Econ303exam3Chp10

Question 1

The distinction between real and nominal shocks is that

A. real shocks directly affect only the FE line, but not the LM curve.
B. real shocks have a large direct effect on the IS curve and the FE line, but only a small direct effect on the LM curve.
C. real shocks directly affect only the IS curve, but not the FE line or LM curve.
D. real shocks directly affect only the IS curve or the FE line, but not the LM curve.

Answer 1

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

Question 2

A temporary adverse productivity shock would

A. decrease the expected future marginal product of capital.
B. shift the labor supply curve upward.
C. decrease future income.
D. decrease the level of employment.

Answer 2

D. decrease the level of employment.

Question 3

The most common measure of productivity shocks is known as

A. the Lucas supply curve.
B. the Kydland factor.
C. the Solow residual.
D. the Prescott productivity parameter.

Answer 3

C. the Solow residual.

Question 4

The Solow residual is

A. the waste from the production process.
B. a measure of the efficiency of the production process.
C. the most common measure of productivity shocks.
D. a measure of the proportion of involuntarily unemployed workers.

Answer 4

C. the most common measure of productivity shocks.

Question 5

Measures of the Solow residual show it to be

A. strongly procyclical.
B. strongly countercyclical.
C. mildly countercyclical.
D. mildly procyclical.

Answer 5

A. strongly procyclical.

Question 6

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

A. is reverse causation from future output to money.
B. are real business cycles caused by productivity shocks.
C. are rational expectations among the public.
D. are propagation mechanisms in the economy.

Answer 6

A. is reverse causation from future output to money.

Question 7

A temporary increase in government purchases in the classical model would

A. shift the marginal product of labor curve to the left.
B. shift the production function to the right. C. shift the labor supply curve to the right.
D. shift the labor demand curve to the right.

Answer 7

C. shift the labor supply curve to the right.

Question 8

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

A. a change in the leadership of the Fed and its policy was followed by noticeable changes in the money supply and a recession or inflation.
B. a change in monetary institutions preceded a boom or recession.
C. large gold discoveries that increased the money supply preceded an economic boom.
D. the fact that every recession was preceded by a drop in the money supply.

Answer 8

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

Question 9

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

A. Hamiltonian theory.
B. monetarism.
C. real business cycle theory.
D. Keynesian theory.

Answer 9

C. real business cycle theory.

Question 10

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

A. 1/(Y Ka N1-a).
B. (Y Ka) / N1-a.
C. Y Ka N1-a.
D. Y / (Ka N1-a).

Answer 10

D. Y / (Ka N1-a).

Question 11

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

A. an increase in the real money supply.
B. a rise in nominal wages.
C. an excess supply for goods.
D. a fall in the price level.

Answer 11

B. a rise in nominal wages.

Question 12

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

A. a decrease in output and an increase in the real interest rate.
B. a decrease in output and the real interest rate.
C. an increase in output and a decrease in the real interest rate.
D. an increase in output and the real interest rate.

Answer 12

D. an increase in output and the real interest rate.

Question 13

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?

A. Business cycles are always and everywhere a monetary phenomenon.
B. Business cycles could be caused by the cumulation of small productivity shocks.
C. Wars and military buildups could be considered productivity shocks.
D. Business cycles are often caused by unobservable productivity shocks, which aren’t apparent at the time they occur.

Answer 13

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

Question 14

The formula Y / (KaN1-a) provides a calculation of

A. dynamic efficiency.
B. the Solow residual.
C. economy-wide monopoly power.
D. x-efficiency.

Answer 14

B. the Solow residual.

Question 15

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.

A. decrease; increase
B. increase; decrease
C. decrease; decrease
D. increase; increase

Answer 15

A. decrease; increase

Question 16

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

A. The strength of pro-cyclicality of different variables
B. The degree to which variables lead output over the business cycle
C. The degree to which different economic variables move together
D. The amount of random variation in economic variables

Answer 16

D. The amount of random variation in economic variables

Question 17

Braun and Evans found that

A. shocks to fiscal policy are the main source of business cycle fluctuations.
B. the measured Solow residual varied sharply over the seasons.
C. professional forecasters have rational expectations of inflation.
D. electricity use by producers rises sharply in economic upturns.

Answer 17

B. the measured Solow residual varied sharply over the seasons.

Question 18

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

A. a 10% increase in the real money supply.
B. a less-than-10% change in the price level due to a shift in the aggregate supply curve.
C. no change in the real money supply.
D. a 10% decrease in the real money supply.

Answer 18

C. no change in the real money supply.

Question 19

Friedman and Schwarz argue that money is not neutral because

A. 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.
B. money is a leading, procyclical variable.
C. they found no evidence that productivity changes or changes in government spending contributed to business cycles; only monetary changes preceded every recession.
D. theoretical models of the economy don’t show monetary neutrality.

Answer 19

A. 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 20

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

A. Granger causality.
B. reverse causation.
C. nominal adjustment.
D. money neutrality.

Answer 20

B. reverse causation.

Question 21

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

A. A change in the level of government transfer programs
B. A change in taxes on corporate profits
C. The introduction of new management techniques
D. An increase in the money supply

Answer 21

C. The introduction of new management techniques

Question 22

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

A. the coefficients (a and 1 - a) on capital and labor in the production function are procyclical.
B. employment is procyclical.
C. resource utilization is procyclical.
D. demand shocks are the dominant force determining the business cycle.

Answer 22

C. resource utilization is procyclical.

Question 23

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

A. fewer; increase
B. more; increase
C. fewer; decline
D. more; decline

Answer 23

D. more; decline

Question 24

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

A. frictional and structural; cyclical
B. structural; frictional and cyclical
C. cyclical; frictional and structural
D. frictional and cyclical; structural

Answer 24

A. frictional and structural; cyclical

Question 25

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

A. increase; decrease; increase
B. increase; decrease; decrease
C. decrease; decrease; increase
D. increase; increase; decrease

Answer 25

B. increase; decrease; decrease

Question 26

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

A. little; in different industries
B. much; within the same industry
C. little; within the same industry
D. much; in different industries

Answer 26

B. much; within the same industry

Question 27

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

A. political constraints on policy actions prevent the government from carrying out effective policies.
B. the government has imperfect knowledge of the economy.
C. time lags between the onset of a recession and the implementation of effective countermeasures make anti-recessionary macroeconomic policies impractical.
D. only productivity shocks can cause real fluctuations in the business cycle.

Answer 27

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

Question 28

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

A. the real quantity of government purchases.
B. the size of the labor force.
C. the spending and saving decisions of consumers.
D. the production function.

Answer 28

D. the production function.

Question 29

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

A. the power of labor unions, which prevent firms from cutting wages.
B. a mismatch of workers and jobs.
C. slack aggregate demand.
D. the failure of wages to adjust to restore equilibrium in the labor market.

Answer 29

B. a mismatch of workers and jobs.

Question 30

Reverse causation is the idea that

A. expected future increases in the money supply cause increases in current output.
B. current increases in output cause future increases in the money supply.
C. current increases in the money supply cause future increases in output.
D. expected future increases in output cause increases in the current money supply.

Answer 30

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

Question 31

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

A. A change in the production function
B. A change in the real quantity of government purchases
C. A change in the money supply
D. A change in the size of the labor force

Answer 31

C. A change in the money supply

Question 32

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

A. the economy is likely to go into a recession in the next six months to a year.
B. inflation is lower than its targeted level.
C. the economy is in a recession.
D. the benefits of the spending exceed the costs.

Answer 32

D. the benefits of the spending exceed the costs.

Question 33

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

A. an increase in the real money supply.
B. a rise in nominal wages.
C. an excess supply for goods.
D. a fall in the price level.

Answer 33

B. a rise in nominal wages.

Question 34

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

A. output, employment, real wages, and the price level.
B. output, the real interest rate, real wages, and the price level.
C. output, employment, the real interest rate, and the price level.
D. employment, the real interest rate, real wages, and the price level.

Answer 34

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

Question 35

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

A. The degree to which different economic variables move together
B. The amount of random variation in economic variables
C. The degree to which variables lead output over the business cycle
D. The strength of pro-cyclicality of different variables

Answer 35

A. The degree to which different economic variables move together

Question 36

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

A. the economy is likely to go into a recession in the next six months to a year.
B. inflation is lower than its targeted level.
C. the economy is in a recession.
D. the benefits of the spending exceed the costs.

Answer 36

D. the benefits of the spending exceed the costs.

Question 37

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

A. the real quantity of government purchases.
B. the size of the labor force.
C. the spending and saving decisions of consumers.
D. the production function.

Answer 37

D. the production function.

Question 38

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

A. a change in the leadership of the Fed and its policy was followed by noticeable changes in the money supply and a recession or inflation.
B. a change in monetary institutions preceded a boom or recession.
C. large gold discoveries that increased the money supply preceded an economic boom.
D. the fact that every recession was preceded by a drop in the money supply.

Answer 38

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

Question 39

Labor hoarding occurs when

A. involuntary unemployment exceeds voluntary unemployment.
B. because of hiring and firing costs, firms retain workers in a recession that they would otherwise lay off.
C. the unemployment rate exceeds the natural rate of unemployment.
D. firms keep good workers so other firms can’t hire them.

Answer 39

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