Ch 8 - Classical models and the monetary policy

Question 1

What are the key assumptions of the classical model?

Answer 1

All markets clear instantaneously such that output is at its natural rate and involuntary unemployment is 0
Labour mkt variable is hours worked
Prices are perfectly flexible
Output in the economy is only determined by labour and capital
Labour and capital have positive but decreasing marginal productivities
Firms demand labour up to the point where the MC of labour is equal to the MB of labour

Question 2

All a change in the nominal money supply does is _________. Monetary policy has no impact on _________

Answer 2

Change nominal variables one to one. The real economy

Question 3

Real business cycle theory extends the classical model to take into account ________

Answer 3

The optimizing behaviour of agents

Question 4

RBC theory distinguishes between ________ and _________

Answer 4

Nominal shocks and real shocks

Question 5

Nominal shocks only affect the ______

Answer 5

LM curve

Question 6

Real shocks only affect the _________

Answer 6

IS or AS curves

Question 7

According to RBC theory ______ to the economy are the primary cause of business cycles

Answer 7

Real shocks

Question 8

What are the assumptions in the Lucas misperceptions model?

Answer 8

Each individual seller is isolated, supplying a homogenous product
Each seller can only observe the prices of the adjacent island
The seller sets the price of his product based on the avg of all other prices
Prices are fully flexible

Question 9

In the Lucas misperceptions model, if an increase in price is due to __________ the seller should increase supply and if it is due to _________ he should keep supply unchanged

Answer 9

An increase in the demand for the product, an increase in the general price level

Question 10

The misperceptions occurs where___________

Answer 10

A seller misperceives an increase in the general price level for an increase in the demand for the product

Question 11

What does the limited participation model state?

Answer 11

Monetary policy can have real effects if there are a limited number of agents participating in financial markets, meaning some consumers may be restricted in their access to the banking system and therefore cannot save via interest bearing assets