Term 2 Week 6

Question 1

What utility function is used in RBC model?

Answer 1

CRRA model

Question 2

How do you calibrate in RBC model?

What is a potential issue with this?

Answer 2

-Assigning parameters so it is consistent with empirical facts.

-If you engineer this so model matches it is causes a biased model.

Question 3

What are the parameters in the RBC model which are used?

Question 4

How is technology used in the RBC model as a parameter?

Answer 4

The shock aspect of tech is used

Question 5

How is the RBC model stimulated?

Answer 5

The solow residual is treated as an exogenous shock

and see how the economy responds to this shock

Question 6

How does ouput compare to RBC model compared to data?

How does consumption compare to RBC model consumption?

How does volatility compare to the RBC model consumption?

Answer 6

-Really good fit co-movement and volatility

-RBC model is less volatile compared to data consumption

-model compares volatility well but moves too early

Question 7

How does RBC model compare to empirical results
What are the main issues with the model?

Question 8

How is the following for RBC model?

Answer 8

Volatility
-investment volatility is the same
-Understates volatility and consumption

Persistence:
Good autocorrelation compared to the rest of the data

Co-movement
Model predicts comoevement well except from, wage and rental rate of capital
Really overstates the magnitude between output and all other variables (this shows that more than 1 shock is relevant)

Question 8

What is the exogenous mechanism for TFP in RBC
Assume positive TFP shock?

Answer 8

-For given factor supplies TFP increases MPL and MPK

-The higher MPL and MPK reflects in higher w and r

-Consumption will increase but not as much as output as increase w increases income but r increases which

-Labour supply increases and w increases.
Higher w means that people will work more

-Higher savings means higher kt+1 which means higher MPL

Question 9

What are the main critics of the RBC model?

Answer 9

Tech
-unclear what tech shocks are
-Are recessions times of tech regress?

-Failure to capital and labour markets
-no involuntary

Question 10

What are the decisions being made in the RBC model?

Answer 10

-Firms wake up and observe the level of technology and decide
-level of labour
-level of capital

Then households wake up and decide how much labour to provide

Question 11

What is the policy implication for RBC model?

Answer 11

As fluctuations are efificient responses:

-There is no involuntary unemployment
The first welfare theorem applies

-No scope for policies to stabilise the economy.
-No sense for monetary policy

Question 12

Why does the RBC model

Question 13

What is the quantity theory of money equation?

How do we calculate velocity of money and what is it saying

What is the final quantity theory of m

Answer 13

Circulating money = nominal income
M x V = P x Y

V = PY/ M

How many times 1 unit of money is spent in the economy.

M x V bar = P x Y

Question 14

What is the equation for demand of money?

What does this show?

Answer 14

M^d = k x PY

Shows that interest rates have no direct impact of money demand

Question 15

How does RBC model link with classic dichotomy?

Answer 15

The RBC model only looks at the real side of the economy as all prices are normalised to 1

Question 16

What did classical economists

Answer 16

P = M x V bar / Y bar

Question 17

How can the quantity theory of money turn into the theory of inflation?

What is the interpretation of this?

Answer 17

Inflation rate = Money growth rate - growth rate of output.

-Money is neutral : Monetary policy has no real effects
-increase is gm increases inflation 1 to 1

Question 18

How does the quantity theory of money match up empirically?

Answer 18

In the long run quantity of money and inflation are correlated.

-In the short quantity fo money and inflation are not correlated.