Deck 15: Dsge Models: the Frontier of Business Cycle Research

Question 1

Which of the following are frequent sources of shocks included in modern DSGE models?
i. Factor productivity
ii. Complete markets
iii. Monetary policy

A) i
B) ii and iii
C) i and ii
D) i, ii, and iii
E) i and iii

Answer 1

i and iii

Question 2

The early DSGE models assumed that TFP:

A) fluctuates over time rather than growing at a constant rate.
B) is constant but labor supply changes.
C) is highly correlated with real interest rates.
D) equals the marginal product of capital.
E) is always positive.

Answer 2

fluctuates over time rather than growing at a constant rate.

Question 3

Which of the following economists and Nobel Prize winners did NOT contribute to the DSGE literature?

A) Paul Krugman
B) Finn Kydland
C) Tom Sargent
D) Chris Simms
E) Robert Lucas

Answer 3

Paul Krugman

Question 4

In DSGE models, the passage of the Affordable Care Act increased ________, which would be ________ shock today.

A) uncertainty; negative
B) health care costs; a positive transitory
C) worker productivity; real wage
D) certainty about health care costs; positive
E) government debt; positive TFP

Question 5

Which of the following features are frequently included in modern DSGE models?
i. Nominal rigidities
ii. Complete markets
iii. Adjustment costs to capital

A) i, ii, and iii
B) i
C) ii and iii
D) i and ii
E) i and iii

Question 6

"DSGE" stands for:

A) dynamic stochastic general equilibrium.
B) deterministic simulated generalized estimation.
C) demand supply generated effects.
D) discrete stationary generated equilibrium.
E) demand and supply government expenditures.

Question 7

The first DSGE models were called ________ models and used the ________ to study macroeconomic fluctuations.

A) monetary; quantity theory of money
B) Keynesian; IS/MP model
C) island; Robinson Crusoe model
D) real business cycle; Solow model
E) altruism; overlapping generations model

Question 8

A constraint to complicated macroeconomic models has been:

A) an insufficient understanding of statistics.
B) that economists have run out of ideas.
C) that firms do not maximize profits.
D) that the models are complicated and challenging to solve.
E) that agents are not rational.

Question 9

The key change the early DSGE models made to the ________ was to change the nature of ________ from ________.

A) AS/AD model; potential output; linear to fluctuating
B) quantity equation; velocity; being constant to moving in unpredictable ways
C) Robinson Crusoe model; the discount rate; high to low patience
D) Fisher equation; inflation expectations; ex post to ex ante
E) Solow model; TFP; growing at a constant rate to shocks

Question 10

In the DSGE framework, prospects for a "fiscal cliff" in the fall of 2012 increases ________ about the future leading firms to ________, which would ________.

A) uncertainty; delay investment; slow economic activity
B) federal surpluses; hire more workers; decrease unemployment
C) state spending; reduce pensions; reduce the labor supply
D) tax rates; increase investment; improve TFP
E) interest rates; reduce investment; lead to better long-term growth

Question 11

An important element of almost every DSGE model is:

A) real exchange rates.
B) the debt-to-GDP ratio.
C) the labor market.
D) fiscal tightness.
E) the trade balance.

Question 12

In a paper by Minneapolis Fed bank president Narayana Kocherlakota, he argues that research in macroeconomics is hampered by:

A) too many disagreements by macroeconomists.
B) the state of technology.
C) a fundamental misunderstanding of the macroeconomy.
D) the Lucas critique.
E) models that are too complicated.

Question 13

Which of the following could be a NEGATIVE TFP shock?

A) a hurricane
B) lower taxes
C) a better court system
D) lower tariff rates
E) a low debt-to-GDP ratio

Question 14

Which of the following features is/are frequently included in modern DSGE models?
i. Nominal rigidities
ii. Complete markets
iii. Homogeneity

A) i
B) ii and iii
C) i and ii
D) i, ii, and iii
E) i and iii

Question 15

The three components of any DSGE model are:

A) endogenous variables, shocks, and economic "features."
B) TFP, the Solow residual, and Cobb-Douglas production.
C) labor supply, demand, and the real wage.
D) exogenous variables, endogenous variables, and normal variables.
E) interest rates, inflation, and unemployment.

Question 16

In the abbreviation DGSE, the "S" stands for ________ and refers to ________ that impact the macroeconomy.

A) supply; supply shocks
B) sudden; demand shocks
C) stochastic; random shocks
D) Simms; consumption preferences
E) savings; transitory precautionary savings

Question 17

An example of the limits of using TFP as the sole driver of recessions is:

A) noting that there was a large positive TFP shock during the Great Recession.
B) that hyperinflations nearly destroyed many African economies.
C) finding that financial shocks have been the cause of every recession since 1960.
D) that it is impossible to, even weakly, estimate TFP shocks.
E) demonstrating that no shock is random.

Question 18

RBC stands for:

A) random bond currency.
B) rational behavior consumption.
C) relative borrowing constraints.
D) retail business caution.
E) real business cycle.

Question 19

Which of the following features is/are frequently included in modern DSGE models?
i. Adverse selection
ii. Complete markets
iii. Moral hazard

A) i
B) ii and iii
C) i and ii
D) i, ii, and iii
E) i and iii

Question 20

In the real business cycle models, business cycles are caused by:

A) nominal productivity shocks.
B) real monetary shocks.
C) real productivity shocks.
D) real price effects.
E) changes to real interest rates.

Question 21

In the Solow model, ________ is assumed to be constant.

A) capital
B) investment
C) output
D) the savings rate
E) consumption

Question 22

In the labor supply curve, the parameter represents:

A) consumption per person.
B) the ratio.
C) the marginal product of capital.
D) the overall magnitude of labor supply.
E) the marginal utility of leisure.

Question 23

The labor supply curve is derived from:

A) people maximizing their utilities.
B) the marginal product of labor.
C) the equilibrium real wage.
D) minimizing the cost of work.
E) recognizing the opportunity cost of consumption.

Question 24

In perfect competition, firms hire workers until the:

A) marginal product of labor equals the real wage.
B) marginal product of labor equals the marginal product of capital.
C) average product of labor equals per capita output.
D) real interest rate equals the nominal wage adjusted for inflation.
E) nominal wage equals the per capita capital.

Question 25

The labor supply curve is increasing in ________ and decreasing in ________.

A) leisure; the real wage
B) the nominal wage; leisure
C) consumption per person; leisure
D) leisure; consumption per person
E) None of these answers is correct.

Question 26

A computer virus that temporarily shuts down major manufacturers would:

A) temporarily reduce output.
B) increase the marginal product of capital.
C) reduce leisure demand.
D) have a negative and long-term impact on consumption.
E) None of these answers is correct.

Question 27

The 1990s U.S. economy enjoyed a technology jump in the form of the Internet. Which of the following is likely to be predicted by a DSGE model?
i. A decline in the marginal product of labor
ii. A decrease in output
iii. An increase in the real wage

A) iii
B) ii
C) i
D) i and ii
E) ii and iii

Question 28

What makes DSGE models difficult to solve is:

A) the forward-looking consumption decision.
B) determining the "right" real interest rate.
C) mathematically solving the utility maximization problem.
D) solving the permanent-income hypothesis.
E) parameterizing the model.

Question 29

Refer to the following figure when answering the following questions.
Figure 15.1: The Labor Market
Consider Figure 15.1, which is a representation of the labor market. In 2005, Hurricane Katrina hit the Gulf Coast of the United States; this would cause a shift from curve ________ because this is an example of a(n) ________.

A) negative TFP shock
B) increase in TFP
C) increase in the interest rate
D) rise in government expenditure
E) None of these answers is correct.

Question 30

Refer to the following figure when answering the following questions.
Figure 15.1: The Labor Market
Consider Figure 15.1, which is a representation of the labor market. If an economy improves its legal system, you would see a shift from curve ________ because this is an example of a(n) ________.

A) increase in TFP
B) decrease in consumption
C) increase in the saving rate
D) rise in the nominal wage
E) None of these answers is correct.

Question 31

In the simplified DSGE model in the text, we treat:

A) consumption as exogenous.
B) the wage as exogenous.
C) consumption as endogenous.
D) the depreciation rate as given.
E) total factor productivity as predictable.

Question 32

A computer virus that temporarily shuts down major manufacturers would:

A) decrease long-run economic growth.
B) reduce the real wage.
C) increase the marginal product of labor.
D) increase the amount of leisure demanded.
E) None of these answers is correct.

Question 33

The labor market equilibrium determines the market clearing the ________ and ________.

A) real wage; labor used in production
B) nominal wage; the real wage
C) level of unemployment; the long-run nominal wage
D) marginal product of labor; the supply of labor
E) real wage; the marginal product of labor

Question 34

Refer to the following figure when answering the following questions.
Figure 15.1: The Labor Market
Consider Figure 15.1, which is a representation of the labor market. If there is a forest fire that shuts down the electric grid, you would see a shift from curve ________ because this is an example of a(n) ________.

A) increase in TFP
B) decrease in TFP
C) increase in taxes
D) rise in consumption
E) None of these answers is correct.

Question 35

A change in total factor productivity will ________, which ________.

A) change the demand for labor; shifts the labor demand curve
B) decrease the demand for labor; shifts the labor demand curve out
C) increase the supply of labor; shifts the labor demand curve
D) change the demand for labor; shifts labor supply
E) reduce the marginal product of labor; moves the wage down along the labor demand curve

Question 36

Using the Cobb-Douglas production function , the marginal product of labor, or the real
Wage, is:

A) .
B) .
C) .
D) .
E) .

Question 37

Which of the following represents labor supply?

A)
B)
C)
D)
E)

Question 38

In the movie (and book) Sahara, toxic waste is leeching into Mali's groundwater. Which of the following effects would you expect to occur in the DSGE framework?
i. A decline in the marginal product of labor
ii. An increase in output
iii. A decline in the real wage

A) i and iii
B) i
C) ii and iii
D) iii
E) i, ii, and iii

Question 39

Suppose a worker gets a new computer; this would:

A) increase the nominal wage.
B) reduce the marginal product of labor.
C) increase the amount of leisure demanded.
D) increase the marginal product of labor.
E) None of these answers is correct.

Question 40

Using the Cobb-Douglas production function , the marginal product of labor, or the real
Wage, is:

A) .
B) .
C) .
D) .
E) .

Question 41

Figure 15.1: The Labor Market a. and d. b. .
e.
None of these answers is correct.
c. .
In the stylized DSGE model, if government expenditures rise, ________ rise(s) and ________, which causes ________.

A) labor demand; real wages rise; inflation to rise
B) wages; labor demand falls; consumption to decline
C) labor supply; real wages fall; consumption to fall
D) real interest rates; inflation rises; the marginal product of capital to rise
E) taxes; labor demand rises; output to fall

Question 42

If the classical dichotomy holds a change in monetary policy, it ________ and ________.

A) increases employment; reduces taxes
B) has no real effects; only affects nominal variables
C) changes output; has no influence on inflation
D) will reduce unemployment; cannot increase inflation
E) has no nominal effects; only moves real variables

Question 43

In 2003, Ireland reduced its corporate tax rate from 16 percent to 12.5 percent. In labor markets this would ________, which would ________.

A) cause an increase in labor demand; push real wages up
B) cause an increase in labor supply; push down nominal wages
C) have no impact on labor markets; have no effect on inflation
D) increase TFP; push real wages up
E) cause a decreased demand for labor; cause price stickiness

Question 44

In Belgium, the corporate tax rate is 33 percent, while in the Netherlands it is about 25 percent.
In labor markets in the stylized DSGE model, you would expect ________, ceteris paribus,
Because ________.

A) TFP changes to offset tax rates; any change to taxes is reflected in TFP
B) wages to be lower in Belgium; corporate tax rates behave similarly to TFP
C) real interest rates to be higher in Belgium; firms would substitute out of capital into labor
D) wages to be higher in Belgium; income tax rates behave similarly to TFP
E) Not enough information is given.

Question 45

When taxes are included in the stylized DSGE model, with Cobb-Douglas production, labor demand is given by:

A) .
B) .
C) .
D) .
E) .

Question 46

In the labor supply model , we can think of ________ as ________.

A) the total labor pool
B) inflation
C) equal to sticky wages
D) leisure
E) reflecting sticky prices

Question 47

When taxes are included in the stylized DSGE model, with Cobb-Douglas production, labor demand is given by:

A) .
B) .
C) .
D) .
E) .

Question 48

Figure 15.1: The Labor Market a. and d. b. .
e.
None of these answers is correct.
c. .
In the stylized DSGE model, the motivation for a rise in government expenditure ________ today is ________.

A) reducing consumption; the permanent-income hypothesis
B) raising wages; a rise in TFP
C) increasing labor demand; the Solow growth model
D) forcing workers to work; capacity utilization
E) increasing leisure; diminishing returns to consumption

Question 49

Refer to the following figure when answering the following questions.
Figure 15.1: The Labor Market
Consider Figure 15.1, which is a representation of the labor market. In 2008, China reduced its corporate tax rate from 33 percent to 25 percent; this would cause a shift from curve ________, because changes in taxes are ________ in the stylized DSGE model.

A) similar to a change in TFP
B) the opposite of a change in income taxes
C) identical to a change in income taxes
D) negatively affected by TFP
E) None of these answers is correct.

Question 50

Refer to the following figure when answering the following questions.
Figure 15.2: The Labor Market
In the stylized DSGE model for the labor market displayed in Figure 15.2, with sticky wages, expansionary monetary policy would cause a move from ________ because ________.

A) of the natural rate of unemployment
B) involuntary unemployment would be zero
C) other prices would rise
D) the labor market would clear
E) real wages would rise

Question 51

Sticky nominal wages can lead to:

A) involuntary unemployment.
B)
C) a labor surplus.
D) falling real wages.
E) higher levels of TFP.

Question 52

In the stylized DSGE model's representation of labor markets, if corporate tax rates rise and TFP rises, real wages would:

A) rise.
B) move randomly.
C) fall.
D) not change.
E) Not enough information is given.

Question 53

Refer to the following figure when answering the following questions.
Figure 15.1: The Labor Market
Consider Figure 15.1, which is a representation of the labor market. In 2005, Hurricane Katrina hit the Gulf Coast of the United States; this would cause a shift from curve ________ because this is an example of a(n) ________.

A) increase in tax rates
B) increase in government spending
C) negative TFP shock
D) rise in exchange rates
E) None of these answers is correct.

Question 54

A temporary increase in government spending ________, and a permanent increase in government spending ________.

A) shifts the labor supply up; shifts the labor supply up
B) shifts the labor supply up; has no impact on labor supply
C) shifts the labor demand up; shifts the labor supply down
D) has no impact on labor demand; shifts the labor supply down
E) shifts the labor supply up; shifts the labor demand down

Question 55

In the stylized DSGE model, the variable that allows future events to affect the economy today is:

A) consumption.
B) nominal wages.
C) the real interest rate.
D) the discount factor.
E) TFP.

Question 56

When consumption falls, ________ also tend(s) to fall.

A) leisure
B) unemployment
C) prices
D) interest rates
E) government expenditure

Question 57

In Figure 15.1, which is a representation of the labor market, a decrease in government expenditure is represented by:

Question 58

Figure 15.1: The Labor Market a. and d. b. .
e.
None of these answers is correct.
c. .
In the stylized DSGE model, contrary to the Keynesian model, ________ government expenditure ________.

A) increasing; makes workers poorer
B) decreasing; makes workers poorer
C) increasing; reduces tax rates
D) declining; reduces inflation
E) perfectly anticipated changes to; have no impact on inflation

Question 59

Using the labor market in the stylized DSGE model, from workers' perspectives, which of the following would be beneficial to them?
i. A reduction in the sales tax rate
ii. A reduction in the income tax rate
iii. A reduction in TFP

A) ii
B) ii and iii
C) iii
D) i, ii, and iii
E) i and ii

Question 60

Refer to the following figure when answering the following questions.
Figure 15.1: The Labor Market
Consider Figure 15.1, which is a representation of the labor market. If the state of Colorado decided to raise its sales tax rate, this would cause a shift from curve ________, because changes in taxes are ________ in the stylized DSGE model.

A) reflected in the marginal produce of capital
B) identical to a change in income taxes
C) similar to a change in TFP
D) negatively affected by TFP
E) None of these answers is correct.

Question 61

With sticky prices in the stylized DSGE model, a monetary expansion:
i. Increases real wages
ii. Increases nominal wages
iii. Reduces output

A) i
B) ii
C) i and ii
D) i and iii
E) iii

Question 62

You are a recent hire at the Labor Department and are asked to assess monetary policy's effects on labor markets using a stylized DSGE model with sticky prices. You read the Fed's policy statement, and given the negative output gap it decides to ________, which would ________ and ________.

A) reduce taxes; reduce labor demand; push real wages down
B) increase the FFR; reduce consumption; shift labor supply out
C) use a fiscal expansion; lower taxes today; increase taxes in the future
D) change inflationary expectations; raise the target inflation rate; raise real wages
E) reduce the FFR; increase labor demand; push real wages up

Question 63

With a nominal price rigidity:

A) firms cannot charge the market clearing price.
B) all prices are the same.
C) wages are also always fixed.
D) inflationary expectations are constant.
E) monetary policy is transparent.

Question 64

The fact that ________ almost as sharply as GDP in the Smets-Wouters DSGE model ________.

A) inflation rises; supports the Phillips curve analysis
B) employment falls; provides insight into the nature of Okun's law
C) consumption rises; contradicts consumption smoothing
D) interest rates fluctuate; demonstrates that real interest rates are constant
E) tax revenues increase; reinforces Ricardian equivalence

Question 65

Refer to the following figure when answering the following questions.
Figure 15.2: The Labor Market
In the stylized DSGE model for the labor market displayed in Figure 15.2, the line marked is due to which of the following?
i. Cyclical unemployment
ii. Sticky prices
iii. The natural rate of unemployment

A) iii
B) i and ii
C) i
D) ii
E) None of these answers is correct.

Question 66

Refer to the following figure when answering the following questions.
Figure 15.2: The Labor Market
In the stylized DSGE model for the labor market displayed in Figure 15.2, the line marked is due to which of the following?
i. Cyclical unemployment
ii. Sticky prices
iii. Sticky wages

A) iii
B) i and ii
C) ii
D) i
E) ii and iii

Question 67

With sticky prices, in the stylized DSGE model, firms ________ and labor demand is ________.

A) agree to produce what is demanded; vertical
B) must update their expectations; equal to the marginal product of labor
C) use adaptive expectations; horizontal
D) produce at the natural rate of output; downward sloping
E) supply at marginal cost; perfectly competitive

Question 68

In the Smets-Wouters DSGE model presented in the text, contractionary monetary policy has the largest impact on:

A) consumption.
B) real GDP.
C) hours worked.
D) unemployment.
E) inflation.

Question 69

Refer to the following figure when answering the following questions.
Figure 15.2: The Labor Market
In the stylized DSGE model for the labor market displayed in Figure 15.2, with sticky wages, contractionary monetary policy would cause a move from ________ because ________.

A) it would cause a decline in the opportunity cost of leisure
B) consumption would fall
C) the real wage would not change
D) taxes would rise
E) other prices would fall

Question 70

Impulse response functions can be thought of as:

A) an alternative way of looking at AS/AD.
B) a substitute to the Solow model.
C) accurately reflecting an economy's dynamics.
D) an application of empirical estimates to understanding an economy.
E) demonstrating how economies worldwide react to shocks.

Question 71

Refer to the following figure when answering the following questions.
Figure 15.2: The Labor Market
In the labor market displayed in Figure 15.2, the distance between points and
Is called ________ and is due to ________.

A) involuntary unemployment; sticky nominal wages
B) unemployment; sticky real wages
C) the "reserve army"; institutional frictions
D) the excess demand for labor; rising TFP
E) government employment; a fiscal expansion

Question 72

Refer to the following figure when answering the following questions.
Figure 15.3: The Labor Market
In the stylized DSGE model for the labor market displayed in Figure 15.3, with sticky prices, a monetary contraction would move the labor market from ________ because ________.

A) of , and therefore real GDP falls
B) nominal wages and inflationary expectations rise
C) real wages fall, so workers supply less labor
D) future consumption falls, increasing labor supply
E) the labor market clears, but output markets do not

Question 73

With sticky prices, in the stylized DSGE model, a monetary contraction ________, which ________.

A) raises inflationary expectations; pushes the Phillips curve up
B) lowers inflationary expectations; expands labor supply
C) decreases aggregate demand; decreases labor demand
D) raises taxes; reduces labor demand
E) represents a fiscal expansion; pushes up labor demand

Question 74

In the stylized DSGE model with sticky prices, how does contractionary monetary policy shock affect the labor market?

A)
B)
C)
D)
E)

Question 75

With sticky nominal wages, a monetary expansion causes:

A) real wages to rise.
B) the price level to rise.
C) nominal wages to fall.
D) real interest rates to rise.
E) None of these answers is correct.

Question 76

In DGSE models, the dynamics of how macro variables react to a policy shock is called:

A) the estimated coefficient.
B) transition dynamics.
C) an impulse response function.
D) a policy response function.
E) Ricardian equivalence.

Question 77

In the impulse response function presented in the text, the effects of contractionary monetary policy on real GDP dissipate:

A) almost immediately.
B) after about 20 quarters.
C) after less than a year.
D) after about 3 to 4 quarters.
E) There is no effect on real GDP.

Question 78

In the Smets-Wouters DSGE model, a positive TFP shock has an immediate ________ but ________.

A) negative impact on hours worked; they start to rise after six quarters
B) positive impact on real GDP; growth is negative in the longer run
C) positive impact on inflation; leads to deflation later
D) effect on unemployment; hours worked per worker remains the same
E) negative impact on consumption; consumption grows later, as predicted by the permanent-income hypothesis

Question 79

The quantitative DSGE model that is being used by the Fed and European Central Bank is from:

A) Smets and Wouters.
B) Galí and Gertler.
C) Krugman and Jones.
D) Kydland and Lucas.
E) Christiano, Eichenbaum, and Evans.

Question 80

Refer to the following figure when answering the following questions.
Figure 15.3: The Labor Market
In the stylized DSGE model for the labor market displayed in Figure 15.3, with sticky prices, the Federal Reserve's desire to expand the economy would move the labor market from:

A) .
B) .
C) .
D) .
E) .