Question 1

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

Accepted Answer

Real business cycle theorists believe that production shocks, such as changes in technology or natural disasters, are the primary drivers of business cycle fluctuations. These shocks affect the production function and lead to changes in output and employment levels.

Question 2

Which one of the following is an example of a real shock?

Accepted Answer

A shock to the production function, such as a technological advancement or natural disaster, can lead to a sudden shift in the economy's ability to produce goods and services. This can have real and lasting effects on the economy's output and employment levels. A shock to the money supply, money demand or price level are all nominal shocks, which do not directly affect the real economy.

Question 3

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

Accepted Answer

A rise in oil prices is a real shock because it affects the economy's productive capacity and costs, impacting output and employment.

Question 4

A real shock to an economy will shift

Accepted Answer

A real shock, such as a change in consumer confidence or investment, affects the goods market, shifting the IS curve.

Question 5

The distinction between real and nominal shocks is that

Accepted Answer

Real shocks directly affect the real side of the economy, such as changes in productivity, natural disasters, or changes in technology. They can affect the IS curve or the FE line, but they usually do not affect the LM curve directly, as they do not influence the money market. Nominal shocks, on the other hand, affect the price level or inflation rate and can have a direct impact on the LM curve. Therefore, the distinction between real and nominal shocks is that real shocks affect the real side of the economy, while nominal shocks affect the monetary side. Choice C is the best choice because it correctly identifies that real shocks can affect either the IS curve or the FE line, but not necessarily the LM curve.

Question 6

Real business cycle theory is unable to predict that

Accepted Answer

Real business cycle theory suggests that fluctuations in the economy are primarily caused by changes in technology and productivity, rather than by changes in demand or monetary policy. While real business cycle theory can explain why fluctuations occur, it does not predict the direction or magnitude of specific economic variables, such as the price level, which can be affected by factors outside of technological changes. Therefore, it is unable to predict that the price level is procyclical. The other options listed (employment, real wage, and investment) are consistent with real business cycle theory.

Question 7

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

Accepted Answer

RBC economists are comparing the degree to which different economic variables move together or their correlation. This is done by examining the covariance matrix of the variables and comparing it to the actual data.

Question 8

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

Accepted Answer

When RBC economists compare the volatility in their models to the data, they are looking at the amount of random variation in economic variables. This is because one of the key features of RBC models is that business cycle fluctuations are driven by shocks that are purely random in nature. Therefore, by comparing the volatility in their models to the data, RBC economists are effectively testing how well their models capture this key feature of business cycle dynamics.

Question 9

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

Accepted Answer

An adverse supply shock would decrease labour productivity by reducing the amount of output that can be produced with any given amount of capital and labour. It would also increase average labour productivity through changes in the level of employment, as firms would need to lay off workers due to lower output levels.

Question 10

A temporary adverse productivity shock would

Accepted Answer

A temporary adverse productivity shock would reduce the level of employment as it would decrease the demand for labor, leading to a decrease in output and income in the economy. It may also decrease the expected future marginal product of capital, but this is not a certain outcome. The other two options, shifting the labor supply curve upward and decreasing future income, are unlikely outcomes of a temporary adverse productivity shock.

Question 11

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

Accepted Answer

Real business cycle theory posits that business cycle fluctuations are primarily caused by changes in technology, productivity, and other real factors, rather than monetary policy or other nominal factors. Therefore, changes in the money supply (C) would not be considered a primary cause of business cycle fluctuations according to this theory. Instead, A, B, and D would all be considered important factors in explaining fluctuations in output and employment.

Question 12

A beneficial productivity shock would ________ output,________ the real interest rate,and ________ the price level.

Accepted Answer

A beneficial productivity shock increases output as firms can produce more efficiently. It decreases the real interest rate because the increased supply of goods reduces the need for high interest rates to balance savings and investment. It decreases the price level due to the increased supply of goods, which puts downward pressure on prices.

Question 13

By real shock,economists mean

Accepted Answer

Real shocks refer to events that lead to changes in real economic variables such as productivity, technology and resources, causing a shift in the aggregate supply (AS) curve. These shocks can have a major impact on the economy, affecting employment, inflation and output.Real shocks are different from nominal shocks that affect the money supply or demand, which can be controlled by central banks.

Question 14

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

Accepted Answer

A nominal shock refers to a change in the economy that affects the money supply or price level, such as an increase in money supply.

Question 15

Which of the following observed procyclical behaviour of variables can be accounted for by the real business cycles theory?

Accepted Answer

Real business cycles theory suggests that fluctuations in real economic activity can be attributed to exogenous technological shocks, and thus all of the observed procyclical behaviour of real wages, employment, and productivity can be accounted for within this theory.

Question 16

A temporary adverse productivity shock would not

Accepted Answer

A temporary adverse productivity shock would not shift the labor supply curve upward because it primarily affects the demand for labor, not the supply. The shock reduces productivity, leading firms to demand less labor, but it does not directly influence workers' willingness to supply labor.

Question 17

What do RBC economists mean by the term calibration?

Accepted Answer

Calibrating a model involves working out detailed numerical examples to understand how a general theory will work out in practice. This process involves determining values for key parameters, such as interest rates or tax rates, and using these values to simulate the model's behavior under different scenarios. It helps economists test the model's predictions and makes their analysis more precise.

Question 18

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

Accepted Answer

A productivity shock refers to a sudden change in the efficiency level of production. The introduction of new management techniques, changes in government regulations affecting production, or a spell of unusually good or bad weather can all lead to sudden changes in productivity levels. However, a change in the level of government transfer programs would not directly affect productivity, and therefore would not be considered a productivity shock.

Question 19

A business cycle fact that does NOT seem to be consistent with the simple RBC theory is that

Accepted Answer

The simple Real Business Cycle (RBC) theory does not typically account for inflation dynamics, as it focuses on real shocks like technology changes. Inflation increasing during or immediately after a recession is inconsistent with RBC, which would expect inflation to slow due to reduced demand.

Question 20

Which of the following is NOT an example of the productivity shock?

Accepted Answer

The answer of Which of the following is NOT an...

Quiz 11: Classical Business Cycle Analysis: Market-Clearing Macroeconomics