Exam 10: Classical Business Cycle Analysis

Suppose the money demand of individuals and firms depends on what they perceive to be the probabilities that the economy will expand or contract over the following six months.Suppose their money demand is given by the equation L = 0.5Y - 100i + 20z,where z is the probability that the economy is expanding six months in the future.If z = 1,the economy will certainly be in recovery,if z = 0,the economy will certainly be in recession,and for z between 0 and 1 there is some uncertainty about the future state of the economy.Use a classical (RBC)model of the economy.If the Fed moves the money supply to target the price level,how does the money supply relate to the expected future state of the economy? Is this an example of reverse causation?

Why do many economists believe that money affects output? What is the empirical evidence in support of that belief?

The distinction between real and nominal shocks is that

A temporary adverse productivity shock would

When RBC economists compare the volatility in their models to the data,what are they looking at?

In recession years,________ jobs are lost than created,and vacacies and job openings ________.

According to classical economists,the government should increase government purchases when

Prescott's calibrated RBC model was able to match the data in terms of the ________ between many key macroeconomic variables and GNP; that is,in terms of how closely they moved with GNP over the business cycle.

Use the classical IS-LM model to show the effects of a temporary decrease in government purchases on the equilibrium levels of output,the real interest rate,employment,the real wage,and the price level.

Classical economists think that the government ________ use fiscal policy to dampen the business cycle because prices and wages adjust ________.

Research on productivity shocks has shown that

The misperceptions theory was originally proposed by ________ and rigorously formulated by ________.

What do RBC economists mean by the term calibration?

According to the misperceptions theory,the amount by which producers increase their output when the general price level rises depends on

Given data on capital (K),labor (N),and output (Y),and estimates of capital's share of output (a),the Solow residual is measured as

Use the classical (RBC)IS-LM-FE model to show the effects on the economy of a temporary adverse supply shock-for example,an increase in the price of oil.You should show the impact on the real wage,employment,output,the real interest rate,consumption,investment,and the price level.

Classical economists would cite all of the following as reasons why the government cannot smooth out the business cycle EXCEPT that

The theory of rational expectations suggests that

In the classical IS-LM/AD-AS model,a beneficial productivity shock would ________ output,________ the real interest rate,and ________ the price level.

According to the misperceptions theory,when the aggregate price level is higher than expected,