Chapter15 - The Price-Misperceptions Model

Name:

True/False
Indicate whether the statement is true or false.

If households misperceive prices, they may change real decisions in response to changes in the money supply in the long run.

If the actual price level is above the expected price level, then workers’ actual real wage will be below their expected real wage.

The real effect of a given monetary shock is larger the more stable the underlying monetary environment.

Money can only effect real variables in the short run, if people expect the increase in the money supply.

If monetary authorities follow a monetary rule, then monetary policy is more effective in affecting real variables like real GDP.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

We would expect households to have the most complete information about:

a.	their own wage rate.
b.	the wage rate available on other jobs.
c.	products purchased occasionally like a automobile.
d.	all of the above.

We would expect households to have the most complete information about:

a.	the wage rate available on other jobs.
b.	products they purchase frequently.
c.	products purchased occasionally like a automobile.
d.	all of the above.

We would expect households to have incomplete information about:

a.	their own wage rate.
b.	products they purchase frequently.
c.	products purchased occasionally like a automobile.
d.	all of the above.

We would expect households to have incomplete information about:

a.	their own wage rate.
b.	products they purchase frequently.
c.	wage rates available on other jobs.
d.	all of the above.

10.

The workers’ perceived real wage rate is:

a.	their nominal wage rate divided by the actual price level.
b.	the actual price level divided by their nominal wage rate.
c.	their nominal wage rate divided by the expected price level.
d.	the expected price level divided by their 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:

a.	the expected real wage rate is greater than the actual real wage rate.
b.	the expected real wage rate is less than the actual real wage rate.
c.	the expected real wage rate is greater than the actual nominal wage rate.
d.	the actual real wage rate is greater than the actual nominal wage rate.

12.

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.
b.	$5.
c.	$2.50.
d.	none of the above.

13.

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.
b.	$5.
c.	$2.50.
d.	none of the above.

14.

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.
b.	$5.
c.	$2.50.
d.	none of the above.

15.

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.
b.	the expected real wage rate is less than the actual real wage rate.
c.	the expected real wage rate is greater than the actual nominal wage rate.
d.	the actual real wage rate is greater than the actual nominal wage rate.

16.

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.
b.	$2.50.
c.	$2.
d.	none of the above.

17.

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.
b.	$2.50.
c.	$2.
d.	none of the above.

18.

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.
b.	$2.50.
c.	$2.
d.	none of the above.

19.

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.
b.	the expected real wage is rising.
c.	the actual real wage is falling.
d.	all of the above.

20.

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.
b.	the expected real wage is falling.
c.	the actual real wage is falling.
d.	all of the above.

21.

a.	the nominal wage is rising.
b.	the expected real wage is falling.
c.	the actual real wage is rising.
d.	all of the above.

22.

a.	the nominal wage is falling.
b.	the expected real wage is rising.
c.	the actual real wage is rising.
d.	all of the above.

23.

In the current period a perceived increase in the real wage, will cause households to:

a.	work more.
b.	consume more goods.
c.	consume less leisure.
d.	all of the above.

24.

In the current period a perceived increase in the real wage, will cause households to:

a.	work more.
b.	consume fewer goods.
c.	consume more leisure.
d.	all of the above.

25.

In the current period a perceived increase in the real wage, will cause households to:

a.	work less.
b.	consume more goods.
c.	consume more leisure.
d.	all of the above.

26.

In the current period a perceived increase in the real wage, will cause households to:

a.	work less.
b.	consume fewer goods.
c.	consume less leisure.
d.	all of the above.

27.

If the perceive real wage goes up, workers will supply more labor:

a.	unless the actual real wage remains the same or falls.
b.	in the long run.
c.	in the short run.
d.	all of the above.

28.

If the perceive real wage goes up, real GDP increases:

a.	unless the actual real wage remains the same or falls.
b.	in the long run.
c.	in the short run.
d.	all of the above.

29.

While price misperceptions can cause an increase labor supply and GDP in the short-run, in the long run:

a.	money is neutral.
b.	money does not affect real GDP.
c.	labor supply returns to its initial position.
d.	all of the above.

30.

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.
b.	money negatively impacts real GDP.
c.	labor supply returns to its initial position.
d.	all of the above.

31.

While price misperceptions can cause an increase in labor supply and GDP in the short-run, in the long run:

a.	money is neutral.
b.	money negatively affects real GDP.
c.	labor supply ultimately declines.
d.	all of the above.

32.

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.
b.	money does not affect real GDP.
c.	labor supply falls by more than its initial increase.
d.	all of the above.

33.

An increase in the money supply:

a.	can affect real variables temporarily in the short run.
b.	can not affect real variables in the long run.
c.	can affect nominal variables in the long run.
d.	all of the above.

34.

An increase in the money supply:

a.	can affect real variables temporarily in the short run.
b.	can not affect nominal variables in the short run.
c.	can affect real variables in the long run.
d.	all of the above.

35.

An increase in the money supply:

a.	can not affect real variables temporarily in the short run.
b.	can not affect real variables in the long run.
c.	can not affect nominal variables in the long run.
d.	all of the above.

36.

An increase in the money supply:

a.	can not affect real variables temporarily in the short run.
b.	can affect real variables in the long run.
c.	can affect nominal variables in the long run.
d.	all of the above.

37.

An increase in the money supply and inflation can only affect real variables only:

a.	if households perceive it is happening.
b.	if households do not perceive all of the inflation.
c.	in the long run.
d.	if households expect it.

38.

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.
b.	money affects real variables like GDP.
c.	the model is still neutral even in the short run.
d.	all of the above.

39.

Monetary policy authorities can only affect the real economy, if:

a.	their actions are anticipated by the public.
b.	their actions are consistent and predictable.
c.	their actions are fully communicated to the public.
d.	their actions systematically fool the public.

40.

A monetary shock of a given size has a larger real effect:

a.	the more it is anticipated by the public.
b.	the more stable the underlying monetary environment.
c.	the more fully it is explained and communicated to the public.
d.	all of the above.

41.

Price misperception during a positive technology shock would cause:

a.	output or GDP to rise by less than it would without price misperception.
b.	labor supply to rise by less than it would without price misperception.
c.	the expected price level to fall less than the actual price level falls.
d.	all of the above.

42.

Price misperception during a positive technology shock would cause:

a.	output or GDP to rise by less than it would without price misperception.
b.	labor supply to fall by more than it would without price misperception.
c.	the expected price level to fall more than the actual price level falls.
d.	all of the above.

43.

Price misperception during a positive technology shock would cause:

a.	output or GDP to fall by more than it would without price misperception.
b.	labor supply to rise by less than it would without price misperception.
c.	the expected price level to fall more than the actual price level falls.
d.	all of the above.

44.

Price misperception during a positive technology shock would cause:

a.	output or GDP to fall by more than it would without price misperception.
b.	labor supply to fall by more than it would without price misperception.
c.	the expected price level to fall less than the actual price level falls.
d.	all of the above.

45.

Discretionary monetary policy is when the monetary authority:

a.	does not commit to future monetary actions.
b.	commits to future monetary actions.
c.	never produces a monetary surprise to households.
d.	always behaves in a predictable way.

46.

A monetary policy rule is when the monetary authority:

a.	does not commit to future monetary actions.
b.	commits to future monetary actions.
c.	often produces a monetary surprise to households.
d.	always behaves in unpredictable ways.

47.

The price misperception model predicts:

a.	the price level will be procyclical while in US data the price level is countercyclical.
b.	the nominal quantity of money is procyclical and in US data money is weakly procyclical.
c.	the real wage is countercyclical while in US data the real wage is procyclical.
d.	all of the above.

48.

The price misperception model predicts:

a.	the price level will be procyclical while in US data the price level is countercyclical.
b.	the nominal quantity of money is countercyclical while in US data money is weakly procyclical.
c.	the real wage is procyclical and in US data the real wage is procyclical.
d.	all of the above.

49.

The price misperception model predicts:

a.	the price level will be countercyclical while in US data the price level is countercyclical.
b.	the nominal quantity of money is procyclical and in US data money is weakly procyclical.
c.	the real wage is procyclical and in US data the real wage is procyclical.
d.	all of the above.

50.

The price misperception model predicts:

a.	the price level will be countercyclical and in US data the price level is countercyclical.
b.	the nominal quantity of money is countercyclical while in US data money is weakly procyclical.
c.	the real wage is countercyclical while in US data the real wage is procyclical.
d.	all of the above.

51.

Real variables can only be affected by:

a.	unperceived changes in the price level.
b.	perceived changes in the price level.
c.	expected changes in the price level.
d.	actual changes in the price level.

52.

Monetary policy can affect real variables in the short run if monetary policy:

a.	surprises households.
b.	is random.
c.	is unpredictable.
d.	all of the above.

53.

Monetary policy can affect real variables in the short run if monetary policy:

a.	surprises households.
b.	is consistent.
c.	is predictable.
d.	all of the above.

54.

Monetary policy can affect real variables in the short run if monetary policy:

a.	is fully explained to households.
b.	is random.
c.	is predictable.
d.	all of the above.

55.

Monetary policy can affect real variables in the short run if monetary policy:

a.	is fully communicated to households.
b.	is consistent.
c.	is unpredictable.
d.	all of the above.

Short Answer

56.

On what types of prices do households have the best information and on what types of products may they have incomplete information?

57.

What are the short run effects of a real wage misperception in the market clearing model?

58.

Why even with the possibility of real wage misperceptions is the market clearing model still neutral in the long run?

59.

Under what conditions do monetary policy changes have the larger real effects on an economy?

60.

What is the difference between discretionary monetary policy and monetary policy under a policy rule?