In the Smets-Wouters DSGE model, a negative TFP shock will cause real GDP to ________ by ________.
A) fall; more than the decline in the shock
B) rise; more than predicted by empirical models
C) not change; Okun's law
D) fall; less than consumption
E) fall; the same as the decline in inflation

Question

Quizplus · Accepted Answer

According to the Smets-Wouters DSGE model, a negative TFP (total factor productivity) shock will cause real GDP to fall by more than the decline in the shock. This is due to the model's assumptions about how firms adjust their prices and wages in response to shocks, leading to a greater impact on output.

In the Smets-Wouters DSGE Model, a Negative TFP Shock Will