Ch 9 - Keynesian models with money supply as a policy instrument

Question 1

When the price level increases, the output is _____ the full employment level in the short run

Answer 1

Above

Question 2

A monetary expansion has real effects in the short run caused by ___________

Answer 2

Nominal wages being sticky

Question 3

In the LR a monetary expansion only causes a _______ movement in prices and nominal wages

Answer 3

One to one

Question 4

When inflation is equal to the expected rate and unemployment is equal to the natural rate, any attempt to reduce unemployment below its natural rate would be _________

Answer 4

Inflationary

Question 5

What is Okun’s law?

Answer 5

The negative relationship between unemployment and departures of output from potential output

Question 6

What is meant by sticky prices?

Answer 6

Prices are set at the beginning of the period and cannot change to accommodate shocks or other developments in the economy

Question 7

What is the rationale for sticky prices?

Answer 7

Menu costs, firms do not wish to disturb loyal customers

Question 8

In a multi period pricing model the _________ component of MP has real effects

Answer 8

Systematic

Question 9

What is meant be systematic shock?

Answer 9

Part of the money stock that depends on variables such as unemployment, past mock shocks etc… that are predictable

Question 10

What are non-systematic shocks?

Answer 10

Monetary shocks that either originate from the authorities themselves or in the financial markets

Question 11

What is the policy ineffectiveness proposition?

Answer 11

Monetary shocks have real effects in the economy while changes in the predictable component of MP do not change output at all

Question 12

What is the Lucas critique?

Answer 12

Refers to the instability of reduced form expressions used for policy making or policy appraisal