Question 1

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.

Accepted Answer

The answer of Use the classical (RBC)IS-LM-FE model to show...

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

Accepted Answer

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

Question 3

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

Accepted Answer

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

Question 4

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.

Accepted Answer

The answer of Use the classical IS-LM model to show...

Question 5

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

Accepted Answer

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 6

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

Accepted Answer

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

Question 7

The distinction between real and nominal shocks is that

Accepted Answer

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 8

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?

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The answer of Suppose the money demand of individuals and...

Question 9

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

Accepted Answer

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

Question 10

Measures of the Solow residual show it to be

Accepted Answer

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

Question 11

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.

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Question 12

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

Accepted Answer

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

Question 13

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?

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The answer of How is the Solow residual measured? What...

Question 14

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

Accepted Answer

The answer of Why do many economists believe that money...

Question 15

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

Accepted Answer

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 16

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

Accepted Answer

The answer of Why doesn't stabilization policy work,according to economists...

Question 17

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

Accepted Answer

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 18

The term household production refers to

Accepted Answer

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 19

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

Accepted Answer

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 20

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

Accepted Answer

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

Exam 10: Classical Business Cycle Analysis