Deck 12: Real Business Cycles and New Keynesian Economics

Question 1

Real business cycle proponents argue that

A)recessions are caused by movements of output away from the natural rate of output.
B)prices and wages are sticky.
C)macroeconomics should be based on the same assumptions as microeconomics.
D)monetary policy is important in determining recessions.
E)none of the above.

Answer 1

C

Question 2

What would be the explanation of the Great Depression offered by proponents of real business cycle models? Do you see any potential problems with their explanations?

Answer 2

Real Business Cycle models would explain the Great Depression as caused by a large,negative,and persistent productivity shock.One problem with this analysis is that it is very difficult to identify exactly what this shock could be.Another problem is that the Great Depression was characterized by excess supply,not a fall in supply,as evidenced by the falling price level throughout the Great Depression.

Question 3

The simple real business cycle model production function is shown as

Answer 3

y_t = z_tF(K_t,N_t). Describe the difference(s)in this production function and the original classical production function. This production function contains the additional term z_t,which represents "shocks" to the production process,meaning events that change the level of output forthcoming for given level of the labor and capital inputs.Furthermore,there is no bar over the K.In the real business cycle the capital stock is not taken as given but rather is chosen for each period by the representative agent.

Question 4

Define hysteresis.How do insider-outsider models explain hysteresis?

Question 5

In the real business cycle model,business cycles are

A)efficient and do not represent lost output.
B)driven by technology shocks.
C)occur when markets clear.
D)all of the above.
E)None of the above

Question 6

Which of the following shocks have been emphasized most often with respect to real business cycle theory?

A)Shocks to technology
B)Variations in environmental conditions
C)Changes in the real (relative)prices of imported raw materials
D)Changes in tax rates
E)None of the above

Question 7

Explain what is meant by a representative agent.Why do real business cycle models make this assumption? What is the problem with this assumption?

Question 8

What role is there for monetary policy in a real business cycle model? Is there a role for stabilization policy? Compare and contrast this with the traditional Keynesian model.

Question 9

Which of the following statements is (are)correct? According to real business cycle theory,

A)the desirable monetary policy would appear to be one that results in a slow steady growth in the money supply and,thus,stable prices.
B)there is some role for activist monetary stabilization policy of a Keynesian type.
C)changes in aggregate demand cannot impact output.
D)Both a and b
E)Both a and c

Question 10

The real business cycle theory

A)argues for active stabilization policy.
B)argues for interventionist policies in response to recessions.
C)is in favor of a constant money growth rate rule for the money stock.
D)is an offshoot of Monetarist theory.
E)none of the above.

Question 11

In what sense is unemployment voluntary in real business cycle and classical models? In what sense is unemployment involuntary in Keynesian and new Keynesian models?

Question 12

The real business cycle theory is most closely related to

A)Keynesian theory.
B)monetarist theory.
C)the classical model.
D)the new Keynesian model.

Question 13

A usual assumption in real business cycle models is that the economy is populated by a group of identical individuals and the behavior of the group can then be explained in terms of the behavior of one individual,called a(n)

A)maximizing agent.
B)representative agent.
C)republican agent.
D)informative agent.
E)democratic agent

Question 14

New Keynesian economics differs from real business cycle economics in that

A)markets are perfectly competitive in new Keynesian models.
B)business cycles are fluctuations in the natural rate of unemployment in new Keynesian models.
C)wages and prices are perfectly flexible.
D)agents maximize utility in the new Keynesian model.
E)none of the above.

Question 15

Consider the turnover cost model of efficiency wages.Suppose that the government imposes a tax on hiring a worker.What should happen to wages and unemployment?

Question 16

Numerous studies of the labor market (and your own experience)suggest that the labor market is becoming increasingly specialized,meaning that each job increasingly requires a unique set of education and job training skills.Analyze this development within the context of a model of efficiency wages.What impact do you think this has on unemployment? Wage flexibility? How do you think that firms respond to these developments? Provide graphs of the labor market to illustrate.

Question 17

The aggregate production function for real business cycle models is shown as

A)y_t = F(K_t,N_t).
B)y_t = z_tF(K_t - N_t).
C)y_t = z_tF(K_t,N_t).
D)y_t = z_t/(K_t,N_t).

Question 18

Which of the following statements are correct? In (the)

A)Keynesian model,unemployment is voluntary.
B)real business cycle models,all unemployment is voluntary.
C)new classical models,there is voluntary unemployment.
D)Both b and c
E)All of the above

Question 19

In real business cycle models and new classical models

A)monetary factors are responsible for fluctuations in output and employment.
B)changes in unemployment are involuntary.
C)markets always clear.
D)prices and wages are perfectly flexible.
E)none of the above.

Question 20

Explain the ways in which the real business cycle model is an extension of the Classical model.In what ways are they different?

Question 21

New Keynesians would agree with all of the following except

A)stabilization policy can reduce the severity of business cycles.
B)wages and prices are sticky.
C)markets are perfectly competitive.
D)market equilibrium is often suboptimal.

Question 22

Advocates of real business cycle theories argue that all of the following could cause a recession except

A)a fall in consumer expectations.
B)natural disasters.
C)higher taxation.
D)increases in the price of oil.

Question 23

Which of the following cannot be used to justify efficiency wages

A)Sticky price (menu cost)models
B)turnover costs
C)worker shirking
D)worker morale

Question 24

New Keynesian economists

A)believe that the deviations of output below potential output during recessions are socially costly.
B)presume that much unemployment is involuntary.
C)attempt to improve the microeconomic foundations of the traditional Keynesian models,not challenge their major premises.
D)Both a and c
E)All of the above

Question 25

In a study of whether prices are sticky or not,Alan Blinder supervised interviews of corporate executives on the frequency with which their firms change prices and found that

A)55 percent of firms changed prices only once a year or less.
B)over 20 percent of the firms changed prices more than 12 times per year.
C)10 percent of companies changed prices 4 to 12 times per year.
D)there is not a considerable departure from auction-market behavior.

Question 26

With respect to efficiency wage models,the efficiency of workers depends

A)positively on the money wage they are paid.
B)positively on the real wage they are paid.
C)inversely on the age of the workers.
D)positively on the unemployment rate.

Question 27

In real business cycle models,business cycles are caused by ______,while in new Keynesian model,business cycles are caused by ________.

A)aggregate demand; aggregate demand
B)aggregate demand; aggregate supply.
C)aggregate supply; aggregate demand.
D)fiscal policy; monetary policy

Question 28

Which of the following is correct? A general assumption in real business cycle models is that

A)dissimilar individuals populate the economy.
B)the labor market does not clear.
C)the economy is populated by a group of identical individuals.
D)the economy experiences involuntary unemployment.

Question 29

According to real business cycle theory,an increase in taxes

A)would significantly reduce labor supply,increase employment,and decrease output.
B)a decline in employment but not in output.
C)would significantly reduce labor supply,and decrease employment and output.
D)no change in output and employment.

Question 30

According to real business cycle theory,business cycles

A)can be eliminated with appropriate monetary and fiscal policy.
B)are natural and efficient reactions to changes in productivity.
C)do not occur.
D)occur infrequently.
E)none of the above.

Question 31

Which of the following statements is (are)correct? In the insider/outsider model there is

A)unemployment due to the real wage being set above the market clearing level.
B)cyclical unemployment in response to changes in aggregate demand.
C)structural unemployment in response to hysteresis.
D)Both a and b
E)all of the above

Question 32

New Keynesian economists have examined whether real-world prices are,in fact,sticky.In one study of 38 magazines,Stephen Cecchetti found

A)that price rigidity was nonexistent with respect to magazines at newsstands.
B)considerable rigidity with respect to the newsstand prices of magazines.
C)that most of the 38 magazines in the study had price changes at least once a year.
D)that the Readers Digest price was changed 15 times between 1950 and 1980.

Question 33

Real business cycle and new Keynesian models disagree upon

A)whether people form their expectations rationally.
B)whether changes in unemployment are voluntary or involuntary.
C)whether individuals engage in optimizing behavior at all times.
D)whether changes in the money supply affect output in the long-run.

Question 34

Which of the following statements is (are)correct?

A)Real business cycle theorists remain convinced that the business cycle can be explained as an equilibrium phenomenon
B)According to real business cycle theorists,fluctuations in output come as optimizing agents respond to real shocks that affect production possibilities
C)Real business cycle theorists consider policies to prevent fluctuations in output unnecessary
D)Both a and b e.All of the above

Question 35

The real business cycle theory and the new classical theory agree that

A)business cycles are driven by changes in aggregate demand.
B)expectations are formed rationally.
C)imperfect information plays a big role in business cycles.
D)none of the above.

Question 36

The new Keynesian theories of efficiency wages imply

A)nominal wage rigidity.
B)real wage rigidity.
C)changes in unemployment represent changes in the natural rate of unemployment.
D)market clearing in the labor market in the long-run.
E)None of the above

Question 37

New Keynesian theories of efficiency wages imply

A)voluntary unemployment.
B)real wage rigidity.
C)changes in unemployment represent changes in the natural rate of unemployment.
D)market clearing in the labor market in the long-run.
E)None of the above

Question 38

In the real business cycle theory,during a period when output is falling,

A)workers are voluntarily giving up their jobs.
B)the quantity supplied of labor is falling.
C)aggregate productivity must be falling.
D)all of the above.
E)none of the above.

Question 39

Which of the following models view changes in real supply-side factors as determinants of short-run fluctuations in output and employment?

A)New classical models
B)Political business cycle models
C)Keynesian models
D)Real business cycle models
E)none of the above

Question 40

In any efficiency wage model,it must be true that

A)the marginal benefit of increased efficiency is equal to the marginal cost of higher wages.
B)nominal wages are inflexible.
C)disequilibrium in the labor market exists.
D)all of the above.
E)none of the above.

Question 41

Real business cycle proponents argue that

A)employment is sensitive to changes in the real wage.
B)everyone who wants a job at the current wage can get one.
C)during recessions,people choose not to work.
D)all of the above.

Question 42

Which of the following statements is correct? With respect to efficiency wage models,

A)their key element is an explanation of why the efficiency (or productivity)of workers depends on the real wage.
B)the rationale underlying those models implies that firms will set the real wage above the market clearing level.
C)they explain a real wage rigidity.
D)all of the above

Question 43

According to new Keyneisan theory,real wages are _____ correlated with employment and the portion of the population that is not in the labor market _____ with higher real wages.

A)positively; rises.
B)negatively,does not change.
C)negatively,rises.
D)positively; falls.
E)none of the above.

Question 44

A key element of real business cycle theory is that

A)labor supply is not responsive to changes in real wages.
B)labor supply is highly elastic.
C)as the wage increases,workers are richer and work less.
D)none of the above.

Question 45

New Keynesian economists believe that

A)movements in unemployment can be explained by voluntary movements in and out of the labor market..
B)everyone who is not working is involuntary unemployed.
C)labor markets clear in the long-run.
D)the new classical model has merit,but recessions cannot be adequately explained in a model of with perfectly flexible prices and wages.

Question 46

Real business cycle theorists agree with new classical economists that

A)agents maximize utility and form expectations rationally.
B)the labor market do not clear.
C)imperfect information plays a big role in business cycles.
D)Both a and c

Question 47

Which of the following statements is (are)correct? Critics of the real business cycle model

A)question whether technology has ever been the cause of a recession.
B)do not deny that some technology shocks affect many industries.However,they do not believe that there are enough of these shocks to explain recessions where output falls too as much as 10 percent below potential output.
C)argue that aggregate supply changes drive most business cycles.
D)All of the above
E)None of the above

Question 48

In terms of unemployment,hysteresis models try to explain why

A)cyclical unemployment is always present.
B)structural unemployment cannot be eradicated.
C)high unemployment persists even after its initial cause is long past.
D)frictional unemployment is the cause of hysteresis.

Question 49

According to efficiency wage models,

A)their key element is an explanation of why the efficiency (or productivity)of workers depends on the real wage.
B)the rationale underlying those models implies that firms will set the real wage below the market clearing level.
C)they explain real wage volatility.
D)all of the above.

Question 50

Which of the following models explains why high unemployment has persisted in some European countries for such long periods-periods too long to be the result of fixed money-wage contracts or backward-looking price expectations?

A)Insider outsider models
B)Efficiency wage models
C)Sticky price models
D)IS-LM models

Question 51

Which of the following efficiency wage models centers on the morale of a firm's workers? The

A)shirking model.
B)gift exchange model.
C)turnover model.
D)None of the above

Question 52

Menu costs suggest that sticky prices are ____ for firms but _____ for the economy as a whole.

A)optimal; suboptimal
B)bad; good
C)natural; unnatural
D)suboptimal; optimal.
E)suboptimal; suboptimal

Question 53

Real business cycle theorists agree with new Keynesian economists that

A)agents maximize utility.
B)the labor market do not clear.
C)AS shocks can play a big role in business cycles.
C)
D)Both a and

Question 54

The existence of heavy training costs would provide a rationale for

A)insider-outsider models.
B)IS-LM models.
C)sticky price models.
D)modern efficiency wage models

Question 55

Real business cycle proponents would agree with all of the following except

A)the government's efforts to stabilize the economy can be counterproductive.
B)unanticipated changes in the money supply are destabilizing to the economy.
C)business cycles are a natural response to technology shocks.
D)markets are perfectly competitive.

Question 56

New Keynesian theory says that

A)changes in the money supply can have long run and short run effects on real variables.
B)changes in the money supply can have short run effects on real variables,but not long run effects.
C)changes in the money supply can have long run effects on real variables,but not short run effects.
D)changes in the money supply have no effect on real variables in the short run or the long run.

Question 57

According to critics of new Keynesian economics,it is doubtful that

A)menu costs are very important in the real world.
B)efficiency wage considerations play an important role in the real world.
C)bargaining models are of significance in the real world.
D)All of the above
E)None of the above

Question 58

According to real business cycle theory,real wages are _____ correlated with employment and the portion of the population that is not in the labor market _____ with higher real wages.

A)positively; rises.
B)negatively,does not change.
C)negatively,rises.
D)positively; falls.
E)none of the above.