ECS4861 Assignment 1 (ANSWERS) 2026 - DISTINCTION GUARANTEED

Comprehensively structured ECS4861 Assignment 1 (ANSWERS) 2026 - DISTINCTION GUARANTEED. Prepared to a distinction standard with detailed and well-developed responses... A greater share of company profits paid out as dividends to shareholders. Lower unemployment benefits. All the statements are correct. Lower income tax leading to greater disposable income on the part of workers. are more accurate than simpler ad hoc models such as the IS-LM model. are more rigorous theoretically and should thus replace simpler ad hoc models such as the IS-LM model. are more realistic and thus a better guide to policy than cruder ad hoc models such as the IS-LM model. None of the statements is correct. the explanation of menu costs. the rational expectations hypothesis. the natural rate hypothesis. the Lucas signal extraction confusion hypothesis. because the decrease in output lowers the demand for labour. due to nominal wage rigidity at w0. All the statements are correct. because the lower real wage increases the supply of labour. New classical models do not permit money illusion, even in the short run. New classical models assume rational rather than adaptive expectations. In new classical models, systematic changes in monetary policy have no effect on real output. All the statements are correct. helps to explain why output and inflation tend to move in the same direction over the course of the business cycle. All the statements are correct. assumes that economic agents have imperfect information about the economy. relies on the signal extraction problem. new classical economics relies on the strong version of REH while new Keynesians only accept the weak version thereof. All the statements are correct. new classical economists combine it with the neutrality of money while new Keynesians combine it with the non-neutrality of money. new classical economists combine it with perfectly flexible prices and wages while new Keynesians combine it with sticky wages and prices. New classical models assume imperfect information. In new classical models, the supply of labour by households and output by firms depends on relative prices. New classical models assume continuous market clearing. None of the statements is correct. Voluntary unemployment. Imperfect information. Model consistent expectations. All the statements are correct. sticky prices and wages. the unwillingness of banks to lend money. All the statements are correct. the mispricing of risk. a rightward shift of the short-run aggregate supply curve. a leftward shift of the aggregate demand curve. a rightward shift of the aggregate demand curve. a leftward shift of the long-run aggregate supply curve. there is involuntary unemployment L0–L1. price and wage flexibility ensure that the economy moves back to output level Y0. the fall in aggregate demand leads an increase in the price level and a decrease in real wages. there is voluntary unemployment L0–L1. real wages are set below the market equilibrium level. the leisure preference of workers decreases. technological progress shifts the production function upwards. None of the statements is correct. increases if the productivity of labour increases. increases if the labour force increases. decreases if more people decide to study and further their education. decreases if the marginal cost of labour increases. credit rationing takes place. All the statements are correct. there is asymmetric information about creditors. financial institutions are risk averse. Austerity programmes which cut government spending too sharply. Rent controls. Insufficient unemployment insurance. Lowering inflation using contractionary monetary policies. may tempt the central bank to deviate from announced policy commitments in the future. is less likely than discretionary monetary policy to achieve the optimal combination of inflation and unemployment over time. will lead to lower inflation and higher unemployment over time than would be the case under discretionary monetary policy. helps to lower the natural rate of unemployment. lower wages may lower worker productivity. None of the statements is correct. they may wish to avoid the costs of possible strike action by trade unions. They may confuse an increase in the general price level with an increase in the relative price of the goods they produce. Higher inflation follows higher real output. All the statements are correct. Changes in the money supply precede changes in real output. Increases in employment coincide with increased real output. due to coordination problems between firms. due to the existence of menu costs. because firms have some control over the price of their products. All the statements are correct. In new Keynesian theory, monetary policy is more effective than fiscal policy in restoring aggregate demand. New Keynesian economics tries to explain why wages and prices are sticky. New Keynesian economics assumes continuous market clearing. In new Keynesian models, money is neutral in the short run. All the statements are correct. Endogenous to the model. Consistent with the maximization hypothesis. Consistent with the model. because firms are reluctant to cut prices, not knowing whether other firms will do so. when firms with high debt equity ratios reduce output rather than cut prices. All the statements are correct. even if prices and wages are perfectly flexible. are unsuccessful in changing the behaviour of economic agents. have no effect on the structural parameters of the model. All the statements are correct. lead to changes in expectations about the relevant variables. the policy ineffectiveness proposition. the signal extraction problem. monetary equilibrium business cycle theory MEBCT. rational expectations and dynamic time inconsistency policy analysis. fully flexible prices and real wages have a destabilizing effect on firms demand for labour. prices and real wages are rigid in the long run. the notional demand for labour is lower than the effective demand for labour. None of the statements is correct. Rational expectations. Discretionary monetary policy. None of the statements is correct. Time inconsistency. All the statements are correct. Rational expectations. The weak version of Say’s Law. Monopolistic competition. Increased price competition between firms. Increasing the budget deficit and lowering interest rates. Creation of a more flexible labour market. Nationalisation of key industries. forecast errors are unbiased. forecast errors are serially uncorrelated. All the statements are correct. economic agents know the full probability distribution of outcomes following relevant events such as a change in monetary policy. maximize their utility by taking into account all the relevant information. know the true model of the economy or relevant part thereof. can make systematic forecasting mistakes. have perfect foresight. Only a rule based framework for monetary policy such as inflation targeting can have any effect on output and employment in the short run. None of the statements is correct. Only transparent and well communicated changes in monetary policy will have any effect on output and employment in the short run. The more credible is the central bank the greater is the output sacrifice necessary to bring down inflation. menu costs help to explain real price rigidities. they represent a significant cost to the individual firm. they may contribute significantly to the duration and severity of recessions. they are an insignificant cost for the firm and therefore have very little effect on the economy. has goal independence but not instrument independence. is responsible for setting the inflation target. has instrument independence but not goal independence. has both goal and instrument independence. there is serial correlation of forecast errors over time. no information is ignored in forming expectations. expectations change only if new relevant information becomes available. forecasts of the inflation rate may be biased in a certain direction because economic agents do not have complete knowledge of how the economy works. monetary policy should be guided by explicit rules to control inflation. fiscal policy plays a much more important role than monetary policy in stabilizing the economy. A supply shock which decreased the level of output and demand for labour. monetary policy should follow a fixed money supply growth rule to control inflation. monetary policy can only be effective in reducing inflation if it follows the Taylor rule. policy changes lead to changes in expectations which thus change the parameters of the equations being estimated such that econometric forecasts that do not take this into account are unreliable. expectations change with changes in policy and therefore econometric policy evaluation is impossible. only unannounced or unsystematic changes in monetary policy have any real effects on the economy. All the statements are correct. The expected inflation rate adjusts quickly to changes in the actual inflation rate. A change in the expected inflation rate equals the most recent change in the actual inflation rate. The expected inflation rate adjusts gradually to changes in the actual inflation rate. An increase in the actual inflation rate leads to a rapid acceleration in the expected inflation rate. the aggregate demand curve does not shift and the economy stays at point E0 in diagram a. the short run aggregate supply curve shifts downwards and the economy moves to point E2 in diagram a. the aggregate demand curve shifts to the left and the economy moves to point E2 in diagram a. the aggregate demand curve shifts to the left and the economy moves to point E1 in diagram a. Perfectly flexible wages and prices. Workers choose to be unemployed. The classical dichotomy. All the statements are correct. contractionary policies are required to bring down inflation. there is a positive relationship between inflation and output in the long run. prices and wages are flexible in the long run. the monetary authority must establish its credibility for its policies to be effective. changes in aggregate demand can affect the NAIRU. the NAIRU is determined independently of the inflation rate. supply side factors do not affect the NAIRU. the Phillips curve is vertical at the natural rate of unemployment. give microeconomic explanations for non market clearing. include expectations in their models. All the statements are correct. allow for supply shocks in their models. do not make forecast errors based on publicly available information. make choices based on perfect information. have perfect foresight. form expectations that coincide with the outcomes predicted by the relevant model of the economy. The expected inflation rate adjusts quickly to changes in the actual inflation rate. An increase in the actual inflation rate leads to a rapid acceleration in the expected inflation rate. A change in the expected inflation rate equals the most recent change in the actual inflation rate. The expected inflation rate adjusts gradually to changes in the actual inflation rate. zero. larger than in Keynesian models. None of the statements is correct. larger than in orthodox monetarist models. Continuous market clearing. Imperfect information. Rational expectations. The assumption that unemployment is voluntary rather than involuntary. Which of the following is recommended by new Keynesians as a way of lowering high levels of structural unemployment? Krugman (2000) argues that macroeconomic models that are more fully specified with regard to the rationality postulate and their micro-foundations... Krugman (2000) explains how the development of micro-foundations for the aggregate supply function was most successful as regards... Involuntary unemployment increases... How do new classical models differ from orthodox monetarism? Lucas’s monetary theory of the business cycle... Both new classical economists and (most) new Keynesians include the rational expectations hypothesis (REH) in their models. The main difference between the two is that... How do new classical models differ from the old classical model? Which of the following is a feature of Lucas’s theory of the business cycle? According to the standard new Keynesian model of the business cycle, the severity of the recession was intensified by... According to the new Keynesian theory of the business cycle, the above events led to: In the long run... In the classical model of the labour market, involuntary unemployment will increase if... In the classical model of the economy, the supply of labour: The severity of a recession can be magnified by credit market imperfections in which... According to new classical economists, which of the following contribute to high levels of structural unemployment? According to the dynamic time inconsistency analysis of Kydland and Prescott (1977), a monetary policy rule... According to new Keynesians, firms may pay above-inflation increases in workers’ wages because... Which of the following empirical regularities is/are explained by the new Keynesian model? Nominal price rigidity arises at point E1... How does new Keynesian economics differ from orthodox Keynesian economics? In new classical models of the economy, expectations are... In new Keynesian models, changes in real output and unemployment can occur... Econometric forecasts are unreliable if changes in policy... In retrospect, the main contribution of new classical economics to the development of macroeconomics has been... The reason firms move off their notional demand for labour curve is because... Which of the following are most likely to lead to low inflation at the natural rate of unemployment? Which of the following propositions is compatible with new Keynesian economics? According to the new Keynesian theory of the business cycle, which of the following would have been an appropriate policy to counteract the increase in involuntary unemployment during the Great Recession? The strong version of the rational expectations hypothesis implies The weak version of the rational expectations hypothesis (REH) implies that workers, consumers and firms... Which of the following is a policy implication of new classical theory? In considering the effect of menu costs on the economy, Mankiw argues that... Like the Bank of England, the South African Reserve Bank (SARB)... The weak version of the rational expectations hypothesis (REH) implies that... In new Keynesian economics... The Lucas critique of econometric models as a guide to policy argues that... Which of the following statements best summarises Friedman’s view of how expectations of inflation are formed? If prices and wages are fully flexible... What do new classical models have in common with the old classical model? New Keynesians regard the sacrifice ratio as positive because... The main difference between Friedman’s natural rate of unemployment and the non-accelerating inflation rate of unemployment (NAIRU) is that... A fundamental challenge faced by Keynesians during the 1970s was to... The strong version of the rational expectations hypothesis implies that workers, consumers and firms: Which of the following statements best summarises Friedman’s view of how expectations of inflation are formed? In new classical models of the economy, the sacrifice ratio is.... Which of the following elements of new classical economics has proved to be most controversial?