Deck 10: Classical Business Cycle Analysis

Question 1

Which of the following is an example of a productivity shock?

A)The introduction of new management techniques
B)A change in taxes on corporate profits
C)A change in the level of government transfer programs
D)An increase in the money supply

Answer 1

The introduction of new management techniques

Question 2

An adverse supply shock would directly ________ labor productivity by changing the amount of output that can be produced with any given amount of capital and labor.It would also indirectly ________ average labor productivity through changes in the level of employment.

A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Answer 2

decrease; increase

Question 3

Real business cycle theorists think that most business cycle fluctuations are caused by shocks to

A)the production function.
B)the size of the labor force.
C)the real quantity of government purchases.
D)the spending and saving decisions of consumers.

Answer 3

the production function.

Question 4

When RBC economists work out a detailed numerical example of a more general theory,they are performing

A)econometrics.
B)number theory.
C)calibration.
D)topology.

Question 5

The distinction between real and nominal shocks is that

A)real shocks directly affect only the IS curve, but not the FE line or LM curve.
B)real shocks directly affect only the FE line, but not the LM curve.
C)real shocks directly affect only the IS curve or the FE line, but not the LM curve.
D)real shocks have a large direct effect on the IS curve and the FE line, but only a small direct effect on the LM curve.

Question 6

Prescott's calibrated RBC model was able to match the data in terms of the ________ between many key macroeconomic variables and GNP; that is,in terms of how closely they moved with GNP over the business cycle.

A)correlation
B)interdependence
C)gamma coefficient
D)sigma ratio

Question 7

How do RBC economists face the business cycle fact that inflation is procyclical?

A)They argue that even though inflation doesn't fit their theory, everything else does, and inflation is not important.
B)They note that inflation would not be procyclical if monetary policy were conducted properly.
C)They argue that inflation is procyclical only because monetary policy shocks are the main cause of business cycles.
D)They use alternative statistical methods that suggest that inflation is countercyclical.

Question 8

When RBC economists compare the correlations in their models to the data,what are they looking at?

A)The degree to which variables lead output over the business cycle
B)The strength of procyclicality of different variables
C)The amount of random variation in economic variables
D)The degree to which different economic variables move together

Question 9

When RBC economists compare the volatility in their models to the data,what are they looking at?

A)The degree to which variables lead output over the business cycle
B)The strength of procyclicality of different variables
C)The amount of random variation in economic variables
D)The degree to which different economic variables move together

Question 10

Which of the following is not a primary cause of business cycle fluctuations,according to real business cycle theory?

A)A change in the production function
B)A change in the size of the labor force
C)A change in the money supply
D)A change in the real quantity of government purchases

Question 11

In the classical IS-LM/AD-AS model,a beneficial productivity shock would ________ output,________ the real interest rate,and ________ the price level.

A)increase; decrease; increase
B)increase; decrease; decrease
C)increase; increase; decrease
D)decrease; decrease; increase

Question 12

The theory that real shocks to the economy are the primary cause of business cycles is

A)monetarism.
B)Keynesian theory.
C)real business cycle theory.
D)Hamiltonian theory.

Question 13

According to real business cycle theory,which of the following events is least likely to cause a recession?

A)A decline in the money supply
B)A decline in the capital stock
C)A decline in productivity
D)A decline in labor supply

Question 14

What do RBC economists mean by the term calibration?

A)Modifying the structure of an economic theory to strengthen its logic
B)Changing a theory as the economy changes
C)Working out a detailed numerical example of a more general theory
D)Writing out the implications of a theory for all the main economic variables

Question 15

The most common measure of productivity shocks is known as

A)the Solow residual.
B)the Lucas supply curve.
C)the Prescott productivity parameter.
D)the Kydland factor.

Question 16

Research on productivity shocks has shown that

A)productivity shocks have only nominal effects.
B)there have been no identifiable productivity shocks in the U.S. economy since World War II.
C)small productivity shocks can explain large business cycle fluctuations.
D)large productivity shocks produce only small deviations in aggregate output.

Question 17

Which of the following would not be an example of a productivity shock?

A)The introduction of new management techniques
B)A change in government regulations affecting production
C)A change in the level of government transfer programs
D)A spell of unusually good or unusually bad weather

Question 18

A temporary beneficial productivity shock would

A)shift the labor supply curve down and to the right.
B)increase the level of employment.
C)increase future income.
D)increase the expected future marginal product of capital.

Question 19

A temporary adverse productivity shock would

A)shift the labor supply curve upward.
B)decrease the level of employment.
C)decrease future income.
D)decrease the expected future marginal product of capital.

Question 20

Prescott's calibrated RBC model showed that the actual and simulated ________ of five key macroeconomic variables were very close.

A)magnitudes
B)slopes
C)volatilities
D)betas

Question 21

Labor hoarding occurs when

A)firms keep good workers so other firms can't hire them.
B)the unemployment rate exceeds the natural rate of unemployment.
C)involuntary unemployment exceeds voluntary unemployment.
D)because of hiring and firing costs, firms retain workers in a recession that they would otherwise lay off.

Question 22

When,because of hiring and firing costs,firms retain workers in a recession that they would otherwise lay off,there is said to be

A)labor hoarding.
B)a decline in capacity utilization.
C)voluntary unemployment.
D)involuntary unemployment.

Question 23

Use the classical (RBC)IS-LM-FE model to show the effects on the economy of a temporary beneficial supply shock; for example,a decrease in the price of oil.You should show the impact on the real wage,employment,output,the real interest rate,consumption,investment,and the price level.

Question 24

The formula Y / (K^aN1-a)provides a calculation of

A)x-efficiency.
B)dynamic efficiency.
C)economywide monopoly power.
D)the Solow residual.

Question 25

The Solow residual is

A)the waste from the production process.
B)the most common measure of productivity shocks.
C)a measure of the efficiency of the production process.
D)a measure of the proportion of involuntarily unemployed workers.

Question 26

Define real shocks,define nominal shocks,and give an example of each.

Question 27

If the utilization rates of capital (u_K)and labor (u_N)are procyclical,then the Solow residual,as conventionally measured,is

A)Y[(u_KK)^a)(u_NN)^1-a]
B)Y / [(u_KK)^a)(u_NN)^1-a]
C)A
D)1/{Y[(u_KK)^a)(u_NN)^1-a]}

Question 28

One important reason why the Solow residual may be strongly procyclical even if the actual technology used in production doesn't change is that

A)employment is procyclical.
B)resource utilization is procyclical.
C)demand shocks are the dominant force determining the business cycle.
D)the coefficients (a and 1 - a)on capital and labor in the production function are procyclical.

Question 29

Braun and Evans found that

A)the measured Solow residual varied sharply over the seasons.
B)electricity use by producers rises sharply in economic upturns.
C)professional forecasters have rational expectations of inflation.
D)shocks to fiscal policy are the main source of business cycle fluctuations.

Question 30

Classical economists who allow for shocks other than productivity shocks to affect the economy use ________ models rather than RBC models.

A)Keynesian
B)monetarist
C)nonlinear
D)DSGE

Question 31

Models that are similar to RBC models but allow for shocks other than productivity shocks are known as

A)DSGE models.
B)Keynesian models.
C)Solow models.
D)Friedman models.

Question 32

How do RBC theorists answer the objection that there have been few examples of large and easily measurable real shocks to the U.S.economy in recent decades?

Question 33

The most common measure of productivity shocks used by real business cycle theorists is

A)the Solow residual.
B)average labor productivity.
C)the change in the capital stock.
D)unit labor costs.

Question 34

DSGE models are

A)similar to RBC models but allow for shocks other than productivity shocks.
B)similar to RBC models, but government spending shocks play a major role.
C)similar to Keynesian models except in the long run.
D)similar to Keynesian models except in the short run.

Question 35

Given data on capital (K),labor (N),and output (Y),and estimates of capital's share of output (a),the Solow residual is measured as

A)Y K^aN1-a
B)(Y K^a)/ N^1-a
C)Y / (K^aN1-a)
D)1/(Y K^aN1-a)

Question 36

Critics of the RBC approach argue that it's hard to find productivity shocks large enough to cause business cycles.What is the RBC counterargument to this criticism?

A)Business cycles are always and everywhere a monetary phenomenon.
B)Wars and military buildups could be considered productivity shocks.
C)Business cycles could be caused by the accumulation of small productivity shocks.
D)Business cycles are often caused by unobservable productivity shocks, which aren't apparent at the time they occur.

Question 37

If the utilization rates of capital and labor are procyclical,then

A)output will rise in recessions and decline in expansions.
B)measured productivity will be constant.
C)the Solow residual will be procyclical.
D)prices will be countercyclical.

Question 38

Use the classical (RBC)IS-LM-FE model to show the effects on the economy of a temporary adverse supply shock; for example,an increase in the price of oil.You should show the impact on the real wage,employment,output,the real interest rate,consumption,investment,and the price level.

Question 39

According to the real business cycle theory,what is the principal cause of business cycle fluctuations?

Question 40

Measures of the Solow residual show it to be

A)strongly procyclical.
B)mildly procyclical.
C)mildly countercyclical.
D)strongly countercyclical.

Question 41

Suppose the economy's production function is Y = A(300N - N²).The marginal product of labor is MPN = A(300 - 2N).Suppose that A = 10.The supply of labor is NS = 0.05w + 0.005G.
(a)If G is 26,000,what are the real wage,employment,and output?
(b)If G rises to 26,400,what are the real wage,employment,and output?
(c)If G falls to 25,600,what are the real wage,employment,and output?
(d)In cases (b)and (c),what is the government purchases multiplier; that is,what is the change in output divided by the change in government purchases?

Question 42

Use the classical IS-LM model to show the effects of a temporary decrease in government purchases on the equilibrium levels of output,the real interest rate,employment,the real wage,and the price level.

Question 43

A temporary decrease in government purchases in the classical model would

A)shift the production function to the left.
B)shift the marginal product of labor curve to the right.
C)shift the labor demand curve to the left.
D)shift the labor supply curve to the left.

Question 44

Describe,in general terms,how an economist calibrates a macroeconomic model.What statistics can be usefully examined to see how well the model corresponds to the data?

Question 45

In the classical model,a temporary increase in government purchases causes

A)a decrease in output and the real interest rate.
B)a decrease in output and an increase in the real interest rate.
C)an increase in output and a decrease in the real interest rate.
D)an increase in output and the real interest rate.

Question 46

People increase their labor supply in response to a temporary increase in government purchases because

A)current or future taxes will increase, making them financially worse off.
B)they need to work more to keep up with their neighbors.
C)interest rates will rise, causing a substitution effect.
D)higher spending today will lead to higher spending in the future, as well.

Question 47

In the classical model,a temporary increase in government purchases causes the new equilibrium to have

A)more employment and a lower real wage than before.
B)more employment and a higher real wage than before.
C)less employment and a lower real wage than before.
D)less employment and a higher real wage than before.

Question 48

Classical economists think that the government ________ use fiscal policy to dampen the business cycle because prices and wages adjust ________.

A)should not; rapidly
B)should not; slowly
C)should; slowly
D)should; rapidly

Question 49

People ________ their labor supply in response to a temporary decrease in government purchases because

A)increase; current or future taxes will decrease, making them financially better off.
B)decrease; current or future taxes will decrease, making them financially better off.
C)decrease; current or future taxes will increase, making them financially worse off.
D)increase; current or future taxes will increase, making them financially worse off.

Question 50

According to classical economists,the increase in unemployment in recessions is caused by

A)slack aggregate demand.
B)the failure of wages to adjust to restore equilibrium in the labor market.
C)the power of labor unions, which prevent firms from cutting wages.
D)a mismatch of workers and jobs.

Question 51

A temporary increase in government purchases in the classical model would

A)shift the production function to the right.
B)shift the marginal product of labor curve to the left.
C)shift the labor demand curve to the right.
D)shift the labor supply curve to the right.

Question 52

During a recession,would classical economists propose that changes in government spending or taxes be used to improve economic conditions? Briefly explain.

Question 53

According to classical economists,unemployment exists because

A)it takes time and effort for someone to find a job.
B)government activity causes unemployment.
C)the minimum wage generates unemployment.
D)workers are all identical.

Question 54

How is the Solow residual measured? What problems arise in its measurement when resource utilization varies over the business cycle? What implications do these measurement issues have for evidence supporting the RBC model?

Question 55

According to classical economists,the increase in the unemployment rate in recessions occurs because

A)aggregate demand is insufficient.
B)the time needed to find a job rises in recessions.
C)labor unions prevent firms from cutting wages.
D)firms will replace workers by machines.

Question 56

According to classical economists,the government should increase government purchases when

A)the benefits of the spending exceed the costs.
B)the economy is in a recession.
C)the economy is likely to go into a recession in the next six months to a year.
D)inflation is lower than its targeted level.

Question 57

Classical economists would cite all of the following as reasons why the government cannot smooth out the business cycle except that

A)only productivity shocks can cause real fluctuations in the business cycle.
B)the government has imperfect knowledge of the economy.
C)political constraints on policy actions prevent the government from carrying out effective policies.
D)time lags between the onset of a recession and the implementation of effective countermeasures make anti-recessionary macroeconomic policies impractical.

Question 58

In the classical model,a temporary decrease in government spending would cause a decrease in

A)output, the real interest rate, real wages, and the price level.
B)employment, the real interest rate, real wages, and the price level.
C)output, employment, the real interest rate, and the price level.
D)output, employment, real wages, and the price level.

Question 59

The main avenue by which a temporary change in government purchases in the classical model affects the labor supply is by

A)changing the population.
B)affecting the value of the stock market.
C)increasing business confidence.
D)affecting workers' wealth.

Question 60

According to classical economists,unemployment rises in recessions due to an increase in ________ unemployment,not ________ unemployment.

A)cyclical; frictional and structural
B)frictional and cyclical; structural
C)structural; frictional and cyclical
D)frictional and structural; cyclical

Question 61

A classical economy is described by the following equations:
C^d = 500 + 0.5(Y - T)- 100r.
I^d = 350 - 100r.
L = 0.5Y - 200i.
= 1850.
π^e = 0.05.
Government spending and taxes are equal where T = G = 200.The nominal money supply M = 3560.
(a)What are the equilibrium values of the real interest rate,the price level,consumption,and investment?
(b)Suppose an economic shock increases desired investment by 10,so it is now I^d = 360 - 100r.How does this affect the equilibrium values of the real interest rate,the price level,consumption,and investment?
(c)Returning to the initial situation in part (a),suppose an economic shock increases desired consumption by 10,so it is now C^d = 510 + 0.5 (Y - T)- 100r.How does this affect the equilibrium values of the real interest rate,the price level,consumption,and investment?

Question 62

The idea that expected future increases in output cause increases in the current money supply and that expected future decreases in output cause decreases in the current money supply,rather than the other way around,is known as

A)Granger causality.
B)money neutrality.
C)nominal adjustment.
D)reverse causation.

Question 63

The basic classical model can account for the procyclical behavior of money if there

A)are real business cycles caused by productivity shocks.
B)is reverse causation from future output to money.
C)are rational expectations among the public.
D)are propagation mechanisms in the economy.

Question 64

Assuming money neutrality in the classical model,a 10% increase in the nominal money supply would cause

A)a 10% increase in the real money supply.
B)a 10% decrease in the real money supply.
C)no change in the real money supply.
D)a less-than-10% change in the price level due to a shift in the aggregate supply curve.

Question 65

Because employment actually continued to fall at the beginning of the recoveries that began in 1991,2001,and 2009,these recoveries have come to be known as

A)pseudo recoveries.
B)non-recoveries.
C)double-dip recoveries.
D)jobless recoveries.

Question 66

Friedman and Schwarz argue that money is not neutral because

A)theoretical models of the economy don't show monetary neutrality.
B)money is a leading, procyclical variable.
C)they found several historical incidents in which changes in the money supply were not responses to macroeconomic conditions, and output moved in the same direction as money.
D)they found no evidence that productivity changes or changes in government spending contributed to business cycles; only monetary changes preceded every recession.

Question 67

Assuming that money is neutral,an increase in the nominal money supply would cause

A)an excess supply for goods.
B)an increase in the real money supply.
C)a fall in the price level.
D)a rise in nominal wages.

Question 68

Reverse causation is the idea that

A)current increases in output cause future increases in the money supply.
B)current increases in the money supply cause future increases in output.
C)expected future increases in the money supply cause increases in current output.
D)expected future increases in output cause increases in the current money supply.

Question 69

The misperceptions theory was originally proposed by ________ and rigorously formulated by ________.

A)Milton Friedman; Robert Lucas
B)John Maynard Keynes; Robert Solow
C)Edward Prescott; Robert King
D)James Tobin; Greg Mankiw

Question 70

Why do many economists believe that money affects output? What is the empirical evidence in support of that belief?

Question 71

A jobless recovery occurs when

A)no jobs are created in an economy after a recession ends.
B)employment continues to fall at the beginning of a recovery.
C)only low-quality jobs are created in a recovery.
D)most of the new jobs created in a recovery are overseas.

Question 72

Classical economists believe that

A)money is neutral.
B)an increase in the real money supply affects output.
C)inflation is determined by wage growth.
D)monetary policy should be used to combat recessions.

Question 73

If producers have imperfect information about the general price level and sometimes misinterpret changes in the general price level as changes in relative prices,then

A)the short-run aggregate supply curve is vertical.
B)the short-run aggregate supply curve slopes upward.
C)the aggregate demand curve is vertical.
D)the aggregate demand curve is horizontal.

Question 74

Romer and Romer found evidence that money is not neutral because

A)in several episodes, such as 1979-1982, changes in monetary policy led to recessions.
B)they found that inflation was highly correlated with the rate of growth of the money supply.
C)if money were neutral, no one would care what the Fed does.
D)they found no evidence that productivity changes or changes in government spending contributed to business cycles; only monetary changes preceded every recession.

Question 75

Suppose the money demand of individuals and firms depends on what they perceive to be the probabilities that the economy will expand or contract over the following six months.Suppose their money demand is given by the equation L = 0.5Y - 100i + 20z,where z is the probability that the economy is expanding six months in the future.If z = 1,the economy will certainly be in recovery,if z = 0,the economy will certainly be in recession,and for z between 0 and 1 there is some uncertainty about the future state of the economy.Use a classical (RBC)model of the economy.If the Fed moves the money supply to target the price level,how does the money supply relate to the expected future state of the economy? Is this an example of reverse causation?

Question 76

You and a friend are arguing over the issue of the nonneutrality of money.You believe that money is not neutral,and to prove your point you would cite all of the following except

A)large gold discoveries that increased the money supply preceded an economic boom.
B)a change in monetary institutions preceded a boom or recession.
C)a change in the leadership of the Fed and its policy was followed by noticeable changes in the money supply and a recession or inflation.
D)the fact that every recession was preceded by a drop in the money supply.

Question 77

Davis and Haltiwanger showed that ________ churning of jobs occurs and that this churning reflects closing of old plants and opening of new ones ________.

A)little; in different industries
B)little; within the same industry
C)much; within the same industry
D)much; in different industries

Question 78

According to classical economists,in recessions,the government should

A)stimulate the economy to increase demand.
B)actively use fiscal policy to combat the recession.
C)increase the minimum wage so that poor people will be able to afford necessities.
D)eliminate barriers to labor market adjustment, such as burdensome regulations on businesses.

Question 79

In recession years,________ jobs are lost than created,and vacancies and job openings ________.

A)more; increase
B)more; decline
C)fewer; decline
D)fewer; increase

Question 80

According to classical economists,in recessions,not only does the unemployment rate increase,so does the

A)interest rate.
B)level of fiscal stimulus.
C)natural rate of unemployment.
D)level of potential output.