Deck 13: Business Cycle Models with Flexible Prices and Wages

Question 1

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

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.
E) results in no change in the real wage and the price level.

Answer 1

increases the real wage and decreases the price level.

Question 2

Real business cycle theory was introduced by

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.

Answer 2

Finn Kydland and Edward Prescott.

Question 3

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

A) real wages to fall.
B) the price level to rise.
C) real interest rates to rise.
D) the output demand curve shifting less than the output supply curve.
E) the money supply to shift right.

Answer 3

the output demand curve shifting less than the output supply curve.

Question 4

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

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 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

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 6

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

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 7

The basic real business cycle model has some difficulty explaining why

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 8

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

A) rarely occur.
B) may, in part, be an artifact of measurement error.
C) lead to imperceptible changes in labour demand.
D) are too small to account for the size of fluctuations in real GDP.
E) does not explain the overall fluctuations in the business cycle.

Question 9

Shocks to total factor productivity are least plausible as an explanation of the recession of

A) 1974-1975.
B) 1979.
C) 1981-1982.
D) 1990-1991.
E) 2000-2002.

Question 10

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

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 11

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

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 behaviour of future total factor productivity.
D) future total factor productivity is likely to decrease.
E) are typically temporary and have no influence on future levels of aggregate real GDP.

Question 12

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

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.
E) government to vary its spending and taxation decreases in response to shocks that affect the price level.

Question 13

The phenomenon of underutilization of labour during a recession is called

A) labour stockpiling.
B) investing in human capital.
C) labour force stabilization.
D) labour hoarding.
E) retraining labour.

Question 14

Two business cycle facts that are less easily explained by the real business cycle are that

A) money and prices are both acyclical.
B) the nominal money supply is procyclical and leads the business cycle.
C) the nominal money supply is procyclical and is coincident with the business cycle.
D) the nominal money supply is procyclical and lags the business cycle.
E) the nominal money supply is procyclical and is a leading indicator.

Question 15

The real business cycle model replicates the key business cycle regularities

A) both qualitatively and quantitatively.
B) qualitatively but not quantitatively.
C) quantitatively but not qualitatively.
D) neither qualitatively nor quantitatively.
E) with equal magnitudes of change.

Question 16

Endogenous money is where the money supply is not determined by the monetary authority,but

A) by the federal government.
B) by the private sector.
C) the consumer.
D) responds to conditions in the economy.
E) by total money demand in the economy.

Question 17

The real business cycle model best explains the procyclicality of the nominal money by

A) an unpredictable Bank of Canada.
B) exogenous money.
C) endogenous money.
D) uncorrelated money.
E) monetary neutrality.

Question 18

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

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.
E) has a theoretically ambiguous effect on the nominal interest rate.

Question 19

Shocks to total factor productivity are most plausible as an explanation of the recession of

A) 1974-1975.
B) 1979.
C) 1981-1982.
D) 1990-1991.
E) 2000-2002.

Question 20

According to real business cycle theorists,the tendency of money to lead output may be due to

A) government spending shocks, which lead to later changes in economic activity, and the tendency for bank loans to expand in advance of real activity that will occur at a later date.
B) the tendency for bank loans to expand in advance of real activity that will occur at a later date and the Bank of Canada's use of all available information in trying to stabilize the price level.
C) the Bank of Canada's use of all available information in trying to stabilize the price level and the Bank of Canada's use of all available information in trying to stabilize the level of economic activity.
D) the Bank of Canada's use of all available information in trying to stabilize the level of economic activity and government spending shocks, which lead to later changes in economic activity.
E) the Bank of Canada's use of all available information in trying to stabilize business cycle fluctuations and the price level.

Question 21

Fiscal policy can stabilize output in the coordination failure model by

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 22

In the coordination failure model,a rightward shift in the labour supply curve

A) decreases employment and increases real wages.
B) increases employment and decreases output.
C) decreases employment and increases output.
D) decreases employment and decreases output.
E) results in no change in employment and the e real wage.

Question 23

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

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

Question 24

A negative total factor productivity shock and a negative monetary shock contributed to the recession of

A) 1974-1975.
B) 1979.
C) 1981-1982.
D) 1990-1991.
E) 2000-2002.

Question 25

In the coordination failure model,

A) money supply rises.
B) money is not neutral.
C) money is neutral.
D) money is dictated by politics.
E) money supply is unpredictable.

Question 26

Extraneous events that are completely unrelated to economic fundamentals are called

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

Question 27

A Keynesian model that is consistent with fully flexible wages and prices is based upon the notion of

A) cooperation failures.
B) coordination failures.
C) collaboration failures.
D) decreasing returns to scale.
E) strategic complementarities.

Question 28

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

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 29

Research by Amaral and MacGee find evidence that for the Great Depression,

A) total factor productivity played a more important role than sticky prices.
B) modern theories of the business cycle perform poorly.
C) sticky prices played a more important role than total factor productivity.
D) deflation was the most important factor.
E) total factor productivity was largely irrelevant.

Question 30

In the coordination failure model,a rightward shift in the labour supply curve

A) increases the real wage and increases employment.
B) increases the real wage and decreases employment.
C) decreases the real wage and increases employment.
D) decreases the real wage and decreases employment.
E) increases the real wage and increases output.

Question 31

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

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.
E) in both current and future periods.

Question 32

The Keynesian coordination failure model is most relevant for analyzing the recssion of

A) 2008-2009.
B) 1974-1975.
C) 1990-1991.
D) 1981-1982.
E) 2000-2002.

Question 33

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

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 34

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

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

Question 35

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

A) decreasing returns to scale.
B) constant returns to scale.
C) increasing returns to scale.
D) a downward-sloping labour supply curve.
E) diminishing marginal product of labour.

Question 36

In the coordination failure model,business cycles can be caused by events that are completely unrelated to economic fundamentals such as

A) climate.
B) business and consumer confidence.
C) preferences, endowments and technology.
D) countercyclical government policy.
E) politics.

Question 37

Increasing returns to scale refers to

A) more total factor productivity leading to greater aggregate output.
B) lower real interest rates leading to greater aggregate output.
C) output doubles as all inputs double.
D) output more than doubles as all inputs double.
E) marginal product of labour diminishes when quantity of capital increases.

Question 38

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

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

Question 39

If the money supply is a sunspot variable in the coordination failure model,

A) money would appear to be non-neutral.
B) money would appear to be neutral.
C) money would appear to be dictated by politics.
D) money would appear to be unpredictable.
E) money would appear to be dictated by the private sector.

Question 40

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

A) mismanagement.
B) complementarities.
C) substitutabilities.
D) collusion.
E) government policy making.

Question 41

In the New Monetarist Model,the two key classes of liquid assets in the economy are:

A) currency and financial liquid assets.
B) currency and housing.
C) housing and stocks.
D) currency and stocks.
E) financial liquid assets and stocks.

Question 42

Which feature of the 2008-2009 financial crises is key for the deficient financial liquidity effect?

A) very high real interest rates.
B) average labour productivity fell.
C) consumption and investment expenditures fell.
D) very low real interest rates.
E) employment and the price level fell.

Question 43

According to the New Monetarist Model,a negative shift in the k(r)function causes:

A) a shift right in aggregate demand, output increases and the real interest rate increases.
B) a shift left in aggregate supply, output decreases and the real interest rate increases.
C) a shift left in aggregate demand, output falls and the real interest rate decreases.
D) a shift right in aggregate supply, output increases and the real interest rate decreases.
E) a shift left in aggregate demand, output falls and the real interest rate increases.

Question 44

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

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 45

What impact will an increase in the money supply have on an economy with deficient financial liquidity according to the New Monetarist model.

Question 46

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

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 47

In response to a financial liquidity shortage,if the central bank increases the money supply,

A) aggregate demand shifts to the right, correcting the liquidity shortage.
B) output increases and the price level remains constant.
C) output increases and the price level increases.
D) aggregate demand shifts further left, exacerbating the problem.
E) aggregate supply shifts right, offsetting the decrease in aggregate demand.

Question 48

In liquidity trap caused by deficient financial liquidity,the central bank action that matters is

A) open market purchases of government bonds.
B) the interest rate charged on reserves.
C) the interest rate charged on government bonds.
D) open market sale of government bonds
E) quantitative easing.

Question 49

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

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 50

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

A) government policy is unpredictable.
B) consumer behaviour is rational and predictable.
C) that underlying shocks that cause business cycles are expectations which are essentially unobservable.
D) money supply shocks are predictable.
E) there are fluctuations between "good" and "bad" equilibria.

Question 51

Recent research by Nicholas Bloom,Max Floetotto,and Nir Jaimovich finds strong empirical evidence that

A) increased uncertainty plays little role in recent recessions.
B) total factor productivity remains more relevant than uncertainty.
C) money is neutral.
D) money is superneutral.
E) increase uncertainty is an important factor in recent recessions.

Question 52

Using the New Monetarist Model and the key features of the 2008-2009 financial crises and recesssion suggests

A) deficiant financial liquidity was a problem for the U.S. but not for Canada.
B) adequate financial liquidity was available in both the U.S. and Canada.
C) the model does not perform well matching the key facts.
D) the model matches some key facts but misses others.
E) deficiant financial liquidity was a problem for Canada, but not for the U.S.

Question 53

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

A) evidence supporting intertemporal substitution as an important determinant of labour 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.
E) the Bank of Canada does not use all available information.

Question 54

The proper monetary policy response to a financial liquidity shortage is

A) an open market sale of government bonds.
B) an increase in the money supply.
C) a helicopter drop of money.
D) an open market purchase of government bonds.
E) quantitative easing.

Question 55

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

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.