Deck 22: Modern Business Cycle Theory

Question 1

Solow residuals are estimates of ________.

A) deadweight loss
B) the natural rate of unemployment
C) aggregate productivity
D) labor hoarding

Answer 1

aggregate productivity

Question 2

In the real business cycle model, the short-run aggregate supply curve is always the same as ________.

A) long-run aggregate supply.
B) the long-run aggregate demand schedule.
C) the velocity of money.
D) the real rate of interest.

Answer 2

long-run aggregate supply.

Question 3

Which of the following would be considered a negative real supply shock?

A) a relaxation of government environmental regulations.
B) a permanent increase in the price of energy.
C) a decrease in the money supply.
D) a decrease in aggregate demand.

Answer 3

a permanent increase in the price of energy.

Question 4

Which of the following would be considered a negative real supply shock?

A) an increase in expected inflation
B) a disruption of financial markets
C) a decrease in government spending
D) a decrease in guaranteed pension benefits

Question 5

In the real business cycle model, unemployment is ________.

A) costless to individual workers.
B) the result of higher productivity.
C) voluntary.
D) the result of higher wages.

Question 6

During business contractions, the growth rate of Solow residuals is ________.

A) near or below zero
B) well above zero
C) approaching infinity
D) impossible to calculate

Question 7

According to real business cycle theory, a likely cause of an increase in employment is ________.

A) an increase in the real wage
B) an increase in aggregate demand
C) a decrease in the real wage
D) a decrease in the real interest rate

Question 8

In the aggregate production function Y = A K0.3L0.7, real business cycle theory treats ________ as the key independent variable.

A) potential output
B) productivity
C) the capital stock
D) the labor input

Question 9

The New Keynesian model, is Keynesian in that ________.

A) it assumes wages and prices are sticky.
B) changes in the money supply are taken to be the single most important influence on business movements.
C) the velocity of money is a constant.
D) expectations are assumed to be rational.

Question 10

In real business cycle models, shifts of the aggregate demand curve ________.

A) cause changes in inflation, but have no effect on output
B) cannot occur
C) result from changes in the willingness to work
D) result from Solow residuals

Question 11

The primary source of shocks to potential output and long-run supply for real business cycle theorists is ________.

A) changes in the money supply.
B) a change in the price of complements.
C) a change in any of the components of aggregate demand.
D) shocks to productivity.

Question 12

Real business cycle theorists take the comovement of aggregate output and Solow residuals as strong confirmation that economic fluctuations are caused by ________.

A) changes in aggregate demand.
B) changes in the money supply.
C) changes in the rate of inflation.
D) productivity shocks.

Question 13

The complete wage and price flexibility of the real business cycle framework implies that ________.

A) the velocity of money is a constant.
B) the velocity of money times the money supply is equal to the nominal value of transactions over a given period of time.
C) aggregate output always equals potential output.
D) sustained economic contractions, like the Great Depression, cannot occur in real, historical time.

Question 14

The real business cycle model begins with the assumption that ________.

A) wages and prices are sticky.
B) wages and prices are completely flexible.
C) the velocity of money is a constant.
D) nominal variables are superior to real variables in describing economic activity.

Question 15

Among the pioneers of real business cycle theory is ________.

A) Edward Prescott
B) Robert Lucas
C) Robert Solow
D) Paul Volcker

Question 16

According to the real business cycle model, a rightward shift in the long-run aggregate supply schedule would be caused by________.

A) a negative supply shock.
B) an increase in aggregate demand.
C) a positive supply shock.
D) a decrease in aggregate demand.

Question 17

If output begins to grow substantially faster than capital and labor inputs, then the real business cycle model predicts, ceteris paribus, ________.

A) an increase in inflation
B) a decrease in employment
C) a decrease in investment
D) a business cycle expansion

Question 18

Given the aggregate production function Y = A K0.3L0.7, the Solow residual equals ________ when Y is 60, K = 5 and L = 5.

A) 2.4
B) 35
C) 25
D) 12

Question 19

In real business cycle models, a change in willingness to work ________.

A) is associated with productivity shocks
B) causes a shift of the aggregate demand curve
C) would violate the market-clearing assumption
D) has no effect on potential output

Question 20

In the real business cycle model, fluctuations in employment are explained by ________.

A) changes in the composition of household assets.
B) intertemporal substitution as real wages and real interest rates changes.
C) changes in the marginal propensity to consume.
D) the impact of a change in price on quantity demand and quantity supplied in goods markets.

Question 21

If workers sit idly by for a portion of their workday, but are still employed, ________.

A) the negative productivity shock has no effect on output
B) it is unlikely that a decrease in aggregate demand is the cause
C) aggregate data may create a false illusion of a negative productivity shock
D) a negative productivity shock is the most plausible explanation

Question 22

The new Keynesian model has ________ in common with the real business cycle model.

A) wage and price stickiness
B) a theory of aggregate demand
C) procyclical inflation
D) a microeconomic foundation

Question 23

In the new Keynesian model, a positive, permanent supply shock will result in ________.

A) an increase in aggregate demand
B) a decrease in aggregate demand
C) no change in aggregate demand
D) a change in aggregate demand, only if the shock is anticipated

Question 24

Use the concept of intertemporal substitution to explain how, in real business cycle models, a change in potential output causes an immediate change in actual output.

Question 25

In the new Keynesian model, the effects on output of an anticipated aggregate demand shock are________.

A) less than if that event was unanticipated.
B) greater than if that event was unanticipated.
C) the same as would develop if that event was unanticipated.
D) independent of whether or not that event is anticipated or unanticipated.

Question 26

The standard IS curve is adjusted in new Keynesian theory to account for ________.

A) the forward-looking behavior of households and firms.
B) the difference between real and nominal variables.
C) changes in GDP, or Gross Domestic Product.
D) the impact of a rising national debt.

Question 27

Shocks to long-run aggregate supply can be a source of business fluctuations ________.

A) only in real business cycle models.
B) only in new Keynesian models.
C) in both real business cycle and new Keynesian models.
D) only if the money supply rises.

Question 28

How might real business cycle theorists respond to evidence of procyclical inflation?

Question 29

In the new Keynesian model, if an aggregate demand increase is anticipated, then ________.

A) aggregate demand will not change.
B) short-run aggregate supply will shift up immediately
C) short-run aggregate supply will shift down immediately
D) there is no immediate effect on the short-run supply curve

Question 30

In the new Keynesian model, an increase in productivity will cause ________.

A) a leftward shift in short-run and long-run aggregate supply.
B) a rightward shift in short-run and long-run aggregate supply.
C) a leftward shift in short-run aggregate supply and rightward shift in long-run aggregate supply
D) a rightward shift in short-run aggregate supply and a leftward shift in long-run aggregate supply.

Question 31

In the new Keynesian model, if an aggregate demand increase is unanticipated, then ________.

A) aggregate demand will not change.
B) short-run aggregate supply will shift up immediately
C) short-run aggregate supply will shift down immediately
D) there is no immediate effect on the short-run supply curve

Question 32

Critics of real business cycle analysis suggest that the persuasiveness of the model may be limited by the existence of ________.

A) flexible wages and prices.
B) rising wages.
C) voluntary unemployment.
D) labor hoarding.

Question 33

If workers sit idly by for a portion of their workday, but are still employed, firms may be engaged in ________.

A) intertemporal substitution.
B) voluntary unemployment.
C) labor hoarding.
D) real business.

Question 34

The real business cycle model suggests that, with aggregate demand unchanged, increases in output would be associated with ________.

A) an increase in inflation.
B) a decline in inflation.
C) and unchanged price level.
D) procyclical inflation.

Question 35

In the new Keynesian model, if an aggregate demand increase is unanticipated, then ________.

A) aggregate demand will not change.
B) short-run aggregate supply will shift up immediately
C) short-run aggregate supply will shift down immediately
D) there is no immediate effect on expectations about future inflation

Question 36

In the new Keynesian model, an ________ increase in productivity will impact ________.

A) unanticipated; both aggregate demand and aggregate supply
B) anticipated; both aggregate demand and aggregate supply
C) anticipated; aggregate demand, but not aggregate supply
D) unanticipated; aggregate demand, but not aggregate supply

Question 37

Critics of real business cycle theory doubt the plausibility of ________.

A) intertemporal substitution
B) negative productivity shocks.
C) adaptive expectations.
D) a trade-off between work and leisure

Question 38

In the new Keynesian model, expected inflation is a function of ________.

A) expected future output gaps and markup shocks
B) current and past inflation
C) unanticipated aggregate demand shocks
D) expected growth of the money supply

Question 39

In the new Keynesian model, sticky prices may be due to ________.

A) involuntary unemployment.
B) negative productivity shocks.
C) positive productivity shocks.
D) staggered prices.

Question 40

How might a real business cycle theorist explain the "Volcker recession" of the early 1980s?

Question 41

The three business cycle models differ mostly in their treatment of ________.

A) aggregate demand
B) short-run aggregate supply
C) long-run aggregate supply
D) productivity shocks

Question 42

Long-run aggregate supply shocks are not a source of business cycle fluctuations in the ________, because ________.

A) traditional Keynesian model; long-run supply shocks are incompatible with adaptive expectations
B) traditional Keynesian model; demand fluctuations are considered of dominant importance
C) real business cycle model; shocks cannot persist in the long run, when prices and wages are flexible
D) new Keynesian model; such shocks are anticipated by forward-looking consumers and firms

Question 43

The level of income is unchanged in response to anticipated anti-inflation policy in ________.

A) real business cycle theory.
B) traditional Keynesian theory.
C) new Keynesian theory.
D) post classical theory

Question 44

Prices are regarded as sticky in ________.

A) new Keynesian and traditional Keynesian theory.
B) real business cycle and new Keynesian theory.
C) real business cycle and traditional Keynesian theory.
D) traditional Keynesian, new Keynesian and real business cycle theory.

Question 45

In the long run, does it matter whether a policy action was anticipated or not?

Question 46

Expectations are adaptive in ________.

A) traditional Keynesian models.
B) the Lucas Model.
C) new Keynesian theory.
D) the real business cycle model.

Question 47

Price flexibility is a key feature of ________.

A) traditional Keynesian theory.
B) new Keynesian theory.
C) real business cycle theory.
D) traditional Keynesian, new Keynesian and real business cycle theory.

Question 48

Credibility is important to successful anti-inflationary policy in ________.

A) new Keynesian theory.
B) traditional Keynesian theory.
C) real business cycle theory.
D) post classical theory

Question 49

________ highlights the importance of fiscal policy as a determinant of good macroeconomic performance.

A) The real business cycle model
B) The traditional Keynesian model
C) The new Keynesian model
D) Rational expectations

Question 50

In the new Keynesian model, the immediate effect on inflation of an anticipated aggregate demand shock is ________.

A) less than if that event was unanticipated.
B) greater than if that event was unanticipated.
C) the same as would develop if that event was unanticipated.
D) independent of whether or not that event is anticipated or unanticipated.

Question 51

A belief that demand shocks are an important source of business cycle fluctuations implies a preference of ________.

A) the new Keynesian model over the traditional Keynesian model
B) the real business cycle model over the traditional Keynesian model
C) the real business cycle model over the new Keynesian model
D) the new Keynesian model over the real business cycle model

Question 52

In the new Keynesian model, the ultimate effect on output of an anticipated aggregate demand shock is ________.

A) less than if that event was unanticipated.
B) greater than if that event was unanticipated.
C) the same as would develop if that event had never occurred
D) dependent on whether or not that event is temporary or permanent

Question 53

Suppose a tax cut that had been anticipated by households and businesses doesn't happen. Describe a new Keynesian analysis of the consequences of this "event."

Question 54

Credibility is not important in ________.

A) new Keynesian and traditional Keynesian theory.
B) real business cycle and traditional Keynesian theory.
C) real business cycle and new Keynesian theory.
D) traditional Keynesian, new Keynesian and real business cycle theory.

Question 55

The level of income is unchanged in response to unanticipated anti-inflation policy in ________.

A) real business cycle theory.
B) traditional Keynesian theory.
C) new Keynesian theory.
D) post classical theory

Question 56

Research supporting the new Keynesian model finds that prices are ________.

A) slow to adjust to aggregate demand shocks
B) changed very frequently
C) changed only infrequently
D) not as flexible as wages

Question 57

Expectations are taken to be rational in________.

A) traditional Keynesian and new Keynesian theory.
B) new Keynesian and real business cycle theory.
C) real business cycle and traditional Keynesian theory.
D) traditional Keynesian, new Keynesian and real business cycle theory.

Question 58

In the new Keynesian model, the ultimate effect on inflation of an anticipated aggregate demand shock is ________.

A) less than if that event was unanticipated.
B) greater than if that event was unanticipated.
C) the same as would develop if that event had never occurred
D) independent of whether or not that event is anticipated or unanticipated.

Question 59

Long-run aggregate supply shocks are a source of business cycle fluctuations in ________.

A) traditional Keynesian and new Keynesian theory.
B) new Keynesian and real business cycle theory.
C) real business cycle and traditional Keynesian theory.
D) traditional Keynesian, new Keynesian and real business cycle theory.

Question 60

Discretionary economic policy is not beneficial in the ________.

A) traditional Keynesian theory.
B) new Keynesian theory.
C) Luka Brazzi model.
D) real business cycle theory.

Question 61

The possibility that unanticipated policy changes are an important source of output fluctuations is most consistent with ________.

A) traditional Keynesian theory
B) new Keynesian theory
C) real business cycle theory
D) institutionalist theory

Question 62

Anti-inflationary policy is less costly when that policy is anticipated in ________.

A) traditional Keynesian theory.
B) new Keynesian theory.
C) real business cycle theory.
D) institutionalist theory.

Question 63

The credit spread is countercyclical and coincident, suggesting that a sudden increase in financial frictions is most likely ________.

A) when the economy has been expanding for some time
B) after the economy has turned into a recession
C) during the recovery phase of the business cycle
D) when expected inflation is declining

Question 64

Suppose the U.S. government announces that it will bring the federal budget deficit to zero, over the next ten years, with no change in tax rates. Describe the effects of such a policy according to the three business cycle models, assuming that the policy is fully credible.

Question 65

In the absence of financial frictions, ________.

A) interest rates for different borrowers move closely together
B) all loans in the economy are transacted at a common interest rate
C) the level of output is not affected by changes in the real interest rate
D) an increase in inflation leads to a decrease in the real interest rate

Question 66

An increase in financial frictions results in ________.

A) an increase in the federal funds rate
B) a reduced supply of credit to households and businesses
C) a decrease in short-run aggregate supply
D) an upward shift of the monetary policy curve

Question 67

Reductions in inflation have no cost in terms of lower output in ________.

A) traditional Keynesian theory.
B) new Keynesian theory.
C) real business cycle theory.
D) traditional and new Keynesian theory.

Question 68

How do the new Keynesian and real business cycle models differ on the ability of inflationary expectations to affect output?

Question 69

In macroeconomic modelling, as price flexibility increases________.

A) the short-run aggregate supply schedule will get flatter.
B) the short-run aggregate supply schedule will get steeper.
C) the short-run aggregate supply schedule will shift to the right.
D) the short-run aggregate supply schedule will shift to the left.

Question 70

Expansionary policy only leads to inflation, but does not raise output in ________.

A) traditional Keynesian theory.
B) new Keynesian theory.
C) real business cycle theory.
D) traditional Keynesian, new Keynesian and real business cycle theory.

Question 71

The difference between the interest rate on loans to households and firms and the interest rate on completely safe assets is known as ________.

A) the fed funds rate.
B) the discount rate.
C) asymmetric information.
D) the credit spread.

Question 72

The most direct and important consequence of an increase in asymmetric information problems is ________.

A) a decrease in the probability of loan repayment
B) inability to assess the probability of loan repayment
C) unwillingness of borrowers to accept the market rate of interest
D) inability of creditors to acquire enough funds to meet borrowers' demand

Question 73

According to real business cycle theory, an increase in financial frictions might lead to ________, if ________.

A) a decrease in output; the rise in the credit spread causes a leftward shift of aggregate demand
B) a decrease in inflation; the disruption of capital markets results in a leftward shift of long-run aggregate supply
C) a decrease in output; the disruption of capital markets results in a leftward shift of long-run aggregate supply
D) a decrease in output; a decline in expected output causes a leftward shift of aggregate demand

Question 74

An increase in financial frictions results in ________.

A) an increase in output and inflation.
B) a rise in the interest rate set by monetary policy.
C) a decline in the real interest rates faced by households and firms.
D) a decline in the interest rate set by monetary policy.

Question 75

The management of expectations has increased in importance in policymaking in recent decades with the rise of________.

A) traditional Keynesian theory.
B) institutionalist theory
C) torsion theory.
D) new Keynesian theory.

Question 76

No distinction is made between the effects of anticipated and unanticipated policy in ________.

A) traditional Keynesian theory.
B) new Keynesian theory.
C) real business cycle theory.
D) traditional Keynesian and real business cycle theory.

Question 77

An increase in asymmetric information that increases financial frictions will tend to ________.

A) increase the moral hazard and adverse selection problems in credit markets.
B) decrease financial frictions.
C) improve market efficiency.
D) decrease the moral hazard problem.

Question 78

As the U.S. economy recovers from the recession of 2007-2009, stubbornly high unemployment is a concern. For each of the three business cycle models, identify the appropriate policy regime.

Question 79

An increase in financial frictions results in ________.

A) a movement to the left along the AD curve
B) a leftward shift of the MP curve
C) a decrease in output and increase in inflation
D) a leftward shift of the IS curve

Question 80

The zero-lower-bound problem develops when ________.

A) real interest rates fall close to zero.
B) nominal interest rates fall close to zero.
C) the difference between real and nominal interest rates approaches zero.
D) the sum of real and nominal interest rates approaches zero.