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New Keynesian Economics

Description: This quiz is designed to test your understanding of the New Keynesian Economics, which is a school of thought in macroeconomics that focuses on the role of price stickiness and imperfect information in economic fluctuations.
Number of Questions: 15
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Tags: macroeconomics new keynesian economics price stickiness imperfect information
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What is the central idea of New Keynesian Economics?

  1. Price stickiness and imperfect information are the main causes of economic fluctuations.

  2. The economy is always at full employment.

  3. Government spending is the most effective way to stimulate the economy.

  4. Monetary policy is the most effective way to control inflation.

Show answer
Correct Option: A
Explanation:

New Keynesian Economics argues that price stickiness and imperfect information prevent the economy from reaching full employment in the short run.

What is price stickiness?

  1. The tendency for prices to change slowly over time.

  2. The tendency for prices to change quickly over time.

  3. The tendency for prices to remain constant over time.

  4. The tendency for prices to fall over time.

Show answer
Correct Option: A
Explanation:

Price stickiness is the tendency for prices to change slowly over time, even when there are changes in demand or supply.

What is imperfect information?

  1. The lack of complete information about the economy.

  2. The lack of complete information about the future.

  3. The lack of complete information about the present.

  4. The lack of complete information about the past.

Show answer
Correct Option: A
Explanation:

Imperfect information is the lack of complete information about the economy, which can lead to mistakes in decision-making.

How does price stickiness affect the economy?

  1. It prevents the economy from reaching full employment.

  2. It causes the economy to experience inflation.

  3. It causes the economy to experience deflation.

  4. It has no effect on the economy.

Show answer
Correct Option: A
Explanation:

Price stickiness prevents the economy from reaching full employment because it makes it difficult for firms to adjust their prices in response to changes in demand.

How does imperfect information affect the economy?

  1. It leads to mistakes in decision-making.

  2. It causes the economy to experience uncertainty.

  3. It causes the economy to experience risk.

  4. It has no effect on the economy.

Show answer
Correct Option: A
Explanation:

Imperfect information leads to mistakes in decision-making because people do not have all the information they need to make informed decisions.

What are the policy implications of New Keynesian Economics?

  1. The government should use fiscal policy to stimulate the economy.

  2. The government should use monetary policy to stimulate the economy.

  3. The government should use both fiscal and monetary policy to stimulate the economy.

  4. The government should not intervene in the economy.

Show answer
Correct Option: C
Explanation:

New Keynesian Economics argues that the government should use both fiscal and monetary policy to stimulate the economy because price stickiness and imperfect information prevent the economy from reaching full employment on its own.

Which of the following is a key assumption of New Keynesian Economics?

  1. Prices are perfectly flexible.

  2. Information is perfect.

  3. The economy is always at full employment.

  4. There are frictions in the economy that prevent it from reaching full employment.

Show answer
Correct Option: D
Explanation:

New Keynesian Economics assumes that there are frictions in the economy, such as price stickiness and imperfect information, that prevent it from reaching full employment.

What is the main difference between New Keynesian Economics and traditional Keynesian Economics?

  1. New Keynesian Economics assumes that prices are perfectly flexible.

  2. New Keynesian Economics assumes that information is perfect.

  3. New Keynesian Economics assumes that the economy is always at full employment.

  4. New Keynesian Economics assumes that there are frictions in the economy that prevent it from reaching full employment.

Show answer
Correct Option: D
Explanation:

The main difference between New Keynesian Economics and traditional Keynesian Economics is that New Keynesian Economics assumes that there are frictions in the economy, such as price stickiness and imperfect information, that prevent it from reaching full employment.

Which of the following is a key policy recommendation of New Keynesian Economics?

  1. The government should use fiscal policy to stimulate the economy.

  2. The government should use monetary policy to stimulate the economy.

  3. The government should use both fiscal and monetary policy to stimulate the economy.

  4. The government should not intervene in the economy.

Show answer
Correct Option: C
Explanation:

New Keynesian Economics recommends that the government should use both fiscal and monetary policy to stimulate the economy because price stickiness and imperfect information prevent the economy from reaching full employment on its own.

What is the main criticism of New Keynesian Economics?

  1. It is too complex.

  2. It is not based on empirical evidence.

  3. It does not provide a clear policy framework.

  4. It is not consistent with the data.

Show answer
Correct Option: D
Explanation:

The main criticism of New Keynesian Economics is that it is not consistent with the data. Some economists argue that the model does not accurately predict the behavior of the economy.

Which of the following is a key figure in the development of New Keynesian Economics?

  1. John Maynard Keynes

  2. Milton Friedman

  3. Robert Lucas

  4. George Akerlof

Show answer
Correct Option: D
Explanation:

George Akerlof is a key figure in the development of New Keynesian Economics. He is known for his work on asymmetric information and the market for lemons.

What is the market for lemons?

  1. A market where buyers and sellers have perfect information.

  2. A market where buyers and sellers have imperfect information.

  3. A market where buyers have perfect information and sellers have imperfect information.

  4. A market where sellers have perfect information and buyers have imperfect information.

Show answer
Correct Option: B
Explanation:

The market for lemons is a market where buyers and sellers have imperfect information. This can lead to problems, such as adverse selection and moral hazard.

What is adverse selection?

  1. The situation where buyers have more information than sellers.

  2. The situation where sellers have more information than buyers.

  3. The situation where buyers and sellers have the same information.

  4. The situation where buyers and sellers have no information.

Show answer
Correct Option: B
Explanation:

Adverse selection is the situation where sellers have more information than buyers. This can lead to problems, such as the sale of defective goods.

What is moral hazard?

  1. The situation where buyers have more information than sellers.

  2. The situation where sellers have more information than buyers.

  3. The situation where buyers and sellers have the same information.

  4. The situation where buyers and sellers have no information.

Show answer
Correct Option: A
Explanation:

Moral hazard is the situation where buyers have more information than sellers. This can lead to problems, such as the overconsumption of goods and services.

How do New Keynesian economists view the role of government in the economy?

  1. Government should play a limited role in the economy.

  2. Government should play an active role in the economy.

  3. Government should not intervene in the economy.

  4. Government should only intervene in the economy in times of crisis.

Show answer
Correct Option: B
Explanation:

New Keynesian economists believe that government should play an active role in the economy in order to address market failures and promote economic stability.

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