Barro
Chapter 15
TRUE/FALSE
1. If households misperceive prices, they may change real decisions in response to changes in the money
supply in the long run.
2. If the actual price level is above the expected price level, then workers’ actual real wage will be below
their expected real wage.
3. The real effect of a given monetary shock is larger the more stable the underlying monetary
environment.
4. Money can only effect real variables in the short run, if people expect the increase in the money
supply.
5. If monetary authorities follow a monetary rule, then monetary policy is more effective in affecting real
variables like real GDP.
6. In the price-misperceptions model, market prices adjust to clear markets only very slowly.
7. In the price-misperceptions model, an increase in the price level increases the equilibrium labor input
and capital services in the short- and long-run.
8. Discretionary monetary policy is more likely than a policy rule to promote a reputation for the central
bank of promoting low inflation.
9. A formal provision in the law to target inflation requires secrecy about the central bank’s activities.
10. Discretionary monetary policy suffers from an incentive for the central bank to sometimes renege on
its commitment to low inflation.
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MULTIPLE CHOICE
1. We would expect households to have the most complete information about:
a.
their own wage rate.
c.
products purchased occasionally like a
automobile.
b.
the wage rate available on other jobs.
d.
all of the above.
2. We would expect households to have the most complete information about:
a.
the wage rate available on other jobs.
c.
products purchased occasionally like a
automobile.
b.
products they purchase frequently.
d.
all of the above.
3. We would expect households to have incomplete information about:
a.
their own wage rate.
c.
products purchased occasionally like a
automobile.
b.
products they purchase frequently.
d.
all of the above.
4. We would expect households to have incomplete information about:
a.
their own wage rate.
c.
wage rates available on other jobs.
b.
products they purchase frequently.
d.
all of the above.
5. The workers’ perceived real wage rate is:
a.
their nominal wage rate divided by the
actual price level.
c.
their nominal wage rate divided by the
expected price level.
b.
the actual price level divided by their
nominal wage rate.
d.
the expected price level divided by their
nominal wage rate.
6. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4,
then:
a.
the expected real wage rate is greater than
the actual real wage rate.
c.
the expected real wage rate is greater than
the actual nominal wage rate.
b.
the expected real wage rate is less than the
actual real wage rate.
d.
the actual real wage rate is greater than the
actual nominal wage rate.
7. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4,
then expected real wage rate is:
a.
$10.
c.
$2.50.
b.
$5.
d.
none of the above.
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8. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4,
then actual real wage rate is:
a.
$10.
c.
$2.50.
b.
$5.
d.
none of the above.
9. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4,
then actual nominal wage rate is:
a.
$10.
c.
$2.50.
b.
$5.
d.
none of the above.
10. If the nominal wage is $10 per hour and the expected price level is 5 and the actual price level is 4,
then:
a.
the expected real wage rate is greater than
the actual real wage rate.
c.
the expected real wage rate is greater than
the actual nominal wage rate.
b.
the expected real wage rate is less than the
actual real wage rate.
d.
the actual real wage rate is greater than the
actual nominal wage rate.
11. If the nominal wage is $10 per hour and the expected price level is 2 and the actual price level is 4,
then actual real wage rate is:
a.
$10.
c.
$2.
b.
$2.50.
d.
none of the above.
12. If the nominal wage is $10 per hour and the expected price level is 5 and the actual price level is 4,
then expected real wage rate is:
a.
$10.
c.
$2.
b.
$2.50.
d.
none of the above.
13. If the nominal wage is $10 per hour and the expected price level is 5 and the actual price level is 4,
then actual nominal wage rate is:
a.
$10.
c.
$2.
b.
$2.50.
d.
none of the above.
14. If the nominal wage rises from $10 per hour in period one to $15 per hour in period 2 as the expected
price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period
2:
a.
the nominal wage is rising.
c.
the actual real wage is falling.
b.
the expected real wage is rising.
d.
all of the above.
15. If the nominal wage rises from $10 per hour in period 1 to $15 per hour in period 2 as the expected
price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period
2:
a.
the nominal wage is falling.
c.
the actual real wage is falling.
b.
the expected real wage is falling.
d.
all of the above.
16. If the nominal wage rises from $10 per hour in period one to $15 per hour in period 2 as the expected
price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period
2:
a.
the nominal wage is rising.
c.
the actual real wage is rising.
b.
the expected real wage is falling.
d.
all of the above.
17. If the nominal wage rises from $10 per hour in period one to $15 per hour in period 2 as the expected
price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period
2:
a.
the nominal wage is falling.
c.
the actual real wage is rising.
b.
the expected real wage is rising.
d.
all of the above.
18. In the current period a perceived increase in the real wage, will cause households to:
a.
work more.
c.
consume less leisure.
b.
consume more goods.
d.
all of the above.
19. In the current period a perceived increase in the real wage, will cause households to:
a.
work more.
c.
consume more leisure.
b.
consume fewer goods.
d.
all of the above.
20. In the current period a perceived increase in the real wage, will cause households to:
a.
work less.
c.
consume more leisure.
b.
consume more goods.
d.
all of the above.
21. In the current period a perceived increase in the real wage, will cause households to:
a.
work less.
c.
consume less leisure.
b.
consume fewer goods.
d.
all of the above.
22. If the perceive real wage goes up, workers will supply more labor:
a.
unless the actual real wage remains the
same or falls.
c.
in the short run.
b.
in the long run.
d.
all of the above.
23. If the perceive real wage goes up, real GDP increases:
a.
unless the actual real wage remains the
same or falls.
c.
in the short run.
b.
in the long run.
d.
all of the above.
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24. While price misperceptions can cause an increase labor supply and GDP in the short-run, in the long
run:
a.
money is neutral.
c.
labor supply returns to its initial position.
b.
money does not affect real GDP.
d.
all of the above.
25. While price misperceptions can cause an increase in labor supply and GDP in the short-run, in the long
run:
a.
money is no longer neutral in the model.
c.
labor supply returns to its initial position.
b.
money negatively impacts real GDP.
d.
all of the above.
26. While price misperceptions can cause an increase in labor supply and GDP in the short-run, in the long
run:
a.
money is neutral.
c.
labor supply ultimately declines.
b.
money negatively affects real GDP.
d.
all of the above.
27. While price misperceptions can cause an increase in labor supply and GDP in the short-run, in the long
run:
a.
money is no longer neutral in the model.
c.
labor supply falls by more than its initial
increase.
b.
money does not affect real GDP.
d.
all of the above.
28. An increase in the money supply:
a.
can affect real variables temporarily in the
short run.
c.
can affect nominal variables in the long
run.
b.
can not affect real variables in the long
run.
d.
all of the above.
29. An increase in the money supply:
a.
can affect real variables temporarily in the
short run.
c.
can affect real variables in the long run.
b.
can not affect nominal variables in the
short run.
d.
all of the above.
30. An increase in the money supply:
a.
can not affect real variables temporarily in
the short run.
c.
can not affect nominal variables in the
long run.
b.
can not affect real variables in the long
run.
d.
all of the above.
31. An increase in the money supply:
a.
can not affect real variables temporarily in
c.
can affect nominal variables in the long
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the short run.
run.
b.
can affect real variables in the long run.
d.
all of the above.
32. An increase in the money supply and inflation can only affect real variables only:
a.
if households perceive it is happening.
c.
in the long run.
b.
if households do not perceive all of the
inflation.
d.
if households expect it.
33. In the short run if households’ perceived money growth and inflation equals the actual money growth
and inflation, then
a.
money affects real variables like labor
supply.
c.
the model is still neutral even in the short
run.
b.
money affects real variables like GDP.
d.
all of the above.
34. Monetary policy authorities can only affect the real economy, if:
a.
their actions are anticipated by the public.
c.
their actions are fully communicated to the
public.
b.
their actions are consistent and
predictable.
d.
their actions systematically fool the
public.
35. A monetary shock of a given size has a larger real effect:
a.
the more it is anticipated by the public.
c.
the more fully it is explained and
communicated to the public.
b.
the more stable the underlying monetary
environment.
d.
all of the above.
36. Price misperception during a positive technology shock would cause:
a.
output or GDP to rise by less than it would
without price misperception.
c.
the expected price level to fall less than
the actual price level falls.
b.
labor supply to rise by less than it would
without price misperception.
d.
all of the above.
37. Price misperception during a positive technology shock would cause:
a.
output or GDP to rise by less than it would
without price misperception.
c.
the expected price level to fall more than
the actual price level falls.
b.
labor supply to fall by more than it would
without price misperception.
d.
all of the above.
38. Price misperception during a positive technology shock would cause:
a.
output or GDP to fall by more than it
would without price misperception.
c.
the expected price level to fall more than
the actual price level falls.
b.
labor supply to rise by less than it would
d.
all of the above.
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without price misperception.
39. Price misperception during a positive technology shock would cause:
a.
output or GDP to fall by more than it
would without price misperception.
c.
the expected price level to fall less than
the actual price level falls.
b.
labor supply to fall by more than it would
without price misperception.
d.
all of the above.
40. Discretionary monetary policy is when the monetary authority:
a.
does not commit to future monetary
actions.
c.
never produces a monetary surprise to
households.
b.
commits to future monetary actions.
d.
always behaves in a predictable way.
41. A monetary policy rule is when the monetary authority:
a.
does not commit to future monetary
actions.
c.
often produces a monetary surprise to
households.
b.
commits to future monetary actions.
d.
always behaves in unpredictable ways.
42. The price misperception model predicts:
a.
the price level will be procyclical while in
US data the price level is countercyclical.
c.
the real wage is countercyclical while in
US data the real wage is procyclical.
b.
the nominal quantity of money is
procyclical and in US data money is
weakly procyclical.
d.
all of the above.
43. The price misperception model predicts:
a.
the price level will be procyclical while in
US data the price level is countercyclical.
c.
the real wage is procyclical and in US data
the real wage is procyclical.
b.
the nominal quantity of money is
countercyclical while in US data money is
weakly procyclical.
d.
all of the above.
44. The price misperception model predicts:
a.
the price level will be countercyclical
while in US data the price level is
countercyclical.
c.
the real wage is procyclical and in US data
the real wage is procyclical.
b.
the nominal quantity of money is
procyclical and in US data money is
weakly procyclical.
d.
all of the above.
45. The price misperception model predicts:
a.
the price level will be countercyclical and
c.
the real wage is countercyclical while in
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in US data the price level is
countercyclical.
US data the real wage is procyclical.
b.
the nominal quantity of money is
countercyclical while in US data money is
weakly procyclical.
d.
all of the above.
46. Real variables can only be affected by:
a.
unperceived changes in the price level.
c.
expected changes in the price level.
b.
perceived changes in the price level.
d.
actual changes in the price level.
47. Monetary policy can affect real variables in the short run if monetary policy:
a.
surprises households.
c.
is unpredictable.
b.
is random.
d.
all of the above.
48. Monetary policy can affect real variables in the short run if monetary policy:
a.
surprises households.
c.
is predictable.
b.
is consistent.
d.
all of the above.
49. Monetary policy can affect real variables in the short run if monetary policy:
a.
is fully explained to households.
c.
is predictable.
b.
is random.
d.
all of the above.
50. Monetary policy can affect real variables in the short run if monetary policy:
a.
is fully communicated to households.
c.
is unpredictable.
b.
is consistent.
d.
all of the above.
51. In the price-misperceptions model, market prices of goods, wage rates, and rental prices
a.
adjust rapidly to clear markets.
c.
give households complete information.
b.
adjust slowly to clear markets.
d.
give households perfect information.
52. The price-misperceptions model differs from the equilibrium business cycle model in that households
a.
no longer serve as providers of capital
services.
c.
find that market-clearing prices move to
equilbrium slowly.
b.
sometimes misinterpret changes in
nominal prices as changes in real prices.
d.
typically face disequilibrium because
prices fail to clear markets.
53. Empirical evidence suggests that money is not always neutral, which is consistent with
a.
an equilibrium business-cycle model.
c.
a price-misperceptions model.
b.
a real business-cycle model.
d.
a wage-imperfections model.
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54. In the price-misperceptions model, employers have
a.
inaccurate information about wages and
accurate information about the price of the
output.
c.
accurate information about wages and the
price of the output.
b.
inaccurate information about wages and
the price of the output.
d.
accurate information about wages and
inaccurate information about the price of
the output.
55. In the price-misperceptions model, workers have
a.
inaccurate information about wages and
accurate information about the price level.
c.
accurate information about wages and the
price level.
b.
accurate information about wages and
inaccurate information about the price
level.
d.
inaccurate information about wages and
the price level.
56. In the price-misperceptions model, a rise in the real wage rate makes the demand curve for labor, in the
short run, to
a.
become steeper than in an equilibrium
business-cycle model.
c.
depend about expectations about prices,
not the actual price used in an equilibrium
business-cycle model.
b.
become less steep than in an equilibrium
business-cycle model.
d.
remain the same as in an equilibrium
business-cycle model.
57. In the price-misperceptions model, a rise in the nominal wage rate makes the supply curve of labor, in
the short run,
a.
shift to the right compared to an
equilibrium business-cycle model.
c.
shift to the left compared to an
equilibrium business-cycle model.
b.
become less steep than in an equilibrium
business-cycle model.
d.
remain the same as in an equilibrium
business-cycle model.
58. In the price-misperceptions model, an increase in the price level in the short run,
a.
lowers the quantity of labor supplied at a
given real wage.
c.
leaves the quantity of labor supplied
unchanged.
b.
lowers the quantity of labor supplied at a
given nominal wage.
d.
increases the quantity of labor supplied at
a given real wage.
59. In the price-misperceptions model, an increase in the price level will, in the long run,
a.
lower the quantity of labor supplied at a
given real wage.
c.
leave the quantity of labor supplied
unchanged.
b.
lower the quantity of labor supplied at a
given nominal wage.
d.
increase the quantity of labor supplied at a
given real wage.
60. In the price-misperceptions model, an increase in the price level will, in the short run,
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a.
increase the equilibrium quantity of labor
input and real GDP.
c.
leave the equilibrium quantity of labor
input and real GDP unchanged.
b.
lower the equilbirum quantity of labor
input and increase real GDP.
d.
lower the equilibrium quantity of labor
input and real GDP.
61. In the price-misperceptions model, an increase in the price level in the short-run
a.
decreases the equilibrium quantity of labor
input and capital services.
c.
leaves the equilibrium quantity of labor
input and capital services unchanged.
b.
increases the equilibrium quantity of labor
input and capital services.
d.
increases the equilibrium quantity of labor
input and decreases the equilibrium
quantity of capital services.
62. In the price-misperceptions model, an increase in the price level in the long-run
a.
decreases the equilibrium quantity of labor
input and capital services.
c.
increases the equilibrium quantity of labor
input and decreases the equilibrium
quantity of capital services.
b.
increases the equilibrium quantity of labor
input and capital services.
d.
leaves the equilibrium quantity of labor
input and capital services unchanged.
63. The Lucas hypothesis on monetary shocks says that the real effect of a given size monetary shock is
a.
larger, the more stable the underlying
monetary environment.
c.
larger, the less stable the underlying
monetary environment.
b.
smaller, the more stable the underlying
monetary environment.
d.
independent of the stability of the
underlying moentary environment.
64. Empirical evidence shows that, for countries such as the U.S., a monetary shock has
a.
little or no relation to real GDP.
c.
little or no relation to nominal GDP.
b.
a significant positive relation to real GDP.
d.
a signficant negative relation to real GDP.
65. In the price-misperception model, money is
a.
endogenous, just as it is in the equilibrium
business-cycle model.
c.
exogenous, but it is endogenous in the
equilibrium business-cycle model.
b.
exogenous, just as it is in the equilibrium
business-cycle model.
d.
endogenous, but it is exogenous in the
equilibrium business-cycle model.
66. Friedman and Schwartz’s Monetary History concludes that the procyclical pattern for money
a.
does not exist in historical data for the
U.S. from 1867 to 1960.
c.
cannot be explained entirely by
endogenous money.
b.
can only be explained during the times the
U.S. used a commodity money.
d.
can be explained entirely by exogenous
money.
67. One reason for preferring a rule for monetary policy is that a rule
a.
allows for additional discretionary policy.
c.
ensures that the economy would have a
negative rate of inflation.
b.
ensures that the economy would have a
positive rate of inflation.
d.
improves the credibility of the monetary
authority.
68. Which of the following is likely to promote low and stable inflation?
a.
inflation targeting
c.
a large benefit from temporarily reneging
on a stated policy
b.
discretionary monetary policy
d.
none of the above
SHORT ANSWER
1. On what types of prices do households have the best information and on what types of products may
they have incomplete information?
2. What are the short run effects of a real wage misperception in the market clearing model?
3. Why even with the possibility of real wage misperceptions is the market clearing model still neutral in
the long run?
4. Under what conditions do monetary policy changes have the larger real effects on an economy?
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5. What is the difference between discretionary monetary policy and monetary policy under a policy
rule?
6. Why might a monetary-policy rule be more likely than discretionary policy to promote low inflation?
ANS: