good customer relations by not changing price lists frequently.

c) There are menu costs in changing prices.

d) Prices are cost determined and costs do not change even when demand changes.

Question 07

When prices are sticky, with the exception of the very special case of a general equilibrium in goods, money and labour markets, we will generally observe:

a) the money market is in equilibrium but the goods market and the labour market are in disequilibrium.

b) the goods market and the labour market are in equilibrium but the goods market is in disequilibrium.

c) the labour market is in equilibrium but the goods market and the money market are in disequilibrium.

d) the goods market and the money market are in equilibrium but the labour market is in disequilibrium.

Question 08

The most important macroeconomic policy implication of sticky prices is?

a) A change in the money supply can change real GDP.

b) Both the IS and LM curve will shift if there is a change in the money supply.

c) The LM curve has a positive slope.

d) Ricardian equivalence.

Oxford University Press, Online Resource Centre, Chapter 11.

Chapter 11

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