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Multiple Choice Quiz
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1
The rational expectations equilibrium approach of Robert Lucas asserts that
A)real output is always at the full-employment level
B)demand-side policies have a permanent effect on output
C)unannounced changes in money supply temporarily affect the level of output and prices
D)people never make any forecasting mistakes
2
According to the Lucas aggregate supply model, what will happen in the short run if the central bank restricts money supply by less than it announced?
A)output and prices will both decrease
B)output and prices will both remain unchanged
C)prices will decrease but output will increase
D)prices will decrease but output will remain unchanged
3
The monetary policy multiplier for the rational expectations model is
A)zero for anticipated monetary policy changes
B)zero for unannounced monetary policy changes
C)zero in the short run but large in the long run
D)large for anticipated changes in money supply but zero for unanticipated changes
4
The rational expectations model by Lucas differs from the classical model since it allows for transitory changes from full-employment. These deviations are the result of
A)imperfectly competitive markets
B)forecasting errors
C)menu costs
D)rigid wages
5
The Lucas critique says that
A)building macroeconomic models on microeconomic foundations will lead to inadequate forecasts
B)people do not really have rational expectations and therefore even an announced monetary policy change will affect output
C)the standard AD-AS model assumes that people make predictions that are inconsistent with the prediction that the model itself makes
D)labor supply is highly sensitive to temporary changes in wage rates even though it is not very sensitive to permanent wage rate changes
6
According to the random walk of GDP model
A)only supply shocks tend to have a long-lasting impact on GDP
B)GDP varies a lot since labor supply is very sensitive to wage rate changes
C)there are many ups and downs but GDP growth pretty much follows an established trend
D)there are frequent transitory supply-side shocks but infrequent permanent demand-side shocks
7
The real business cycle theory asserts that
A)business cycles occur mostly due to changes in money supply
B)labor markets clear only slowly after unannounced monetary policy changes
C)the elasticity of labor supply in response to temporary wage rate changes is high
D)output can vary a lot over a business cycle but only if real wage rate changes are large and permanent
8
The theory of the intertemporal substitution of leisure explains why
A)a person's work effort is highly responsive to temporary wage rate changes
B)aggregate labor supply is highly elastic in response to permanent wage rate changes
C)real wages and labor supply adjust only slowly to announced changes in monetary policy
D)unemployment can temporarily exist even under perfect foresight
9
The New Keynesian model of sticky prices relies on the assumption that
A)markets are imperfectly competitive
B)monetary policy is neutral, even in the short run
C)labor supply is highly sensitive to temporary but not permanent wage rate changes
D)individual firms face a horizontal demand curve
10
Which of the following is NOT true of dynamic stochastic general equilibrium models?
A)The economy is periodically hit by unpredictable shocks
B)Future events depend on agents' decisions today
C)Firms are in perfect competition
D)Workers trade of labor and leisure depending on their real wage





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