Question 1

The basic real business cycle model has some difficulty explaining why

Accepted Answer

A)  consumption is procyclical. 
B)  investment is procyclical. 
C)  the price level is countercyclical. 
D)  the money supply is procyclical. 
E)  the real wage is procyclical.

Question 2

In the New Monetarist Model,for financial liquidity to affect the demand for investments goods requires

Accepted Answer

A)  deficient financial liquidity. 
B)  consumers and firms to be surprised by monetary policy. 
C)  adequate financial liquidity. 
D)  an initially very high interest rate. 
E)  only that consumers and firms behave rationally.

Question 3

In a liquidity trap caused by deficient financial liquidity,if the central bank increases the interest rate it charges on reserves,

Accepted Answer

A)  aggregate demand shifts right and output increases. 
B)  aggregate supply shifts right and output increases. 
C)  aggregate demand shifts right, aggregate supply shifts left and output is constant. 
D)  aggregate demand shifts left and output decreases. 
E)  aggregate supply shifts left and output decreases.

Question 4

According to real business cycle theorists,an increase in total factor productivity could lead to an increase in the nominal money supply due to

Accepted Answer

A)  the cyclical behavior of tax collections and attempts by the Bank of Canada to stabilize real output. 
B)  Bank of Canada attempts to stabilize real output and the price level. 
C)  Bank of Canada attempts to stabilize the price level and banking sector expansion of deposit money. 
D)  banking sector expansion of deposit money and the cyclical behavior of tax collections. 
E)  Bank of Canada attempts to stabilize business cycle fluctuations.

Question 5

Fiscal policy can stabilize output in the coordination failure model by

Accepted Answer

A)  dampening the fluctuations in the business cycle. 
B)  controlling government spending. 
C)  lowering the real interest rate. 
D)  eliminating multiple equilibriums. 
E)  eliminating sunspots.

Question 6

Extraneous events that are completely unrelated to economic fundamentals are called

Accepted Answer

A)  moonbeams. 
B)  black holes. 
C)  sunspots. 
D)  time warps. 
E)  endogenous.

Question 7

An important critique of real business cycle theory is that during a recession,

Accepted Answer

A)  there is overutilization of labour and overutilization of the aggregate capital stock. 
B)  there is underutilization of labour and underutilization of the aggregate capital stock. 
C)  there is overutilization of labour and the wage rate is constant. 
D)  there is underutilization of labour and the real wage decreases 
E)  there is underutilization of labour and total factor productivity increases.

Question 8

In the coordination failure model,the 'bad' equilibrium is characterized by a

Accepted Answer

A)  higher real interest rate and a higher price level than the 'good' equilibrium. 
B)  higher real interest rate and a lower price level than the 'good' equilibrium. 
C)  lower real interest rate and a higher price level than the 'good' equilibrium. 
D)  lower real interest rate and a lower price level than the 'good' equilibrium. 
E)  lower real interest rate and a lower aggregate output than the "good" equilibrium.

Question 9

The policy of the Bank of Canada from April 2009 to May 2010 implies that reserves are relevant for

Accepted Answer

A)  the quantity of inside money but not outside money issued by the central bank. 
B)  fiscal policy in addition to monetary policy. 
C)  the quantity of outside money issued by the central bank. 
D)  a case of adequate financial liquidity. 
E)  aggregate supply.

Question 10

The quantity of liquid financial assets created by the private sector is

Accepted Answer

A)  an increasing function of the interest rate. 
B)  unrelated to the interest rate. 
C)  dependent on the technology for converting cash to liquid assets. 
D)  held constant. 
E)  a decreasing function of the interest rate.

Question 11

Measurement errors of changes in the Solow residual during recessions are most likely caused by

Accepted Answer

A)  underutilization of labour and capital. 
B)  underutilization of labour, but not of capital. 
C)  underutilization of capital, but not of labour. 
D)  mismeasurement of real GDP. 
E)  constant real wage rate.

Question 12

Real business cycle theory was introduced by

Accepted Answer

A)  Milton Friedman and Robert Lucas. 
B)  Milton Friedman and Anna Schwartz. 
C)  Thomas Cooley and Gary Hansen. 
D)  Finn Kydland and Edward Prescott. 
E)  Robert Lucas.

Question 13

The Keynesian view implies that there is a role for monetary and fiscal policy in stabilizing the economy in response to aggregate shocks because

Accepted Answer

A)  prices and wages are slow to clear markets. 
B)  money is neutral. 
C)  comovement of aggregate variables does not generally happen during the business cycle. 
D)  business cycles have many causes. 
E)  these policies are highly effective in raising total factor productivity.

Question 14

In the coordination failure,the most likely explanation of business cycles are

Accepted Answer

A)  money supply shocks. 
B)  government spending shocks. 
C)  total factor productivity shocks. 
D)  fluctuations between 'good' and 'bad' equilibria. 
E)  labour market shocks.

Question 15

If,in the coordination failure model,the nominal money supply acts as a sunspot variable,then it is likely that the nominal money supply would

Accepted Answer

A)  be procyclical. 
B)  be acyclical. 
C)  be countercyclical. 
D)  alternatively appear to be procyclical and countercyclical. 
E)  be a leading indicator.

Exam 13: Business Cycle Models with Flexible Prices and Wages