Deck 10: Classical Business Cycle Analysis

Question 1

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 1

C

Question 2

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 K^aN^1-a
B)(Y K^a)/N^1-a
C)Y/(K^aN^1-a)
D)1/(Y K^aN^1-a)

Answer 2

C

Question 3

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.

Answer 3

D

Question 4

The formula Y/(K^aN^1-a)provides a calculation of

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

Question 5

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 6

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 7

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 8

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 9

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

A)Y[(u_K K)^a)(u_N N)^1-a]
B)Y/[( u_K K)^a)(u_N N)^1-a]
C)A

D)1/{Y[(u_K K)^a)(u_N N)^1-a]}

Question 10

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 11

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 12

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 13

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 14

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 15

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.

Question 16

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 17

Measures of the Solow residual show it to be

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

Question 18

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 19

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 20

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 21

The term household production refers to

A)output produced by forcing children to work.
B)output produced by workers who are telecommuting.
C)services provided directly to households,such as lawn mowing by landscape companies.
D)output produced at home.

Question 22

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 23

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 24

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 25

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 26

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 27

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 28

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 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

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 31

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 32

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 33

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 34

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

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

Question 35

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 36

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 37

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 38

A household-production model more closely matches the U.S.data than a standard RBC model because it has a

A)higher standard deviation of market output.
B)lower standard deviation of market output.
C)higher rate of job destruction.
D)lower standard deviation of consumption.

Question 39

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 40

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 cumulation of small productivity shocks.
D)Business cycles are often caused by unobservable productivity shocks,which aren't apparent at the time they occur.

Question 41

A classical economy is described by the following equations:
C^d = 500 + 0.5(Y - T)- 100r.
I^d = 350 - 100r.
L = 0.5Y - 200i. = 1850.
π^e = 0.05.
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 I^d = 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 C^d = 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 42

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

Question 43

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 44

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 45

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 46

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 47

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 48

According to the misperceptions theory,when P < P^e,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 49

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 50

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 51

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 52

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 53

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.

Question 54

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 55

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 56

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 - P^e)
C)P = 2
D)PY = 12,000

Question 57

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 58

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 59

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 60

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 61

The theory of rational expectations suggests that

A)people never make forecast errors.
B)people make intelligent use of available information.
C)people make systematic forecast errors.
D)people are slow to incorporate new information into their forecasts.

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

According to the misperceptions theory,an anticipated 10% decrease in the money supply leads to a short-run reduction in the price level of

A)0%.
B)5%.
C)some amount between 0% and 10%.
D)10%.

Question 64

Which of the following statements is true about the misperceptions theory?

A)Both anticipated and unanticipated changes in the nominal money supply have real effects on the economy.
B)Neither anticipated nor unanticipated changes in the nominal money supply has real effects on the economy.
C)Unanticipated changes in the nominal money supply have real effects,but anticipated changes are neutral.
D)Anticipated changes in the nominal money supply have real effects,but unanticipated changes are neutral.

Question 65

According to the misperceptions theory,short-lived shocks may have long-term effects on the economy because of

A)multiplier effects.
B)propagation mechanisms.
C)accelerator effects.
D)automatic stabilizers.

Question 66

Why doesn't stabilization policy work,according to economists using the misperceptions theory?

Question 67

According to the misperceptions theory,an anticipated decline in the money supply leads to a shift of the AD curve ________ and a shift of the SRAS curve ________.

A)down and to the left; downward
B)down and to the left; upward
C)up and to the right; downward
D)up and to the right; upward

Question 68

According to the misperceptions theory,if the Fed wanted to use monetary policy to influence the real economy it would have to

A)increase the money supply whenever the economy was in a recession.
B)decrease the money supply whenever the economy was in an inflationary boom.
C)surprise the public with unexpected changes in monetary policy.
D)abide by the monetary targets it announced.

Question 69

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 70

The primary reason that short-lived shocks can have long-run effects is

A)the nonneutrality of money.
B)misperceptions by the public over the actual price level and the expected price level.
C)the presence of rational expectations among the public.
D)the presence of propagation mechanisms.

Question 71

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

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

Question 72

Suppose the economy is characterized by the following equations.
IS curve: r = 20.20 - 0.002Y
LM curve: M/P = Y - 250(r + π^e)
SRAS curve: Y = + 100(P - P^e)
The nominal money supply is M = 19,800,expected inflation is π^e = 0.20,and full-employment output is = 10,000.
(a)If the economy begins in general equilibrium,what are the equilibrium values of the price level,output,and the real interest rate?
(b)If the expected price level is the price level you found in part (a),what happens to the price level,output,and the real interest rate in the short run if there's an unanticipated decrease in the nominal money supply to 14,737.5? {Hint: guess some price levels that differ from the one you found in part (a)by increments of 0.25.}
(c)If the expected price level is the price level you found in part (a),what happens to the price level,output,and the real interest rate in the short run if there's an unanticipated increase in the nominal money supply to 24,937.5?

Question 73

The primary reason why the Fed cannot systematically surprise the public with its monetary policy is

A)the nonneutrality of money.
B)the presence of productivity shocks that generate real business cycles independent of the monetary side of the economy.
C)the presence of rational expectations among the public.
D)the presence of propagation mechanisms within the economy.

Question 74

The reason why some economists believe that attempts by the Fed to surprise the public in a systematic way cannot be successful is that

A)information about the Fed's plans will inevitably be leaked to the public.
B)the Fed announces its goals before Congress and publishes its policy actions in the Federal Reserve Bulletin six weeks after they take place.
C)the public would eventually figure out what the Fed's policies were,negating the Fed's surprise.
D)competition in the money markets would neutralize the Fed's intervention.

Question 75

Analyze the short-run and long-run effects of an unanticipated decrease in the money supply in the misperceptions model.Tell what happens to output,the price level,and the expected price level in both the short run and long run.

Question 76

According to the misperceptions theory,after an unanticipated increase in the money supply has occurred,the SRAS curve must shift ________ to restore general equilibrium; as it does so,the price level ________.

A)downward; rises
B)downward; falls
C)upward; rises
D)upward; falls

Question 77

If the money supply grows 7% during the year,and people expected the money supply to grow by 5%,what happens to the short-run aggregate supply curve,according to the misperceptions theory?

A)It shifts down.
B)It shifts up.
C)It doesn't shift.
D)It shifts down unless Ricardian equivalence holds,in which case it doesn't shift.

Question 78

According to the misperceptions theory,an unanticipated decrease in the money supply shifts the AD curve ________,causing output to ________ in the short run.

A)up and to the right; rise
B)up and to the right; fall
C)down and to the left; rise
D)down and to the left; fall