Multiple Choice Questions
1. A leading countercyclical variable:
a. Reaches a peak before the peak of the business cycle.
b. Reaches a trough before the peak of the business cycle.
c. Reaches a trough along with the trough of a business cycle.
d. All of the above.
e. None of the above.
2. GDP is a good proxy for the business cycle itself since:
a. It typically goes up in a boom and down in a recession.
b. Its real investment spending component is procyclical and coincident.
c. Its real consumption spending component is procyclical and coincident.
d. All of the above
e. None of the above.
3. A characteristic of the unemployment rate is that:
a. It typically goes down in a boom.
b. It typically goes up in a recession.
c. It is not clear whether it is a leading or a lagging indicator.
d. All of the above.
e. None of the above
4. A characteristic of the inflation rate is that:
a. It is a lagging indicator.
b. It typically goes down in a boom.
c. It typically goes up in a recession.
d. All of the above.
e. None of the above.
5. Classical economists believe that:
a. It takes a long time for economic variables to reach equilibrium.
b. Short-run fluctuations are too infrequent and mild to be of much interest.
c. Real variables like output and investment are not determined by nominal variables.
d. All of the above.
e. None of the above.
6. Keynesian economists believe:
a. That the long run is more important than short-run fluctuations.
b. That economies move quickly to their long run equilibrium levels.
c. That the government should pursue active policies to stabilize economic fluctuations.
d. All of the above.
e. None of the above.
7. Keynesian economists:
a. Believe that the classical dichotomy does not hold in the short run.
b. Observe that prices respond slowly to changes in supply and demand.
c. Believe that monetary policy affect aggregate output and the real interest rate.
d. All of the above.
e. None of the above.
8. In a perfectly competitive market:
a. Buyers and sellers are price takers.
b. Prices adjust quickly to equilibrium.
c. The goods purchased are assumed to be standardized products.
d. All of the above.
e. None of the above.
9. Under monopolistic competition:
a. Prices adjust slowly to equilibrium.
b. Many goods and services are not standardized.
c. Even if there is substantial competition in the market, some firms can set prices.
d. All of the above.
e. None of the above.
10. Menu costs:
a. Are the cost a firm bears when it changes its prices.
b. Are one source of price stickiness because changing prices involves many hidden costs.
c. Are one source of price stickiness because firms may not want to change their "menus" too often and risk alienating customers.
d. All of the above.
e. None of the above.
Discussion Questions
1. How do macroeconomists distinguish between flexible and sticky prices and wages?
2. What is the difference between the short-run and the long-run in macroeconomic analysis? Why do macroeconomists differentiate between the two time horizons?
3. How do Keynesian economic views on macroeconomic fluctuations differ from those of classical macroeconomists?
4. How do conflicting views of market structure influence the ideas of classical and Keynesian macroeconomists and how quickly the economy adjusts to long-run equilibrium?
5. How do menu costs contribute to sticky prices?
6. For each of the following products state whether they are sold in a perfectly competitive market or in a monopolistically competitive market?a. Dairy products, e.g., milk, cheese, etc.
b. Automobiles
7. Suppose that in a given economy all goods and services produced are sold in perfectly competitive markets. Would you represent this economy using the classical or Keynesian approach? Explain why.
8. Do you think that the hourly wage (i.e., the price of labor) is a relatively flexible or a relative sticky price? Explain why?