Name: 
 

Chapter 16 - Sticky Prices and Nominal Wage Rates


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

 1. 
A model with sticky prices and nominal wages is a disequilibrium model.
 

 2. 
Menu costs are the posted prices of a firm.
 

 3. 
In the short run in a model with sticky prices, a monetary surprise affects labor demand and real output.
 

 4. 
In the long run in a model with sticky prices, a monetary surprise affects labor demand and real output.
 

 5. 
A new Keynesian model produces a countercyclical pattern of the average product of labor while in the data the average product of labor is weakly procyclical.
 

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

 6. 
Menu costs are:
a.
the posted prices of a firm.
b.
the costs of changing prices.
c.
are set by the government.
d.
are the long run costs of the firm.
 

 7. 
Sticky prices are:
a.
real prices that do not rapidly respond to changed circumstances.
b.
prices set by government.
c.
nominal prices that do not rapidly respond to changed circumstances.
d.
prices that can never be changed.
 

 8. 
In the model of price setting, the demand for the firms product is:
a.
positively related to real income in the economy.
b.
positively related to the firms price relative to the price level.
c.
negatively related to the real wage the firm pays.
d.
all of the above.
 

 9. 
In the model of price setting, the demand for the firms product is:
a.
negatively related to real income in the economy.
b.
negatively to the firms price relative to the price level.
c.
negatively related to the real wage the firm pays.
d.
all of the above.
 

 10. 
A firm’s markup ratio is:
a.
its price relative to the price level.
b.
the price level relative to its marginal costs.
c.
it price relative to its marginal costs.
d.
its marginal cost relative to the price level.
 

 11. 
In the model of price setting, the demand for the firm’s price is:
a.
positively related to the markup ratio.
b.
positively related to the nominal wage the firm pays.
c.
negatively related to the firm’s marginal product of labor.
d.
all of the above.
 

 12. 
In the model of price setting, the demand for the firm’s price is:
a.
positively related to the markup ratio.
b.
negatively related to the nominal wage the firm pays.
c.
positively related to the firm’s marginal product of labor.
d.
all of the above.
 

 13. 
In the model of price setting, the demand for the firm’s price is:
a.
negatively related to the markup ratio.
b.
positively related to the nominal wage the firm pays.
c.
positively related to the firm’s marginal product of labor.
d.
all of the above.
 

 14. 
In the model of price setting, the demand for the firm’s price is:
a.
negatively related to the markup ratio.
b.
negatively related to the nominal wage the firm pays.
c.
negatively related to the firm’s marginal product of labor.
d.
all of the above.
 

 15. 
In the model with sticky prices, in the short run a positive monetary shock leads to:
a.
an increase in household real money balances.
b.
an increase in household’s demand for goods.
c.
no change in household’s desired real money balances.
d.
all of the above.
 

 16. 
In the model with sticky prices, in the short run a positive monetary shock leads to:
a.
an increase in household real money balances.
b.
a decrease in household’s demand for goods.
c.
an increase in house hold’s desired real money balances.
d.
all of the above.
 

 17. 
In the model with sticky prices, in the short run a positive monetary shock leads to:
a.
a decrease in household real money balances.
b.
an increase in household’s demand for goods.
c.
a decrease in household’s desired real money balances.
d.
all of the above.
 

 18. 
In the model with sticky prices, in the short run a positive monetary shock leads to:
a.
a decrease in household real money balances.
b.
a decrease in household’s demand for goods.
c.
no change in household’s desired real money balances.
d.
all of the above.
 

 19. 
In a model with sticky prices, a positive monetary shock would cause households:
a.
to spend more to try to get rid of the excess money.
b.
to want to hold more money.
c.
to change optimal real money balances.
d.
all of the above.
 

 20. 
In the model with sticky prices, in the short run a positive monetary shock leads to:
a.
an increased supply of labor.
b.
an increased demand for labor.
c.
a higher marginal product of labor.
d.
all of the above.
 

 21. 
In the short run with a model with sticky prices a positive monetary surprise:
a.
increases labor demand.
b.
increases real output.
c.
increases the real wage.
d.
all of the above.
 

 22. 
In the short run with a model with sticky prices a positive monetary surprise:
a.
increases labor demand.
b.
decreases real output.
c.
leaves the real wage unchanged.
d.
all of the above.
 

 23. 
In the short run with a model with sticky prices a positive monetary surprise:
a.
decreases labor demand.
b.
increases real output.
c.
leaves the real wage unchanged.
d.
all of the above.
 

 24. 
In the short run with a model with sticky prices a positive monetary surprise:
a.
decreases labor demand.
b.
decreases real output.
c.
increases the real wage.
d.
all of the above.
 

 25. 
In the short run with a model with sticky prices a negative monetary surprise:
a.
decreases labor demand.
b.
decreases real output.
c.
decreases the real wage.
d.
all of the above.
 

 26. 
In the short run with a model with sticky prices a negative monetary surprise:
a.
decreases labor demand.
b.
increases real output.
c.
increases the real wage.
d.
all of the above.
 

 27. 
In the short run with a model with sticky prices a negative monetary surprise:
a.
increases labor demand.
b.
decreases real output.
c.
increases the real wage.
d.
all of the above.
 

 28. 
In the short run with a model with sticky prices a negative monetary surprise:
a.
increases labor demand.
b.
increases real output.
c.
decreases the real wage.
d.
all of the above.
 

 29. 
In the short run in a model with sticky prices:
a.
the labor input is procyclical.
b.
the average product of labor is countercyclical.
c.
the real wage rate in procyclical.
d.
all of the above.
 

 30. 
In the short run in a model with sticky prices:
a.
the labor input is procyclical.
b.
the average product of labor is procyclical.
c.
the real wage rate in countercyclical.
d.
all of the above.
 

 31. 
In the short run in a model with sticky prices:
a.
the labor input is countercyclical.
b.
the average product of labor is countercyclical.
c.
the real wage rate in countercyclical.
d.
all of the above.
 

 32. 
In the short run in a model with sticky prices:
a.
the labor input is countercyclical.
b.
the average product of labor is procyclical.
c.
the real wage rate in procyclical.
d.
all of the above.
 

 33. 
In the long run in a model with sticky prices:
a.
prices will adjust.
b.
money is neutral.
c.
increase in prices reverse the short run effects.
d.
all of the above.
 

 34. 
In the long run in a model with sticky prices:
a.
prices will adjust.
b.
money still affects output.
c.
the short run effects persist.
d.
all of the above.
 

 35. 
In the long run in a model with sticky prices:
a.
prices remain sticky.
b.
money is neutral.
c.
the short run effects persist.
d.
all of the above.
 

 36. 
In the long run in a model with sticky prices:
a.
prices remain sticky.
b.
money affects production.
c.
increase in prices reverse the short run effects.
d.
all of the above.
 

 37. 
In a new Keynesian model:
a.
money is procyclical and money is weakly procyclical in the data.
b.
the price level is countercyclical and the price level is countercyclical in the data.
c.
the average product of labor is countercyclical while the average product of labor is weakly procyclical in the data.
d.
all of the above.
 

 38. 
In a new Keynesian model:
a.
money is procyclical and money is weakly procyclical in the data.
b.
the price level is procyclical and the price level is procyclical in the data.
c.
the average product of labor is procyclical while the average product of labor is countercyclical in the data.
d.
all of the above.
 

 39. 
In a new Keynesian model:
a.
money is countercyclical and money is weakly countercyclical in the data.
b.
the price level is countercyclical and the price level is countercyclical in the data.
c.
the average product of labor is procyclical while the average product of labor is countercyclical in the data.
d.
all of the above.
 

 40. 
In new Keynesian model:
a.
money is countercyclical and money is weakly countercyclical in the data.
b.
the price level is procyclical and the price level is procyclical in the data.
c.
the average product of labor is countercyclical while the average product of labor is weakly procyclical in the data.
d.
all of the above.
 

 41. 
In a new Keynesian model an increase in aggregate demand causes:
a.
an increase in real production greater than the increase in aggregate demand.
b.
an increase in real production equal to increase in aggregate demand.
c.
an increase in real production less than the increase in aggregate demand.
d.
a decrease in real production.
 

 42. 
In a new Keynesian model a temporary increase in output could be cause by:
a.
a positive monetary surprise.
b.
households becoming exogenously more thrifty.
c.
a positive shock to government purchases.
d.
all of the above.
 

 43. 
In a new Keynesian model a temporary increase in output could be cause by:
a.
a positive monetary surprise.
b.
households becoming exogenously less thrifty.
c.
a negative shock to government purchases.
d.
all of the above.
 

 44. 
In a new Keynesian model a temporary increase in output could be cause by:
a.
a negative monetary surprise.
b.
households becoming exogenously more thrifty.
c.
a negative shock to government purchases.
d.
all of the above.
 

 45. 
In a new Keynesian model a temporary increase in output could be cause by:
a.
a negative monetary surprise.
b.
households becoming exogenously less thrifty.
c.
a positive shock to government purchases.
d.
all of the above.
 

 46. 
In the short run in a new Keynesian model an increase in money means:
a.
the price level must rise.
b.
real GDP must rise.
c.
the interest rate must rise.
d.
all of the above.
 

 47. 
In the short run in a new Keynesian model an increase in money means:
a.
the price level must rise.
b.
real GDP must fall.
c.
the interest rate must fall.
d.
all of the above.
 

 48. 
Unlike the price misperception model the new Keynesian models finds that:
a.
the price level is countercyclical as the data show.
b.
the price level is countercyclical while the data show it is procyclical.
c.
the price level is procyclical as the data show.
d.
the price level is procyclical as the data show it is countercyclical.
 

 49. 
In a model with sticky nominal wages an increase in the money supply will:
a.
lower the real wage.
b.
increase real output.
c.
increase the labor input.
d.
all of the above.
 

 50. 
In a model with sticky nominal wages an increase in the money supply will:
a.
lower the real wage.
b.
decrease real output.
c.
decrease the labor input.
d.
all of the above.
 

 51. 
In a model with sticky nominal wages an increase in the money supply will:
a.
raise the real wage.
b.
increase real output.
c.
decrease the labor input.
d.
all of the above.
 

 52. 
In a model with sticky nominal wages an increase in the money supply will:
a.
raise the real wage.
b.
decrease real output.
c.
increase the labor input.
d.
all of the above.
 

 53. 
A result of a model with sticky nominal wages is:
a.
voluntary unemployment in the short run.
b.
a countercyclical real wage while in the data the real wage is procyclical.
c.
money being countercyclical while in the data money is weakly procyclical.
d.
all of the above.
 

 54. 
A result of a model with sticky nominal wages is:
a.
involuntary unemployment in the short run.
b.
a procyclical real wage as in the data.
c.
money being countercyclical while in the data money is weakly procyclical.
d.
all of the above.
 

 55. 
A reason that nominal wages might be sticky is:
a.
the government sets all wages.
b.
contracts between workers and employers.
c.
people having incomplete information about wages at other jobs.
d.
all of the above.
 

Short Answer
 

 56. 
What are sticky prices and when might prices be sticky?
 

 57. 
In a model of price setting what determines firm j’s price?
 

 58. 
What are the effects of a positive monetary surprise in the short run a model with sticky prices?
 

 59. 
What are the long run effects of a monetary surprise in a model with sticky prices?
 

 60. 
What are the effects of a monetary surprise in a model with sticky nominal wages?
 



 
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