Macroeconomics: Frictional Unemployment and Monetary Policy

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According to the Classical model, what is the duration of time for which the unemployment rate can differ from its natural level?

A few months

A very brief time (correct)

Indefinitely

Several years

What is the underlying assumption about people's expectations in the Classical model?

People have rational expectations and try to anticipate policy changes (correct)

People are completely unaware of policy changes

People's expectations are influenced by their emotions

People are easily fooled by policymakers

According to the Keynesian model, what is the reason why unemployment may differ from the natural rate for some time?

Because it takes time for prices and expected prices to adjust (correct)

Because policymakers are unable to implement effective policies

Because people have rational expectations

Because the natural rate of unemployment is unattainable

What is a key characteristic of a 'liquidity trap' in a Keynesian economy?

People hold money and refuse to spend, leading to a decrease in economic activity Signup and view all the answers

What is the role of the expected rate of inflation in the Phillips curve, according to the Keynesian model?

It is the forecast of inflation at the time the oldest sticky prices were set Signup and view all the answers

Can policymakers choose the optimal combination of unemployment and inflation, according to the Keynesian model?

Yes, temporarily Signup and view all the answers

What is the primary goal of the Constant Money Stock rule in Monetarist economics?

To maintain a stable output or economy by controlling the money stock Signup and view all the answers

What is a factor that affects people's ability to get information and make adjustments to their economic positions?

Information costs and impediments to job search Signup and view all the answers

What is the main difference between the Classical and Keynesian models in terms of the Phillips curve?

The Classical model assumes that the unemployment rate returns to its natural level quickly, while the Keynesian model assumes it takes time Signup and view all the answers

What is a characteristic of the Natural Rate of Unemployment?

It is a time-varying rate of unemployment that changes over time Signup and view all the answers

What is a consequence of people hoarding money in a recession?

It makes the recession worse, creating a vicious circle Signup and view all the answers

What is a characteristic of Japan's economy in the 1990s?

A period of prolonged economic slump with deflation Signup and view all the answers

What is the shape of the LR Phillips curve when inflation is fully anticipated?

Vertical Signup and view all the answers

According to the Keynesian view, what is the relationship between the rate of inflation and the levels of employment and output?

Inverse Signup and view all the answers

What is the effect on unemployment when the government implements an expansionary policy in the Keynesian model?

Unemployment rate decreases Signup and view all the answers

What happens to the level of money wage as employment increases in the Keynesian model?

It increases Signup and view all the answers

What is the direction of the Phillips curve implied by the Keynesian model?

Downward-sloping Signup and view all the answers

What is the effect on output when the government implements an expansionary policy in the Keynesian model?

Output increases Signup and view all the answers