Chapter 11 Homework Flashcards

Various explanations have been suggested for real wage rigidity in the Keynesian model. Which is NOT one of them?

Labor Hoarding

Various explanations have been for real wage rigidity in the Keynesian model- what are a couple reasons?

Legal and Institutional factors

Turnover costs

The efficiency-wage model

The idea behind effective labor demand curve is that

Firms are willing to meet the demand for their output at a specific price.

When the economy is not on the FE line and the price level is fixed, the level of employment is given on the

Effective demand curve

Suppose an economy is located on the effective labor demand curve at a point where output is below the full employment level of output. To restore general equilibrium, the price level must

decline

As the price level declines, what happens to employment?

Employment rises.

The two main sources of price stickiness are

Monopolistic competition and menu costs.

A market participant who takes the market price as given is a

Price taker

A market participant who has some power to set prices is a

Price setter

When prices are sticky, firms react to changes in demand by

Changing production rather than by changing prices (since prices are fixed in the short run).

Price Stickiness is:

the tendency of prices to adjust slowly to changes in the economy.

Menus costs are, by definition

The costs of changing prices

What does the Keynesian model predict about monetary neutrality?

In the short run, changes in the money supply will affect output and the real interest rate while in the long run, these changes will only affect the price level.

In the Keynesian model, how does a temporary increase in government purchases affect the following in the short run?

Output will increase in the short run. The real interest rate will increase as well.

In the Keynesian model, how does a temporary increase in government purchases affect the following in the long run?

Output remains unchanged in the short run. The real interest rate increases.

How is a temporary increase in government purchases likely to affect the composition of output in the long-run?

Consumption Expenditure will decrease

Investment Expenditure will decrease

According to the Keynesian IS-LM model, what is the effect of the following on output, the real interest rate, employment, and the price level of an economy in the short run? Increased tax incentives for investment (tax breaks for investment are offset by lump-sum tax increases that keep total current tax collections unchanged).

Output rises, the real interest rate rises and employment will rise bc firms will produce more at the fixed price to profit maximize on the increase in aggregate demand while prices are still fixed.

According to the Keynesian IS-LM model, what is the effect of the following on output, the real interest rate, employment, and the price level of an economy in the long-run? Increased tax incentives for investment (tax breaks for investment are offset by lump-sum tax increases that keep total current tax collections unchanged).

Output remains constant, the real interest rate increases, employment remains constant and the price level will rise.

Classical economists argue that using fiscal policy to fight a recession doesn’t make workers better off. Suppose, however, that the Keynesian model is correct. Relative to a policy of doing nothing, does an increase in government purchases that brings the economy to full employment make workers better off?

Yes, because full employment is restored quickly, whereas if the price level must adjust, it may take a long time for full employment to be restored.

According to Keynesian Business cycle theory,

the procyclical behavior of labor productivity occurs due to firms’ labor hoarding practices.

What does the Keynesian model predict about the cyclical behavior of average labor productivity?

The Keynesian theory assumes that demand shocks cause most cyclical fluctuations. This means that during expansions when employment rises, average labor productivity falls (because of diminishing marginal productivity) so it is countercyclical.