Macroeconomics, 3e (Williamson)

Chapter 11

Market-Clearing Models of the Business Cycle

1)

Real business cycle theory was introduced by

A)

Milton Friedman and Robert Lucas.

B)

Milton Friedman and Anna Schwartz.

C)

Thomas Cooley and Gary Hansen.

D)

Finn Kydland and Edward Prescott.

Answer:

D
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2)

The behavior of the Solow residual suggests that when current total factor productivity increases
A)

it becomes more difficult to predict future total factor productivity.

B)

future total factor productivity is also likely to increase.

C)

such increases are temporary, so we can draw no conclusions about the likely behavior of future total
factor productivity.
D)
future total factor productivity is likely to decrease.
Answer:

B
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3)

In real business cycle theory, the persistence of shocks to total factor productivity is justified by
A)

the fact that some capital depreciates every period.

B)

the observation of Solow residuals.

C)

the fact that Taylor rules have been used in post-war United States.
D)

the fact that capital takes some time to build.

Answer:

B
Question Status:

New

4)

In the real business cycle model, a persistent increase in total factor productivity
A)

has no effect on the real interest rate.

B)

unambiguously increases the real interest rate.

C)

unambiguously decreases the real interest rate.

D)
has a theoretically ambiguous effect on the real interest rate.
Answer:

D
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5)

In the real business cycle model, an increase in current total factor productivity
A)

increases investment demand.

B)

decreases investment demand.

C)

has no impact on investment demand.

D)

has an ambiguous effect on investment demand.

Answer:

A
Question Status:

New
 6)

In the real business cycle model, money demand is

A)

horizontal.
B)

vertical.
C)

upward sloping.
D)

downward sloping.
Answer:

C
Question Status:

New

7)

In the real business cycle model, a persistent increase in total factor productivity
A)

increases the real wage and increases the price level.

B)

increases the real wage and decreases the price level.

C)

decreases the real wage and increases the price level.

D)

decreases the real wage and decreases the price level.

Answer:

B
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 8)

In the real business cycle model, an increase in current total factor productivity leads to
A)

an increase in investment.
B)

a decrease in investment.
C)

no change in investment.
D)

an ambiguous response of investment.

Answer:

A
Question Status:

New

9)

In the real business cycle model, an increase in current total factor productivity leads to
A)

an increase in government expenses.

B)

a decrease in government expenses.

C)

no change in government expenses.

D)

an ambiguous response of government expenses.

Answer:

C
Question Status:

New
 10)

The real business cycle model replicates the key business cycle regularities
A)

both qualitatively and quantitatively.

B)

qualitatively but not quantitatively.

C)

quantitatively but not qualitatively.

D)

neither qualitatively nor quantitatively.

Answer:

A
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11)

The basic real business cycle model has some difficulty explaining why
A)

consumption is procyclical.
B)

investment is procyclical.
C)

the price level is countercyclical.

D)

the money supply is procyclical.

Answer:

D
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 12)

In the real business cycle model, persistent changes in total factor productivity cannot explain the cyclical
properties of which of the following?
A)

the price level

B)

the real wage

C)

investment
D)

none of the above

Answer:

D
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13)

Two business cycle facts that are less easily explained by the real business cycle are that
A)

money and prices are both acyclical.

B)

the nominal money supply is procyclical and leads the business cycle.
C)

the nominal money supply is procyclical and is coincident with the business cycle.
D)

the nominal money supply is procyclical and lags the business cycle.
Answer:

B
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14)

The real business cycle model best explains the procyclicality of the nominal money supply by
A)

an unpredictable Federal Reserve.

B)

exogenous money.
C)

endogenous money.
D)

uncorrelated money.
Answer:

C
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15)

According to real business cycle theorists, an increase in total factor productivity could lead to an increase
in the nominal money supply due to
A)

the cyclical behavior of tax collections and attempts by the Federal Reserve to stabilize real output.
B)

the Federal Reserve's attempts to stabilize real output and the price level.
C)

the Federal Reserve's attempts to stabilize the price level and banking sector expansion of deposit money.
D)

banking sector expansion of deposit money and the cyclical behavior of tax collections.
Answer:

C
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16)

According to real business cycle theorists, the tendency of money to lead output may be due to
A)

government spending shocks, which lead to later changes in economic activity, and the tendency for bank
loans to expand in advance of real activity that will occur at a later date.
B)

the tendency for bank loans to expand in advance of real activity that will occur at a later date and the
Federal Reserve's use of all available information in trying to stabilize the price level.
C)

the Federal Reserve's use of all available information in trying to stabilize the price level and the Federal
Reserve's use of all available information in trying to stabilize the level of economic activity.
D)

the Federal Reserve's use of all available information in trying to stabilize the level of economic activity
and government spending shocks, which lead to later changes in economic activity.
Answer:

B
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17)

According to real business cycle theory

A)

monetary policy is driving business cycles.

B)

Federal Reserve actions need to be watched closely.

C)

technology shocks have a major role in business cycles.

D)

cash-in-advance is necessarily to explain business cycles.

Answer:
C
Question Status:

New

18)

A government policy that is consistent with real business cycle theory would be for
A)

government to vary its spending in response to shocks to total factor productivity.

B)

the monetary authority to expand and contract the nominal money supply in response to shocks to total
factor productivity.
C)

government to smooth out tax distortions over time.

D)

government to vary its lump-sum tax collections in response to changes in total factor productivity.
Answer:

C
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19)

An important critique of real business cycle theory is the belief that cyclical movements in total factor
productivity
A)

rarely occur.
B)

may, in part, be an artifact of measurement error.

C)

lead to imperceptible changes in labor demand.

D)

are too small to account for the size of fluctuations in real GDP.
 Answer:

B
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20)

The phenomenon of underutilization of labor during a recession is called

A)

labor stockpiling.
B)

investing in human capital.

C)

labor force stabilization.

D)

labor hoarding.
Answer:

D
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21)

Measurement errors of changes in the Solow residual during recessions are most likely caused by
A)

underutilization of labor and capital.

B)

underutilization of labor, but not of capital.

C)

underutilization of capital, but not of labor.

D)
mismeasurement of real GDP.
Answer:

A
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22)

Shocks to total factor productivity are least plausible as an explanation of the recession of
A)

1974-1975.
B)

1979.
C)

1981-1982.
D)

1990-1991.
Answer:

C
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 23)

The segmented markets model is motivated by the fact that

A)

there is imperfect competition on the labor market.

B)

there is imperfect competition on the market for goods.

C)

there is imperfect competition on the money market.

D)

not everyone participates in financial markets.

Answer:

D
Question Status:

New

24)

The segmented markets model was initiated by

A)

Martin Feldstein and Paul Volcker.

B)

Finn Kydland and Edward Prescott.

C)

Sanford Grossman and Laurence Weiss.

D)

Robert Lucas and Edward Prescott.

Answer:

C
Question Status:

New
 25)

The liquidity effect is

A)

the households' demand for more liquidity in response to a shock to the money supply.
B)

the households' demand for more liquidity in response to an increase in output.

C)

the decrease of the interest rate in response to an increase in the money supply.
D)

the impact of new technology in the banking sector resulting in the increased use of debit cards.
Answer:

C
Question Status:

New

26)

In the segmented markets model, liquidity demand needs to be modified to take into account that
A)

real output now has a negative impact on liquidity demand.

B)

the profit margin of firms is larger due to imperfect competition.

C)

households and firms form expectations about the money market before they take decisions.
D)

it now also depends on employment.

Answer:

C
Question Status:

New
 27)

In the segmented markets model, an unanticipated increase in the money supply

A)

raises the price level.

B)

lowers output.
C)

increases employment.
D)

increases the interest rate.

Answer:

C
Question Status:

New

28)

In the segmented markets model, in response to money shocks

A)

money is neutral and prices are procyclical.

B)

money is neutral and prices are countercyclical.

C)

money is not neutral and prices are procyclical.

D)

money is not neutral and prices are countercyclical.

Answer:

D
Question Status:

New
 29)

In the segmented markets model with money shocks, the price level is
A)

procyclical.
B)

countercyclical.
C)

acyclical.
D)

It depends.
Answer:

B
Question Status:

New

30)

In the segmented markets model, the central bank can have an impact on real aggregates because
A)

it can choose the interest rate.

B)

it can fool households and firms.

C)

it buys goods with the money injection.

D)

Actually, it cannot have an impact.

Answer:

B
Question Status:

New
 31)

Monetary policy can have a welfare improving role in the segmented markets model if
A)

money shocks are positively correlated with total factor productivity shocks.
B)

the government publicizes well its moves.

C)

households do not maximize preferences.

D)

taxes are distorting.

Answer:

A
Question Status:

New

32)

What is the most unrealistic aspect of the segmented markets model?

A)

Firms do not maximize profits.

B)

Firms have monopoly power.

C)

Firms are subject to the cash-in-advance constraint.

D)

Firms can set wages in advance.

Answer:

C
Question Status:

New
 33)

A Keynesian model that is consistent with fully flexible wages and prices is based upon the notion of
A)

cooperation failures.
B)

coordination failures.
C)

collaboration failures.
D)

decreasing returns to scale.

Answer:

B
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34)

A model with coordination failures has

A)

agents that do not act rationally.

B)

multiple equilibria.
C)

a government that is too large.

D)

a tax rate that is too high.

Answer:

B
Question Status:

New
 35)

Strategic complementarities may help explain business cycles because such complementarities may lead
to
A)

decreasing returns to scale.

B)

constant returns to scale.

C)

increasing returns to scale.

D)

a downward-sloping labor supply curve.

Answer:

C
Question Status:

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36)

In the coordination failure model, increasing returns to scale are best explained by strategic
A)

mismanagement.
B)

complementarities.
C)

substitutabilities.
D)

collusion.
Answer:

B
Question Status:
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37)

The coordination failure model is based on the possibility of increasing returns to scale
A)

both at the aggregate level and at the level of the individual firm.
B)

at the aggregate level, but not at the level of the individual firm.
C)

at the level of the individual firm, but not at the aggregate level.
D)

in future periods, but not in the current period.

Answer:

B
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38)

For the coordination failure model to work, it must be the case that the aggregate labor demand curve
must be
A)

upward sloping and steeper than the labor supply curve.

B)

upward sloping and flatter than the labor supply curve.

C)

downward sloping and steeper than the labor supply curve.

D)

downward sloping and flatter than the labor supply curve.

Answer:

A
Question Status:
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39)

In the coordination failure model, a rightward shift in the labor supply curve
A)

increases the real wage and increases employment.

B)

increases the real wage and decreases employment.

C)

decreases the real wage and increases employment.

D)

decreases the real wage and decreases employment.

Answer:

D
Question Status:

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40)

In the coordination failure model, the "good" equilibrium is characterized by a

A)

higher real interest rate and a higher price level than the "bad" equilibrium.
B)

higher real interest rate and a lower price level than the "bad" equilibrium.
C)

lower real interest rate and a higher price level than the "bad" equilibrium.
D)

lower real interest rate and a lower price level than the "bad" equilibrium.
Answer:

D
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 41)

Extraneous events that are completely unrelated to economic fundamentals are called
A)

moonbeams.
B)

black holes.
C)

sunspots.
D)

time warps.
Answer:

C
Question Status:

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42)

In the coordination failure model, the most likely explanation of business cycles are
A)

money supply shocks.

B)

government spending shocks.

C)

total factor productivity shocks.

D)

fluctuations between "good" and "bad" equilibria.

Answer:

D
Question Status:

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 43)

In the coordination failure model, how is a particular equilibrium attained?

A)

The Federal Reserve picks it.

B)

It depends on total factor productivity shocks.

C)

It depends on money supply shocks.

D)

There is no specific reason.

Answer:

D
Question Status:

New

44)

If an economy is stuck in a "bad" equilibrium in the coordination failure model

A)

the government should intervene by spending more.

B)

the government should intervene by spending less.

C)

the government should promote optimism.

D)

there is nothing that can be done.

Answer:

C
Question Status:

New
 45)

If, in the coordination failure model, the nominal money supply acts as a sunspot variable, then it is likely
that the nominal money supply would
A)

be procyclical.
B)

be acyclical.
C)

be countercyclical.
D)

alternatively appear to be procyclical and countercyclical.

Answer:

A
Question Status:

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46)

In the coordination failure model, we mention sunspots because

A)

they influence business cycles.

B)

apparently irrelevant events may influence business cycles.

C)

in central banker speak, they are synonymous with open market operations.
D)

seasonal sunshine has an impact on the business cycle.

Answer:

B
Question Status:
New
 47)

One potential weakness of the coordination failure model as an explanation of business cycles is that
A)

evidence supporting intertemporal substitution as an important determinant of labor supply is weak.

B)

evidence supporting the existence of increasing returns at the aggregate level is weak.
C)

it fails to explain several of the key business cycle regularities.

D)

it requires that consumers not behave in a rational manner.

Answer:

B
Question Status:

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48)

There are several competing models of the business cycle because

A)

none currently captures all facets of the business cycle.

B)

they are all rooted in different philosophical traditions.

C)

different shocks need different models.

D)

they depend on the type of policy that is adopted.

Answer:

A
Question
Status:

New