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.

Accepted Answer

In the real business cycle model, total factor productivity is positively related to real output and real wages. Therefore, an increase in total factor productivity will lead to an increase in real wages. However, because real output increases as well, this means that the demand for goods and services will increase, leading to an increase in the price level. Thus, the correct answer is B.

Question 2

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.

Accepted Answer

Real business cycle theory was first introduced by Finn Kydland and Edward Prescott in the 1980s.

Question 3

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.

Accepted Answer

A persistent increase in total factor productivity means that firms are able to produce more output with the same amount of inputs. This will lead to an increase in the supply of goods and services in the economy. As a result, the output supply curve will shift to the right. However, if the demand for goods and services does not increase at the same rate as the supply, the output price level will fall, causing real wages to rise. Real interest rates are also likely to fall as a result of increased demand for investment funds. Thus, the only option that is inconsistent with the effects of an increase in total factor productivity is choice D, which suggests that the output demand curve will shift less than the output supply curve. In reality, the opposite is true, as an increase in total factor productivity will tend to increase both the output supply curve and the output demand curve, but the supply curve will typically shift more.

Question 4

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.

Accepted Answer

The Keynesian view holds that prices and wages are slow to adjust, which leads to market imperfections and the potential for aggregate shocks to destabilize the economy. Fiscal and monetary policy can be used to counteract these effects and stabilize the economy.

Question 5

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

Accepted Answer

Real business cycle theorists argue that an increase in total factor productivity leads to an increase in output and income in the economy, which in turn leads to banking sector expansion of deposit money. This, along with Bank of Canada's attempts to stabilize the price level, could lead to an increase in the nominal money supply. The other options do not directly relate to the effect of total factor productivity on the nominal money supply.

Question 6

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.

Accepted Answer

During recessions, both labor and capital are often underutilized, leading to measurement errors in the Solow residual, which is supposed to capture productivity changes.

Question 7

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.

Accepted Answer

The answer of The basic real business cycle model has...

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 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.

Accepted Answer

Real business cycle theory assumes that cyclical movements in total factor productivity are the primary cause of business cycle fluctuations. However, some critics argue that these movements may be partly an artifact of measurement error, which means that the actual changes in productivity may not be as large as estimated by econometric models. This suggests that the theory may overstate the contribution of real shocks to business cycles.

Question 9

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.

Accepted Answer

The answer of Shocks to total factor productivity are least...

Question 10

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.

Accepted Answer

During a recession, there is underutilization of labour and underutilization of the aggregate capital stock.

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.

Accepted Answer

The Solow residual is a measure of total factor productivity, which represents the portion of output growth that cannot be explained by changes in inputs (capital and labor). When current total factor productivity increases, it suggests that there has been an improvement in the efficiency with which inputs are used to produce output. As a result, future total factor productivity is also likely to increase, since the technological and organizational changes that drive productivity growth tend to be cumulative and progressive in nature. Therefore, option B is the correct answer.

Question 12

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.

Accepted Answer

Real business cycle theory suggests that government should aim to minimize distortions in the economy, such as those caused by taxes, and allow the economy to adjust naturally to productivity shocks. Smoothing out tax distortions over time aligns with this approach.

Question 13

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.

Accepted Answer

Labour hoarding refers to the practice of retaining workers during an economic downturn even though they are not fully utilized. This is often done to avoid the costs and uncertainties of layoffs and to maintain a skilled workforce for when economic conditions improve.

Question 14

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.

Accepted Answer

Real business cycle theory suggests that changes in technology, productivity, and other supply-side factors drive the business cycle. However, the procyclical behavior of the nominal money supply is not easily explained by this theory. In fact, empirical evidence shows that the money supply is often a leading indicator of the business cycle, with increases in the money supply preceding economic expansions, and vice versa. This suggests that monetary factors, such as changes in interest rates and credit availability, play an important role in driving the business cycle. Moreover, the fact that money and prices are both acyclical (choice A) is not inconsistent with real business cycle theory, as it focuses on real, not nominal, variables. Finally, the timing of changes in the money supply (choices C, D, and E) is debated among economists, but the consensus is that it is procyclical, meaning it moves with the business cycle rather than leading or lagging it.

Question 15

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.

Accepted Answer

The real business cycle model replicates the key business cycle regularities qualitatively and quantitatively.

Question 16

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.

Accepted Answer

Endogenous money theory suggests that the money supply is determined by the needs of the economy, responding to the demand for loans and credit, rather than being directly controlled by the central bank or government.

Question 17

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.

Accepted Answer

The real business cycle model suggests that money supply is endogenous, meaning it responds to the economic cycle, which explains the procyclicality of nominal money.

Question 18

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.

Accepted Answer

In the real business cycle model, a persistent increase in total factor productivity can lead to higher output and investment demand, which may increase the real interest rate. However, it can also increase savings, which may decrease the real interest rate. Thus, the effect on the real interest rate is theoretically ambiguous.

Question 19

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.

Accepted Answer

The 1974-1975 recession was largely driven by the oil crisis, which can be seen as a shock to total factor productivity as it significantly increased production costs and disrupted economic activity.

Question 20

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.

Accepted Answer

Real business cycle theorists argue that money does not cause changes in economic activity but rather responds to changes in the economy. The expansion of bank loans in advance of real activity can cause the money supply to lead output. Additionally, the Bank of Canada's use of all available information in trying to stabilize the price level can lead to changes in the money supply that affect output. Therefore, the best choice is B, which includes both of these factors.

Quiz 13: Business Cycle Models with Flexible Prices and Wages

In the real business cycle model,a persistent increase in total factor productivity

Real business cycle theory was introduced by

In the real business model,a persistent increase in total factor productivity causes

The Keynesian view implies that there is a role for monetary and fiscal policy in stabilizing the economy in response to aggregate shocks because

According to real business cycle theorists,an increase in total factor productivity could lead to an increase in the nominal money supply due to

Measurement errors of changes in the Solow residual during recessions are most likely caused by

The basic real business cycle model has some difficulty explaining why

An important critique of real business cycle theory is the belief that cyclical movements in total factor productivity

Shocks to total factor productivity are least plausible as an explanation of the recession of

An important critique of real business cycle theory is that during a recession,

The behaviour of the Solow residual suggests that when current total factor productivity increases

A government policy that is consistent with real business cycle theory would be for

The phenomenon of underutilization of labour during a recession is called

Two business cycle facts that are less easily explained by the real business cycle are that

The real business cycle model replicates the key business cycle regularities

Endogenous money is where the money supply is not determined by the monetary authority,but

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

In the real business cycle model,a persistent increase in total factor productivity

Shocks to total factor productivity are most plausible as an explanation of the recession of

According to real business cycle theorists,the tendency of money to lead output may be due to