question

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

answer

real business cycle theory.

question

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

answer

A change in the money supply

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The distinction between real and nominal shocks is that

answer

real shocks directly affect only the IS curve or the FE line, but not the LM curve.

question

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

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the production function.

question

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

answer

The introduction of new management techniques

question

A temporary adverse productivity shock would

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decrease the level of employment.

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

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increase; decrease; decrease

question

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.

answer

decrease; increase

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

answer

calibration

question

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

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The amount of random variation in economic variables

question

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

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The degree to which different economic variables move together

question

The most common measure of productivity shocks is known as

answer

the Solow residual.

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The Solow residual is

answer

the most common measure of productivity shocks.

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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

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Y / (Ka N1-a).

question

The formula Y / (Ka N1-a) provides a calculation of

answer

the Solow residual.

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Measures of the Solow residual show it to be

answer

strongly procyclical.

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

answer

resource utilization is procyclical.

question

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

answer

A u(a/K) u [(1-a)/N]

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Labor hoarding occurs when

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because of hiring and firing costs, firms retain workers in a recession that they would otherwise lay off.

question

Braun and Evans found that

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the measured Solow residual varied sharply over the seasons.

question

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?

answer

Business cycles could be caused by the cumulation of small productivity shocks.

question

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

answer

DSGE models.

question

DSGE models are

answer

similar to RBC models but allow for shocks other than productivity shocks.

question

A temporary increase in government purchases in the classical model would

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shift the labor supply curve to the right.

question

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

answer

an increase in output and the real interest rate.

question

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

answer

output, employment, the real interest rate, and the price level.

question

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

answer

only productivity shocks can cause real fluctuations in the business cycle.

question

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

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the benefits of the spending exceed the costs.

question

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

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a mismatch of workers and jobs.

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

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frictional and structural; cyclical

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

answer

much; within the same industry

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

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more; decline

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The term household production refers to

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output produced at home.

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A household-production model more closely matches the U.S. data than a standard RBC model because it has a

answer

higher standard deviation of market output.

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

answer

a rise in nominal wages.

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

answer

no change in the real money supply.

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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

answer

reverse causation.

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Reverse causation is the idea that

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expected future increases in output cause increases in the current money supply.

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

answer

is reverse causation from future output to money.

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Friedman and Schwarz argue that money is not neutral because

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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.

question

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

answer

the fact that every recession was preceded by a drop in the money supply.

question

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

answer

Milton Friedman; Robert Lucas

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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

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the short-run aggregate supply curve slopes upward.

question

The short-run aggregate supply curve can slope upward because

answer

producers have misperceptions about the aggregate price level.

question

According to the misperceptions theory, when the aggregate price level is higher than expected,

answer

the aggregate quantity of output supplied rises above the full-employment level.

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According to the misperceptions theory, when the price level falls below the expected price level

answer

the economy moves along its SRAS curve.

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If you expect a general price increase of 5% this year and the price of the hamburgers you sell increases by 10%, you would conclude that the relative price of your good has

answer

increased, and you would increase your output.

question

You are likely to think that the relative price of your good has risen and you should increase your output if you expected

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the inflation rate to be 10% and the price of your good rose 13%.

question

Short-run aggregate supply is greater than long-run aggregate supply in the misperceptions theory if

answer

the actual price level is greater than the expected price level.

question

Which of the following equations is most likely to represent short-run aggregate supply according to the misperceptions theory?

answer

Y = 6000 + 50(P - P^c)

question

According to the misperceptions theory, when P < Pc, output is ________ its full-employment level and the short-run aggregate supply curve must shift ________ to restore full employment.

answer

below; downward

question

According to the misperceptions theory, the amount by which producers increase their output when the general price level rises depends on

answer

how much they think their relative prices have increased.

question

If producers believe that the increase in their relative prices is small relative to the increase in the general price level, then the slope of the short-run aggregate supply curve will be

answer

large

question

If producers believe that the increase in their relative prices is large relative to the increase in the general price level, then the slope of the short-run aggregate supply curve will be

answer

small

question

According to the misperceptions theory, an unanticipated decrease in the money supply shifts the AD curve ________, causing output to ________ in the short run.

answer

down and to the left; fall

question

According to the misperceptions theory, after an unanticipated increase in the money supply has occurred, the SRAS curve must shift ________ to restore general equilibrium; as it does so, the price level ________.

answer

upward; rises

question

According to the misperceptions theory, an anticipated decline in the money supply leads to a shift of the AD curve ________ and a shift of the SRAS curve ________.

answer

down and to the left; downward

question

According to the misperceptions theory, an anticipated 10% decrease in the money supply leads to a short-run reduction in the price level of

answer

10%.

question

Which of the following statements is true about the misperceptions theory?

answer

Unanticipated changes in the nominal money supply have real effects, but anticipated changes are neutral.

question

If the money supply grows 7% during the year, and people expected the money supply to grow by 5%, what happens to the short-run aggregate supply curve, according to the misperceptions theory?

answer

it shifts down

question

According to the misperceptions theory, if the Fed wanted to use monetary policy to influence the real economy it would have to

answer

surprise the public with unexpected changes in monetary policy.

question

The reason why some economists believe that attempts by the Fed to surprise the public in a systematic way cannot be successful is that

answer

the public would eventually figure out what the Fed's policies were, negating the Fed's surprise.

question

The primary reason why the Fed cannot systematically surprise the public with its monetary policy is

answer

the presence of rational expectations among the public.

question

The theory of rational expectations suggests that

answer

people make intelligent use of available information.

question

According to the misperceptions theory, short-lived shocks may have long-term effects on the economy because of

answer

propagation mechanisms.

question

The primary reason that short-lived shocks can have long-run effects is

answer

the presence of propagation mechanisms.

Macroeconomics 6/e Chapter 10 – Flashcards

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