Deck 10: Classical Business Cycle Analysis

Question 1

The most common measure of productivity shocks is known as

A)the Solow residual.
B)the Lucas supply curve.
C)the Prescott productivity parameter.
D)the Kydland factor.

Answer 1

A

Question 2

An adverse supply shock would directly ________ labor productivity by changing the amount of output that can be produced with any given amount of capital and labor.It would also indirectly ________ average labor productivity through changes in the level of employment.

A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Answer 2

C

Question 3

What do RBC economists mean by the term calibration?

A)Modifying the structure of an economic theory to strengthen its logic
B)Changing a theory as the economy changes
C)Working out a detailed numerical example of a more general theory
D)Writing out the implications of a theory for all the main economic variables

Answer 3

C

Question 4

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

A)The degree to which variables lead output over the business cycle
B)The strength of procyclicality of different variables
C)The amount of random variation in economic variables
D)The degree to which different economic variables move together

Question 5

Prescott's calibrated RBC model showed that the actual and simulated ________ of five key macroeconomic variables were very close.

A)magnitudes
B)slopes
C)volatilities
D)betas

Question 6

A temporary beneficial productivity shock would

A)shift the labor supply curve down and to the right.
B)increase the level of employment.
C)increase future income.
D)increase the expected future marginal product of capital.

Question 7

When RBC economists work out a detailed numerical example of a more general theory,they are performing

A)econometrics.
B)number theory.
C)calibration.
D)topology.

Question 8

Which of the following is not a primary cause of business cycle fluctuations,according to real business cycle theory?

A)A change in the production function
B)A change in the size of the labor force
C)A change in the money supply
D)A change in the real quantity of government purchases

Question 9

A temporary adverse productivity shock would

A)shift the labor supply curve upward.
B)decrease the level of employment.
C)decrease future income.
D)decrease the expected future marginal product of capital.

Question 10

Which of the following is an example of a productivity shock?

A)The introduction of new management techniques
B)A change in taxes on corporate profits
C)A change in the level of government transfer programs
D)An increase in the money supply

Question 11

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

A)The degree to which variables lead output over the business cycle
B)The strength of procyclicality of different variables
C)The amount of random variation in economic variables
D)The degree to which different economic variables move together

Question 12

Research on productivity shocks has shown that

A)productivity shocks have only nominal effects.
B)there have been no identifiable productivity shocks in the U.S.economy since World War II.
C)small productivity shocks can explain large business cycle fluctuations.
D)large productivity shocks produce only small deviations in aggregate output.

Question 13

The distinction between real and nominal shocks is that

A)real shocks directly affect only the IS curve,but not the FE line or LM curve.
B)real shocks directly affect only the FE line,but not the LM curve.
C)real shocks directly affect only the IS curve or the FE line,but not the LM curve.
D)real shocks have a large direct effect on the IS curve and the FE line,but only a small direct effect on the LM curve.

Question 14

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

A)increase; decrease; increase
B)increase; decrease; decrease
C)increase; increase; decrease
D)decrease; decrease; increase

Question 15

How do RBC economists face the business cycle fact that inflation is procyclical?

A)They argue that even though inflation doesn't fit their theory,everything else does,and inflation is not important.
B)They note that inflation would not be procyclical if monetary policy were conducted properly.
C)They argue that inflation is procyclical only because monetary policy shocks are the main cause of business cycles.
D)They use alternative statistical methods that suggest that inflation is countercyclical.

Question 16

Which of the following would not be an example of a productivity shock?

A)The introduction of new management techniques
B)A change in government regulations affecting production
C)A change in the level of government transfer programs
D)A spell of unusually good or unusually bad weather

Question 17

According to real business cycle theory,which of the following events is least likely to cause a recession?

A)A decline in the money supply
B)A decline in the capital stock
C)A decline in productivity
D)A decline in labor supply

Question 18

The theory that real shocks to the economy are the primary cause of business cycles is

A)monetarism.
B)Keynesian theory.
C)real business cycle theory.
D)Hamiltonian theory.

Question 19

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.

A)correlation
B)interdependence
C)gamma coefficient
D)sigma ratio

Question 20

Real business cycle theorists think that most business cycle fluctuations are caused by shocks to

A)the production function.
B)the size of the labor force.
C)the real quantity of government purchases.
D)the spending and saving decisions of consumers.

Question 21

Define real shocks,define nominal shocks,and give an example of each.

Question 22

How do RBC theorists answer the objection that there have been few examples of large and easily measurable real shocks to the U.S.economy in recent decades?

Question 23

The Solow residual is

A)the waste from the production process.
B)the most common measure of productivity shocks.
C)a measure of the efficiency of the production process.
D)a measure of the proportion of involuntarily unemployed workers.

Question 24

According to the real business cycle theory,what is the principal cause of business cycle fluctuations?

Question 25

If the utilization rates of capital and labor are procyclical,then

A)output will rise in recessions and decline in expansions.
B)measured productivity will be constant.
C)the Solow residual will be procyclical.
D)prices will be countercyclical.

Question 26

DSGE models are

A)similar to RBC models but allow for shocks other than productivity shocks.
B)similar to RBC models,but government spending shocks play a major role.
C)similar to Keynesian models except in the long run.
D)similar to Keynesian models except in the short run.

Question 27

Use the classical (RBC)IS-LM-FE model to show the effects on the economy of a temporary beneficial supply shock-for example,a decrease 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.

Question 28

Classical economists who allow for shocks other than productivity shocks to affect the economy use ________ models rather than RBC models.

A)Keynesian
B)monetarist
C)nonlinear
D)DSGE

Question 29

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.

Question 30

If the utilization rates of capital (uK)and labor (uN)are procyclical,then the Solow residual,as conventionally measured,is

A)Y [(uK K)a (uN N)1-a]
B)Y / [(uK K)a (uN N)1-a]
C)
D)1/{Y [(uK K)a (uN N)1-a]}

Question 31

The formula Y / (KaN1-a)provides a calculation of

A)x-efficiency.
B)dynamic efficiency.
C)economywide monopoly power.
D)the Solow residual.

Question 32

Models that are similar to RBC models but allow for shocks other than productivity shocks are known as

A)DSGE models.
B)Keynesian models.
C)Solow models.
D)Friedman models.

Question 33

Critics of the RBC approach argue that it's hard to find productivity shocks large enough to cause business cycles.What is the RBC counterargument to this criticism?

A)Business cycles are always and everywhere a monetary phenomenon.
B)Wars and military buildups could be considered productivity shocks.
C)Business cycles could be caused by the accumulation of small productivity shocks.
D)Business cycles are often caused by unobservable productivity shocks,which aren't apparent at the time they occur.

Question 34

Measures of the Solow residual show it to be

A)strongly procyclical.
B)mildly procyclical.
C)mildly countercyclical.
D)strongly countercyclical.

Question 35

When,because of hiring and firing costs,firms retain workers in a recession that they would otherwise lay off,there is said to be

A)labor hoarding.
B)a decline in capacity utilization.
C)voluntary unemployment.
D)involuntary unemployment.

Question 36

The most common measure of productivity shocks used by real business cycle theorists is

A)the Solow residual.
B)average labor productivity.
C)the change in the capital stock.
D)unit labor costs.

Question 37

Labor hoarding occurs when

A)firms keep good workers so other firms can't hire them.
B)the unemployment rate exceeds the natural rate of unemployment.
C)involuntary unemployment exceeds voluntary unemployment.
D)because of hiring and firing costs,firms retain workers in a recession that they would otherwise lay off.

Question 38

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

A)Y KaN1-a
B)(Y Ka)/ N1-a
C)Y / (KaN1-a)
D)1/(Y KaN1-a)

Question 39

One important reason why the Solow residual may be strongly procyclical even if the actual technology used in production doesn't change is that

A)employment is procyclical.
B)resource utilization is procyclical.
C)demand shocks are the dominant force determining the business cycle.
D)the coefficients (a and 1 - a)on capital and labor in the production function are procyclical.

Question 40

Braun and Evans found that

A)the measured Solow residual varied sharply over the seasons.
B)electricity use by producers rises sharply in economic upturns.
C)professional forecasters have rational expectations of inflation.
D)shocks to fiscal policy are the main source of business cycle fluctuations.

Question 41

Because employment actually continued to fall at the beginning of the recoveries that began in 1991,2001,and 2009,these recoveries have come to be known as

A)pseudo recoveries.
B)non-recoveries.
C)double-dip recoveries.
D)jobless recoveries.

Question 42

Davis and Haltiwanger showed that ________ churning of jobs occurs and that this churning reflects closing of old plants and opening of new ones ________.

A)little; in different industries
B)little; within the same industry
C)much; within the same industry
D)much; in different industries

Question 43

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

A)more; increase
B)more; decline
C)fewer; decline
D)fewer; increase

Question 44

During a recession,would classical economists propose that changes in government spending or taxes be used to improve economic conditions? Briefly explain.

Question 45

According to classical economists,unemployment rises in recessions due to an increase in ________ unemployment,not ________ unemployment.

A)cyclical; frictional and structural
B)frictional and cyclical; structural
C)structural; frictional and cyclical
D)frictional and structural; cyclical

Question 46

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.

Question 47

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

A)only productivity shocks can cause real fluctuations in the business cycle.
B)the government has imperfect knowledge of the economy.
C)political constraints on policy actions prevent the government from carrying out effective policies.
D)time lags between the onset of a recession and the implementation of effective countermeasures make anti-recessionary macroeconomic policies impractical.

Question 48

Suppose the economy's production function is Y = A(300N - N2).The marginal product of labor is MPN = A(300 - 2N).Suppose that A = 10.The supply of labor is NS = 0.05w + 0.005G.
(a)If G is 26,000,what are the real wage,employment,and output?
(b)If G rises to 26,400,what are the real wage,employment,and output?
(c)If G falls to 25,600,what are the real wage,employment,and output?
(d)In cases (b)and (c),what is the government purchases multiplier; that is,what is the change in output divided by the change in government purchases?

Question 49

Assuming money neutrality in the classical model,a 10% increase in the nominal money supply would cause

A)a 10% increase in the real money supply.
B)a 10% decrease in the real money supply.
C)no change in the real money supply.
D)a less-than-10% change in the price level due to a shift in the aggregate supply curve.

Question 50

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

A)the benefits of the spending exceed the costs.
B)the economy is in a recession.
C)the economy is likely to go into a recession in the next six months to a year.
D)inflation is lower than its targeted level.

Question 51

In the classical model,a temporary decrease in government spending would cause a decrease in

A)output,the real interest rate,real wages,and the price level.
B)employment,the real interest rate,real wages,and the price level.
C)output,employment,the real interest rate,and the price level.
D)output,employment,real wages,and the price level.

Question 52

A temporary decrease in government purchases in the classical model would

A)shift the production function to the left.
B)shift the marginal product of labor curve to the right.
C)shift the labor demand curve to the left.
D)shift the labor supply curve to the left.

Question 53

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

A)should not; rapidly
B)should not; slowly
C)should; slowly
D)should; rapidly

Question 54

A temporary increase in government purchases in the classical model would

A)shift the production function to the right.
B)shift the marginal product of labor curve to the left.
C)shift the labor demand curve to the right.
D)shift the labor supply curve to the right.

Question 55

In the classical model,a temporary increase in government purchases causes

A)a decrease in output and the real interest rate.
B)a decrease in output and an increase in the real interest rate.
C)an increase in output and a decrease in the real interest rate.
D)an increase in output and the real interest rate.

Question 56

According to classical economists,the increase in unemployment in recessions is caused by

A)slack aggregate demand.
B)the failure of wages to adjust to restore equilibrium in the labor market.
C)the power of labor unions,which prevent firms from cutting wages.
D)a mismatch of workers and jobs.

Question 57

A jobless recovery occurs when

A)no jobs are created in an economy after a recession ends.
B)employment continues to fall at the beginning of a recovery.
C)only low quality jobs are created in a recovery.
D)most of the new jobs created in a recovery are overseas.

Question 58

How is the Solow residual measured? What problems arise in its measurement when resource utilization varies over the business cycle? What implications do these measurement issues have for evidence supporting the RBC model?

Question 59

Assuming that money is neutral,an increase in the nominal money supply would cause

A)an excess supply for goods.
B)an increase in the real money supply.
C)a fall in the price level.
D)a rise in nominal wages.

Question 60

Describe,in general terms,how an economist calibrates a macroeconomic model.What statistics can be usefully examined to see how well the model corresponds to the data?

Question 61

If producers believe that the increase in their relative prices is small relative to the increase in the general price level,then the slope of the short-run aggregate supply curve will be

A)zero.
B)small.
C)large.
D)negative.

Question 62

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

A)the slope of the aggregate demand curve.
B)the slope of the long-run aggregate supply curve.
C)the size of the Solow residual.
D)how much they think their relative prices have increased.

Question 63

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

Question 64

You are likely to think that the relative price of your good has risen and you should increase your output if you expected

A)the inflation rate to be 10% and the price of your good rose 7%.
B)the inflation rate to be 10% and the price of your good rose 10%.
C)the inflation rate to be 10% and the price of your good rose 13%.
D)the inflation rate to be 0% and the price of your good fell 10%.

Question 65

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?

Question 66

A classical economy is described by the following equations:
Government spending and taxes are equal where T = G = 200.The nominal money supply M = 3560.
(a)What are the equilibrium values of the real interest rate,the price level,consumption,and investment?
(b)Suppose an economic shock increases desired investment by 10,so it is now Id = 360 - 100r.How does this affect the equilibrium values of the real interest rate,the price level,consumption,and investment?
(c)Returning to the initial situation in part (a),suppose an economic shock increases desired consumption by 10,so it is now Cd = 510 + 0.5 (Y - T)- 100r.How does this affect the equilibrium values of the real interest rate,the price level,consumption,and investment?

Question 67

Reverse causation is the idea that

A)current increases in output cause future increases in the money supply.
B)current increases in the money supply cause future increases in output.
C)expected future increases in the money supply cause increases in current output.
D)expected future increases in output cause increases in the current money supply.

Question 68

If producers have imperfect information about the general price level and sometimes misinterpret changes in the general price level as changes in relative prices,then

A)the short-run aggregate supply curve is vertical.
B)the short-run aggregate supply curve slopes upward.
C)the aggregate demand curve is vertical.
D)the aggregate demand curve is horizontal.

Question 69

Which of the following equations is most likely to represent short-run aggregate supply according to the misperceptions theory?

A)Y = 6000
B)Y = 6000 + 50(P - Pe)
C)P = 2
D)PY = 12,000

Question 70

The basic classical model can account for the procyclical behavior of money if there

A)are real business cycles caused by productivity shocks.
B)is reverse causation from future output to money.
C)are rational expectations among the public.
D)are propagation mechanisms in the economy.

Question 71

If you expect a general price increase of 5% this year and the price of the hamburgers you sell increases by 10%,you would conclude that the relative price of your good has

A)declined,and you would increase your output.
B)declined,and you would decrease your output.
C)increased,and you would increase your output.
D)increased,and you would decrease your output.

Question 72

Short-run aggregate supply is greater than long-run aggregate supply in the misperceptions theory if

A)the actual price level is greater than the expected price level.
B)the actual price level equals the expected price level.
C)the actual price level is less than the expected price level.
D)output is less than its full-employment level.

Question 73

The short-run aggregate supply curve can slope upward because

A)prices are fixed in the short run.
B)wages adjust immediately to changing economic circumstances.
C)producers have misperceptions about the aggregate price level.
D)prices adjust instantaneously.

Question 74

You and a friend are arguing over the issue of the nonneutrality of money.You believe that money is not neutral,and to prove your point you would cite all of the following EXCEPT

A)large gold discoveries that increased the money supply preceded an economic boom.
B)a change in monetary institutions preceded a boom or recession.
C)a change in the leadership of the Fed and its policy was followed by noticeable changes in the money supply and a recession or inflation.
D)the fact that every recession was preceded by a drop in the money supply.

Question 75

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

A)Milton Friedman; Robert Lucas
B)John Maynard Keynes; Robert Solow
C)Edward Prescott; Robert King
D)James Tobin; Greg Mankiw

Question 76

According to the misperceptions theory,when the price level falls below the expected price level

A)the economy's SRAS curve shifts up.
B)the economy moves along its AD curve.
C)the economy moves along its LRAS curve.
D)the economy moves along its SRAS curve.

Question 77

The idea that expected future increases in output cause increases in the current money supply and that expected future decreases in output cause decreases in the current money supply,rather than the other way around,is known as

A)Granger causality.
B)money neutrality.
C)nominal adjustment.
D)reverse causation.

Question 78

According to the misperceptions theory,when P < Pe,output is ________ its full-employment level and the short-run aggregate supply curve must shift ________ to restore full employment.

A)below; upward
B)below; downward
C)above; upward
D)above; downward

Question 79

Friedman and Schwarz argue that money is not neutral because

A)theoretical models of the economy don't show monetary neutrality.
B)money is a leading,procyclical variable.
C)they found several historical incidents in which changes in the money supply were not responses to macroeconomic conditions,and output moved in the same direction as money.
D)they found no evidence that productivity changes or changes in government spending contributed to business cycles; only monetary changes preceded every recession.

Question 80

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

A)the aggregate quantity of output supplied rises above the full-employment level.
B)the aggregate quantity of output supplied falls below the full-employment level.
C)the aggregate quantity of output demanded falls below the full-employment level.
D)the aggregate quantity of output demanded rises above the full-employment level.