# Macroeconomics 6/e Chapter 10

The theory that real shocks to the economy are the primary cause of business cycles is
real business cycle theory.
Which of the following is not a primary cause of business cycle fluctuations, according to real business cycle theory?
A change in the money supply
The distinction between real and nominal shocks is that
real shocks directly affect only the IS curve or the FE line, but not the LM curve.
Real business cycle theorists think that most business cycle fluctuations are caused by shocks to
the production function.
Which of the following is an example of a productivity shock?
The introduction of new management techniques
A temporary adverse productivity shock would
decrease the level of employment.
In the classical IS-LM/AD-AS model, a beneficial productivity shock would ________ output, ________ the real interest rate, and ________ the price level.
increase; decrease; decrease
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.
decrease; increase
When RBC economists work out a detailed numerical example of a more general theory, they are performing
calibration
When RBC economists compare the volatility in their models to the data, what are they looking at?
The amount of random variation in economic variables
When RBC economists compare the correlations in their models to the data, what are they looking at?
The degree to which different economic variables move together
The most common measure of productivity shocks is known as
the Solow residual.
The Solow residual is
the most common measure of productivity shocks.
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
Y / (Ka N1-a).
The formula Y / (Ka N1-a) provides a calculation of
the Solow residual.
Measures of the Solow residual show it to be
strongly procyclical.
One important reason why the Solow residual may be strongly procyclical even if the actual technology used in production doesn’t change is that
resource utilization is procyclical.
If the utilization rates of capital (uK) and labor (uN) are procyclical, then the Solow residual, as conventionally measured, is
A u(a/K) u [(1-a)/N]
Labor hoarding occurs when
because of hiring and firing costs, firms retain workers in a recession that they would otherwise lay off.
Braun and Evans found that
the measured Solow residual varied sharply over the seasons.
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?
Business cycles could be caused by the cumulation of small productivity shocks.
Models that are similar to RBC models but allow for shocks other than productivity shocks are known as
DSGE models.
DSGE models are
similar to RBC models but allow for shocks other than productivity shocks.
A temporary increase in government purchases in the classical model would
shift the labor supply curve to the right.
In the classical model, a temporary increase in government purchases causes
an increase in output and the real interest rate.
In the classical model, a temporary decrease in government spending would cause a decrease in
output, employment, the real interest rate, and the price level.
Classical economists would cite all of the following as reasons why the government cannot smooth out the business cycle EXCEPT that
only productivity shocks can cause real fluctuations in the business cycle.
According to classical economists, the government should increase government purchases when
the benefits of the spending exceed the costs.
According to classical economists, the increase in unemployment in recessions is caused by
a mismatch of workers and jobs.
According to classical economists, unemployment rises in recessions due to an increase in ________ unemployment, not ________ unemployment.
frictional and structural; cyclical
Davis and Haltiwanger showed that ________ churning of jobs occurs and that this churning reflects closing of old plants and opening of new ones ________.
much; within the same industry
In recession years, ________ jobs are lost than created, and vacancies and job openings ________.
more; decline
The term household production refers to
output produced at home.
A household-production model more closely matches the U.S. data than a standard RBC model because it has a
higher standard deviation of market output.
Assuming that money is neutral, an increase in the nominal money supply would cause
a rise in nominal wages.
Assuming money neutrality in the classical model, a 10% increase in the nominal money supply would cause
no change in the real money supply.
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
reverse causation.
Reverse causation is the idea that
expected future increases in output cause increases in the current money supply.
The basic classical model can account for the procyclical behavior of money if there
is reverse causation from future output to money.
Friedman and Schwarz argue that money is not neutral because
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.
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
the fact that every recession was preceded by a drop in the money supply.
The misperceptions theory was originally proposed by ________ and rigorously formulated by ________.
Milton Friedman; Robert Lucas
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
the short-run aggregate supply curve slopes upward.
The short-run aggregate supply curve can slope upward because
producers have misperceptions about the aggregate price level.
According to the misperceptions theory, when the aggregate price level is higher than expected,
the aggregate quantity of output supplied rises above the full-employment level.
According to the misperceptions theory, when the price level falls below the expected price level
the economy moves along its SRAS curve.
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
increased, and you would increase your output.
You are likely to think that the relative price of your good has risen and you should increase your output if you expected
the inflation rate to be 10% and the price of your good rose 13%.
Short-run aggregate supply is greater than long-run aggregate supply in the misperceptions theory if
the actual price level is greater than the expected price level.
Which of the following equations is most likely to represent short-run aggregate supply according to the misperceptions theory?
Y = 6000 + 50(P – P^c)
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.
below; downward
According to the misperceptions theory, the amount by which producers increase their output when the general price level rises depends on
how much they think their relative prices have increased.
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
large
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
small
According to the misperceptions theory, an unanticipated decrease in the money supply shifts the AD curve ________, causing output to ________ in the short run.
down and to the left; fall
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 ________.
upward; rises
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 ________.
down and to the left; downward
According to the misperceptions theory, an anticipated 10% decrease in the money supply leads to a short-run reduction in the price level of
10%.
Which of the following statements is true about the misperceptions theory?
Unanticipated changes in the nominal money supply have real effects, but anticipated changes are neutral.
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?
it shifts down
According to the misperceptions theory, if the Fed wanted to use monetary policy to influence the real economy it would have to
surprise the public with unexpected changes in monetary policy.
The reason why some economists believe that attempts by the Fed to surprise the public in a systematic way cannot be successful is that
the public would eventually figure out what the Fed’s policies were, negating the Fed’s surprise.
The primary reason why the Fed cannot systematically surprise the public with its monetary policy is
the presence of rational expectations among the public.
The theory of rational expectations suggests that
people make intelligent use of available information.
According to the misperceptions theory, short-lived shocks may have long-term effects on the economy because of
propagation mechanisms.
The primary reason that short-lived shocks can have long-run effects is
the presence of propagation mechanisms.

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