In the Smets-Wouters DSGE model, a positive TFP shock has an immediate ________ but ________.
A) negative impact on hours worked; they start to rise after six quarters
B) positive impact on real GDP; growth is negative in the longer run
C) positive impact on inflation; leads to deflation later
D) effect on unemployment; hours worked per worker remains the same
E) negative impact on consumption; consumption grows later, as predicted by the permanent-income hypothesis

Question

Quizplus · Accepted Answer

According to the Smets-Wouters DSGE model, a positive TFP shock leads to an immediate decrease in hours worked, but they start to rise again after six quarters. This is because workers may choose to work less initially, but eventually increase their hours in response to the higher productivity enabled by the shock.

In the Smets-Wouters DSGE Model, a Positive TFP Shock Has