Deck 9: An Equilibrium Business-Cycle Model

Question 1

An increase in the interest rate makes future consumption cheaper and future leisure more expensive.

Answer 1

False

Question 2

An equilibrium business-cycle model:

A)uses shocks to GDP to find equilibrium conditions.
B)uses GDP to find equilibrium shocks to the economy.
C)uses equilibrium conditions to determine how shocks affect real GDP and other macroeconomic variables.
D)uses GDP to find equilibrium conditions.

Answer 2

uses equilibrium conditions to determine how shocks affect real GDP and other macroeconomic variables.

Question 3

The model predicts that in response to a permanent positive change in technology real consumption will be procyclical.

Answer 3

True

Question 4

If there is a permanent increase in technology, A, then we expect consumption to:

A)increase by more than real GDP.
B)increase by the same amount as real GDP.
C)increase but by less than real GDP.
D)be unchanged.

Question 5

During an economic expansion due to an increase in technology, A, consumption will:

A)tend to rise due to the income effect.
B)be unchanged.
C)tend to rise due to the intertemporal substitution effect of the interest rate rising.
D)tend to fluctuate.

Question 6

When the marginal product of labour increases due to a positive technology change, the real wage falls.

Question 7

During an economic expansion due to an increase in technology, A, consumption will:

A)tend to fall due to the income effect.
B)may rise or fall depending on whether the income effect is greater than the substitution effect or not.
C)tend to rise due to the intertemporal substitution effect of the interest rate rising.
D)all of the above.

Question 8

The model predicts that if there is a technology, A, shock, the real rental price of capital will:

A)be relatively high during an economic expansion or a recession.
B)be relatively low during an economic expansion or a recession.
C)be relatively high during an economic expansion and relatively low during a recession.
D)be relatively low during an economic expansion and relatively high during a recession.

Question 9

An increase in the level of technology, A, causes:

A)an increase in the MPL
B)a decrease in the MPL
C)a movement along the MPL hiring more labour.
D)a movement along the MPL hiring less labour.

Question 10

If technology, A, increases, then:

A)the MPK and the demand for capital services increase.
B)the MPK and the demand for capital services decrease.
C)the MPK increases and the demand for capital services decreases.
D)the MPK decreases and the demand for capital services increases.

Question 11

The model predicts that if there is a technology, A, shock, the interest rate, i, will be:

A)relatively high during an economic expansion or a recession.
B)relatively low during an economic expansion or a recession.
C)relatively high during an economic expansion and relatively low during a recession.
D)relatively low during an economic expansion and relatively high during a recession.

Question 12

During an economic expansion due to an increase in technology, A, consumption will:

A)tend to fall due to the income effect.
B)be unchanged.
C)tend to fall due to the intertemporal substitution effect of the interest rate rising.
D)tend to fluctuate.

Question 13

Intertemporal substitution effects are substitution effects over time.

Question 14

If technology, A, increases permanently then we would expect:

A)consumption to decrease as the substitution effect would be greater than the income effect of the change.
B)consumption to increase as the income effect would be greater than the substitution effect of the change.
C)consumption to increase as the substitution effect would be greater than the income effect of the change.
D)consumption to decrease as the income effect would be greater than the substitution effect of the change.

Question 15

The cyclical part of real GDP is

A)trend real GDP less real GDP.
B)real GDP less trend real GDP.
C)real GDP/trend real GDP.
D)trend real GDP/real GDP.

Question 16

The model predicts that an economic expansion caused by an increase in technology, A, will:

A)drive down the real wage.
B)cause labour supply to be greater than labour demand.
C)drive up the real wage.
D)lead to a relatively low real wage.

Question 17

The model predicts that in a recession caused by a decrease in technology, A, we would observe:

A)a relatively low real wage.
B)an excess demand for labour.
C)a relatively high real wage.
D)an increase in the MPL

Question 18

During an economic expansion due to an increase in technology, A, consumption will:

A)tend to rise due to the income effect.
B)may rise or fall depending on whether the income effect is greater than the substitution effect or not.
C)tend to fall due to the intertemporal substitution effect of the interest rate rising.
D)all of the above.

Question 19

The income effect on labour supply is positive.

Question 20

Real GDP equals:

A)trend real GDP plus the cyclical part of GDP
B)trend real GDP times the cyclical part of GDP.
C)trend real GDP less the cyclical part of GDP.
D)trend real GDP divided by the cyclical part of GDP.

Question 21

With a temporary positive change in technology we would expect real current consumption:

A)to increase a lot.
B)to decrease a lot.
C)to remain unchanged.
D)to either increase or decrease a little.

Question 22

A variable that moves in the opposite direction as real GDP is known as:

A)acyclical.
B)procyclical.
C)countercyclical.
D)exogenous.

Question 23

Eurozone real consumer expenditure since 1999 has been:

A)procyclical.
B)countercyclical.
C)a cyclical.
D)exogenous.

Question 24

An example of a temporary change in technology would be:

A)a new discovery.
B)a new invention.
C)a harvest failure.
D)all of the above.

Question 25

An countercyclical variable is one that:

A)moves the same direction as real GDP.
B)has little tendency to move during a business cycle.
C)moves the opposite direction as real GDP.
D)determined outside the model.

Question 26

US real rental price of capital since 2000 has been:

A)procyclical as the model predicts.
B)countercyclical as the model predicts.
C)procyclical rather countercyclical as the model predicts.
D)countercyclical rather procyclical as the model predicts.

Question 27

An procyclical variable is one that:

A)moves the same direction as real GDP.
B)has little tendency to move during a business cycle.
C)moves the opposite direction as real GDP.
D)determined outside the model.

Question 28

Eurozone real gross domestic private investment since 1999 has been:

A)procyclical.
B)countercyclical.
C)a cyclical.
D)exogenous.

Question 29

Eurozone real average earnings of production workers since 1999 has been:

A)mildly procyclical.
B)mildly countercyclical.
C)acyclical.
D)exogenous.

Question 30

With a temporary change in technology the model predicts:

A)the interest rate will be procyclical.
B)a lower interest rate will motivate households to decrease current real consumption.
C)a higher interest rate will motivate households to decrease current real saving.
D)all of the above.

Question 31

An acyclical variable is one that:

A)moves the same direction as real GDP.
B)has little tendency to move during a business cycle.
C)moves the opposite direction as real GDP.
D)determined outside the model.

Question 32

With a temporary change in technology, A, we expect little change in consumption because:

A)the income effect on consumption is larger.
B)the income effect on consumption is smaller.
C)the intertemporal-substitution effect is larger.
D)the intertemporal-substitution effect is smaller.

Question 33

A variable that moves in the same direction as real GDP is known as:

A)acyclical.
B)procyclical.
C)countercyclical.
D)exogenous.

Question 34

A variable that has little tendency to move during a business cycle is known as:

A)acyclical.
B)procyclical.
C)countercyclical.
D)exogenous.

Question 35

If there were a permanent increase in technology, A, we would expect real saving to:

A)increase as the increase in real consumption is less than real GDP.
B)increase as the increase in real consumption is more than real GDP.
C)decrease as the increase in real consumption is more than real GDP.
D)decrease as the increase in real consumption is less than real GDP.

Question 36

With a temporary change in technology the model predicts:

A)the interest rate will be procyclical.
B)a lower interest rate will motivate households to increase current real consumption.
C)a higher interest rate will motivate households to increase current real saving.
D)all of the above.

Question 37

With a temporary change in technology, we would expect:

A)the income effect of consumption to be larger.
B)the income effect of consumption to be smaller.
C)the intertemporal substitution effect on consumption to be larger.

Question 38

Since 1999, in the Eurozone:

A)real gross private investment has varied more than real GDP, while real consumer expenditure has varied less than real GDP.
B)real gross private investment and real consumer expenditure have varied more than real GDP.
C)real gross private investment has varied less than real GDP, while real consumer expenditure has varied more than real GDP.
D)real gross private investment and real consumer expenditure have varied less than real GDP.

Question 39

An example of a temporary change in technology would be:

A)a new discovery.
B)a general strike.
C)a new invention.
D)all of the above.

Question 40

The model predicts that an economic expansion caused by a temporary increase in technology, A, would lead to:

A)high real GDP and investment.
B)low real GDP and high real investment.
C)low real GDP and investment.
D)high real GDP and low real investment.

Question 41

A higher interest rate makes:

A)future consumption and leisure more expensive.
B)future consumption cheaper and future leisure more expensive.
C)future consumption and leisure cheaper.
D)future consumption more expensive and future leisure cheaper.

Question 42

An increase in the interest rate induces worker to:

A)work more in the current period and less in the future.
B)work more in the current period and in the future.
C)work less in the current period and more in the future.
D)work less in the current period and in the future.

Question 43

What does the model predict about investment when technology increases and why and what do the data show about investment in the US?

Question 44

We expect that an increase in real wages will:

A)increase labour supply, if temporary.
B)increase labour supply, if permanent.
C)increase labour supply, whether permanent or temporary.
D)reduce labour supply, whether permanent or temporary.

Question 45

A higher real wage:

A)increases the income of households inducing them to work more.
B)decreases the income of households inducing them to work more.
C)increases the income of households inducing them to work less.
D)decreases the income of households inducing them to work less.

Question 46

When the labour supply of households is allowed to slope upward:

A)the model predictions match the observed data that employment and real wages are countercyclical.
B)the model predictions do not match the observed data that employment and real wages are countercyclical.
C)the model predictions do not match the observed data that employment and real wages are procyclical.
D)the model predictions match the observed data that employment and real wages are procyclical.

Question 47

Temporary changes in technology, A, conflict with the data in that:

A)investment is clearly acyclical.
B)consumption is clearly procyclical.
C)the wage rate is clearly countercyclical.
D)all of the above.

Question 48

A higher interest rate makes:

A)current consumption and future leisure more expensive.
B)current consumption cheaper and future. leisure more expensive.
C)current consumption and future leisure cheaper.
D)current consumption more expensive and future leisure cheaper.

Question 49

A higher interest rate makes:

A)current consumption and leisure more expensive.
B)current consumption cheaper and current. leisure more expensive.
C)current consumption and leisure cheaper.
D)current consumption more expensive and current leisure cheaper.

Question 50

Intertemporal substitution effects motivate households to:

A)supply more labour when the wage rate is temporarily low.
B)supply more labour when the wage rate is permanently low.
C)supply less labour when the wage rate is temporarily low.

Question 51

The measure of labour productivity used in the popular media is:

A)Y/L
B)average product of labour.
C)procyclical.
D)all of the above.

Question 52

If there is a positive technological change, what happens in the labour market?

Question 53

A higher real wage:

A)makes consumption more expensive.
B)makes it a worse deal for households to work an extra hour.
C)makes leisure less expensive.
D)makes leisure more expensive.

Question 54

What is the relationship between real GDP and the cyclical part of GDP?

Question 55

A higher interest rate makes:

A)future consumption cheaper.
B)future leisure cheaper.
C)current consumption more expensive.
D)all of the above.

Question 56

What happens to consumption when there is a permanent and temporary increase in technology, A, and why?

Question 57

In the Eurozone since 1999 total hours worked and employment have been:

A)acyclical.
B)countercyclical.
C)procyclical.
D)exogenous.

Question 58

What happens in the model, if a temporary technology change increase real wages temporarily?

Question 59

In the model with an upward sloping supply curve of labour and increase demand for labour due to a positive technological, A, change:

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

Question 60

The overall effect of a higher real wage is:

A)to increase labour as the income and substitution effect reinforce each other.
B)ambiguous on labour as the income and substitution effect work against each other.
C)to decrease labour as the income and substitution effect reinforce each other.
D)ambiguous because the income and substitution effect reinforce each other.