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

B

Question 2

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.

Answer 2

B

Question 3

Procyclical total factor productivity (TFP)could be caused by

A) when TFP rises, real GDP falls.
B) measurement error.
C) the labour input to production is countercyclical.
D) lower investment when real GDP is high.
E) lower average labour productivity when real GDP is high.

Answer 3

B

Question 4

Comovement between nominal and real variables

A) was once a strong regularity in Canadian data, but is no longer.
B) was not historically a strong regularity in Canada, but now it is.
C) cannot be explained.
D) was observed by Friedman and Schwartz after the 2008-2009 recession.
E) was observed by Friedman Schwartz in the historical Canadian data.

Question 5

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 6

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 7

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 8

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 9

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.

Question 10

The observed correlation between the price level and real GDP may be low because

A) consumption is procyclical.
B) the central bank acts to target the price level.
C) money demand does not depend on income.
D) money demand increases when the nominal interest rate rises.
E) Milton Friedman has passed away.

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

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.

Question 13

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 14

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 behaviour 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 behaviour of tax collections.
E) Bank of Canada attempts to stabilize business cycle fluctuations.

Question 15

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 16

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 17

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 18

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 19

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 20

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 21

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 22

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 23

Extraneous events that are completely unrelated to economic fundamentals are called

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

Question 24

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 25

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 26

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 27

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 28

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 29

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 30

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 31

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 32

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 33

In the coordination failure model

A) there is no role for government policy.
B) government policy works through the multiplier.
C) government policy can work by coordinating actions on the bad equilibrium.
D) government policy can work by coordinating actions on the good equilibrium.
E) government policy can only confuse people.

Question 34

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 35

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 36

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 37

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

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

Question 38

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 39

Distinguishing between the real business cycle model and the coordination failure model

A) is impossible.
B) requires that we verify whether increasing-returns-to-scale production is important.
C) requires that we identify the composition of the labour force.
D) is easy.
E) has been done, and the real business cycle model has been shown to be superior.

Question 40

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 real wage.

Question 41

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 42

Explain what the policy implications of the real business cycle model are. Do you think the real business cycle model leaves out important features of the economy, which causes its policy conclusions to be questionable? Discuss.

Question 43

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 44

The real business cycle model

A) fits the 2008-2009 Canadian data perfectly.
B) cannot account for the behaviour of the price level in the 2008-2009 recession.
C) cannot account of the behaviour of consumption in the 2008-2009 recession.
D) cannot account for the behaviour of investment in the 2008-2009 recession.
E) can account for the behaviour of the price level in the 2008-2009 recession.

Question 45

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 46

The key defect of the real business cycle model and the coordination failure model, in explaining what was going on in the 2008-2009 recession, is

A) the failure to recognize important features of the economy.
B) the fact that financial factors are too important in these models.
C) the absence of a role for government spending.
D) too much attention to international trade.
E) no effect of central bank actions on the price level in these models.

Question 47

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 48

Macroeconomists were criticized after the 2008-2009 recession by

A) Milton Friedman.
B) James Tobin.
C) Paul Krugman.
D) Anna Schwartz.
E) Steve Poloz.

Question 49

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 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 that are essentially unobservable.
D) money supply shocks are predictable.
E) there are fluctuations between "good" and "bad" equilibria.