Week 6 - RBC Model Part 2

Question 1

What are the parameters and exogenous variables that need to be calibrated in the RBC Model

Answer 1

Question 2

When evaluating the quantitive results of the RBC model what question do we want to answer?

Answer 2

Can a frictionless model (perfectly competitive and the business cycle is generated by an exogenous technology shock) replicate the key business cycle features in the data when the Solow residual is treated as an exogenous technology shock?

Question 3

What do the summary statistics show?

The model successfully replicates the high volatility of investment.

The model understates the the volatility of consumption and hours worked.

The model correctly predicts the co-movement between output and all other variables except for the rental rate of capital.

The model overstates the magnitude of the co-movment between output and all other variables.

Answer 3

• The model successfully replicates the high volatility of the investment.
• The model understates the volatility of consumption and hours worked.
• The model correctly predicts the co-movement between output and all other variables except for the rental rate of capital.
• The model overstates the magnitude of the co-movment between output and all other variables.

Question 4

In the RBC model what is the cause of fluctuations?

Answer 4

• Fluctuations are due to the efficient responses of households and firms due to exogenous supply shocks.

Question 5

What is the quantity theory of money?

Answer 5

Question 7

According to the quantity theory of money what happens if there is an exogenous supply in money supply Mt

Answer 7

Question 8

Summarize the effects of the RBC model in the short run and long run

Answer 8

• _{<b>Money neutrality happens in the LR which is the idea that monetary policy is not effective in the long run.</b>}
• _{<b>However in the short run monetary policy is effective, with the short-run being at business cycle changes frequencies.</b>}