Question 1

In the real business cycle model,a persistent increase in total factor productivity

Accepted Answer

A)   has no effect on the real interest rate.
B)   unambiguously increases the real interest rate.
C)   unambiguously decreases the real interest rate.
D)   has a theoretically ambiguous effect on the real interest rate. D

Question 2

One potential weakness of the coordination failure model as an explanation of business cycles is that

Accepted Answer

A)   evidence supporting intertemporal substitution as an important determinant of labor supply is weak.
B)   evidence supporting the existence of increasing returns at the aggregate level is weak.
C)   it fails to explain several of the key business cycle regularities.
D)   it requires that consumers not behave in a rational manner. B

Question 3

If an economy is stuck in a "bad" equilibrium in the coordination failure model

Accepted Answer

A)   the government should intervene by spending more.
B)   the government should intervene by spending less.
C)   the government should promote optimism.
D)   there is nothing that can be done. C

Question 4

The appropriate monetary policy response to a situation with deficient financial liquidity

Accepted Answer

A)   an open market sale of government bonds.
B)   to do nothing.
C)   an open market purchase of government bonds.
D)   to increase reserve requirements.

Question 5

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 Federal Reserve to stabilize real output.
B)   the Federal Reserve's attempts to stabilize real output and the price level.
C)   the Federal Reserve's 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.

Question 6

In the coordination failure model,increasing returns to scale are best explained by strategic

Accepted Answer

A)   mismanagement.
B)   complementarities.
C)   substitutabilities.
D)   collusion.

Question 7

What is the appropriate monetary policy response to a situation with deficient financial liquidity,when there is a liquidity trap?

Accepted Answer

A)   an open market sale of government bonds
B)   a decrease in the interest rate on reserves
C)   an open market purchase of government bonds
D)   an increase in the interest rate on reserves

Question 8

A reduction in financial liquidity,producing deficient liquid assets

Accepted Answer

A)   reduces aggregate output, increases the real interest rate, and reduces the price level.
B)   reduces aggregate output, reduces the real interest rate, and reduces the price level.
C)   reduces aggregate output, increases the real interest rate, and increases the price level.
D)   increases aggregate output, reduces the real interest rate, and reduces the price level.

Question 9

A government policy that is consistent with real business cycle theory would be for

Accepted Answer

A)   government to vary its spending in response to shocks to total factor productivity.
B)   the monetary authority to expand and contract the nominal money supply in response to shocks to total factor productivity.
C)   government to smooth out tax distortions over time.
D)   government to vary its lump-sum tax collections in response to changes in total factor productivity.

Question 10

The coordination failure model is based on the possibility of increasing returns to scale

Accepted Answer

A)   both at the aggregate level and at the level of the individual firm.
B)   at the aggregate level, but not at the level of the individual firm.
C)   at the level of the individual firm, but not at the aggregate level.
D)   in future periods, but not in the current period.

Question 11

An important critique of real business cycle theory is the belief that cyclical movements in total factor productivity

Accepted Answer

A)   rarely occur.
B)   may, in part, be an artifact of measurement error.
C)   lead to imperceptible changes in labor demand.
D)   are too small to account for the size of fluctuations in real GDP.

Question 12

For the coordination failure model to work,it must be the case that the aggregate labor demand curve must be

Accepted Answer

A)   upward sloping and steeper than the labor supply curve.
B)   upward sloping and flatter than the labor supply curve.
C)   downward sloping and steeper than the labor supply curve.
D)   downward sloping and flatter than the labor supply curve.

Question 13

In the coordination failure model,we mention sunspots because

Accepted Answer

A)   they influence business cycles.
B)   apparently irrelevant events may influence business cycles.
C)   in central banker speak, they are synonymous with open market operations.
D)   seasonal sunshine has an impact on the business cycle.

Question 14

In the real business cycle model,an increase in current total factor productivity leads to

Accepted Answer

A)   an increase in investment.
B)   a decrease in investment.
C)   no change in investment.
D)   an ambiguous response of investment.

Question 15

The behavior of the Solow residual suggests that when current total factor productivity increases

Accepted Answer

A)   it becomes more difficult to predict future total factor productivity.
B)   future total factor productivity is also likely to increase.
C)   such increases are temporary, so we can draw no conclusions about the likely behavior of future total factor productivity.
D)   future total factor productivity is likely to decrease.

Question 16

A reduction in financial liquidity,producing deficient liquid assets

Accepted Answer

A)   shifts the output supply curve to the right.
B)   shifts the output demand curve to the right.
C)   shifts the output supply curve to the left.
D)   shifts the output demand curve to the left.

Question 17

In the real business cycle model,a persistent increase in total factor productivity

Accepted Answer

A)   increases the real wage and increases the price level.
B)   increases the real wage and decreases the price level.
C)   decreases the real wage and increases the price level.
D)   decreases the real wage and decreases the price level.

Question 18

A model with coordination failures has

Accepted Answer

A)   agents that do not act rationally.
B)   multiple equilibria.
C)   a government that is too large.
D)   a tax rate that is too high.

Question 19

The phenomenon of underutilization of labor during a recession is called

Accepted Answer

A)   labor stockpiling.
B)   investing in human capital.
C)   labor force stabilization.
D)   labor hoarding.

Question 20

Strategic complementarities may help explain business cycles because such complementarities may lead to

Accepted Answer

A)   decreasing returns to scale.
B)   constant returns to scale.
C)   increasing returns to scale.
D)   a downward-sloping labor supply curve.

Exam 13: Business Cycle Models with Flexible Prices and Wages

In the real business cycle model,a persistent increase in total factor productivity

One potential weakness of the coordination failure model as an explanation of business cycles is that

If an economy is stuck in a "bad" equilibrium in the coordination failure model

The appropriate monetary policy response to a situation with deficient financial liquidity

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

In the coordination failure model,increasing returns to scale are best explained by strategic

What is the appropriate monetary policy response to a situation with deficient financial liquidity,when there is a liquidity trap?

A reduction in financial liquidity,producing deficient liquid assets

A government policy that is consistent with real business cycle theory would be for

The coordination failure model is based on the possibility of increasing returns to scale

An important critique of real business cycle theory is the belief that cyclical movements in total factor productivity

For the coordination failure model to work,it must be the case that the aggregate labor demand curve must be

In the coordination failure model,we mention sunspots because

In the real business cycle model,an increase in current total factor productivity leads to

The behavior of the Solow residual suggests that when current total factor productivity increases

A reduction in financial liquidity,producing deficient liquid assets

In the real business cycle model,a persistent increase in total factor productivity

A model with coordination failures has

The phenomenon of underutilization of labor during a recession is called

Strategic complementarities may help explain business cycles because such complementarities may lead to