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) 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.

Answer 1

has a theoretically ambiguous effect on the real interest rate.

Question 2

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.

Answer 2

government to smooth out tax distortions over time.

Question 3

Business cycle models with flexible prices

A) are all non-Keynesian models.
B) were first introduced in the General Theory of Employment, Interest, and Money.
C) the only business cycle models in use.
D) none of the above.

Answer 3

none of the above.

Question 4

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

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

Question 5

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

A) an unpredictable Federal Reserve.
B) exogenous money.
C) endogenous money.
D) uncorrelated money.

Question 6

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

A) increases investment demand.
B) decreases investment demand.
C) has no impact on investment demand.
D) has an ambiguous effect on investment demand.

Question 7

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

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

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 labor demand.
D) are too small to account for the size of fluctuations in real GDP.

Question 9

The phenomenon of underutilization of labor during a recession is called

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

Question 10

According to real business cycle theory

A) monetary policy is driving business cycles.
B) Federal Reserve actions need to be watched closely.
C) technology shocks have a major role in business cycles.
D) cash-in-advance is necessarily to explain business cycles.

Question 11

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 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 12

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 Federal Reserve's use of all available information in trying to stabilize the price level.
C) the Federal Reserve's use of all available information in trying to stabilize the price level and the Federal Reserve's use of all available information in trying to stabilize the level of economic activity.
D) the Federal Reserve'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.

Question 13

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.

Question 14

The behavior 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 behavior of future total factor productivity.
D) future total factor productivity is likely to decrease.

Question 15

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 labor supply curve.

Question 16

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.

Question 17

A model with coordination failures has

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 18

In real business cycle theory,the persistence of shocks to total factor productivity is justified by

A) the fact that some capital depreciates every period.
B) the behavior of Solow residuals.
C) the fact that Taylor rules have been used in post-war United States.
D) the fact that capital takes some time to build.

Question 19

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.

Question 20

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.

Question 21

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.

Question 22

Extraneous events that are completely unrelated to economic fundamentals are called

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

Question 23

In the coordination failure model,a rightward shift in the labor 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.

Question 24

There are several competing models of the business cycle because

A) none currently captures all facets of the business cycle.
B) they are all rooted in different philosophical traditions.
C) different shocks need different models.
D) they depend on the type of policy that is adopted.

Question 25

In the coordination failure model,we mention sunspots because

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 26

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

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 27

In the coordination failure model,how is a particular equilibrium attained?

A) The Federal Reserve picks it.
B) It depends on total factor productivity shocks.
C) It depends on money supply shocks.
D) because people expect it to be the equilibrium.

Question 28

In the coordination failure model,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.

Question 29

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

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.

Question 30

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.

Question 31

There are several competing models of the business cycle because

A) none currently captures all facets of the business cycle.
B) they are all rooted in different philosophical traditions.
C) different shocks need different models.
D) they depend on the type of policy that is adopted.

Question 32

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 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.

Question 33

A reduction in financial liquidity,producing deficient liquid assets

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 34

A reduction in financial liquidity,producing deficient liquid assets

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 35

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

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 36

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.

Question 37

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

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