ECON 2315 Ch 10
This problem asks you to work out in more detail the example of reverse causation described in the text. Suppose that firms that expect to increase production in the future have to increase their current transactions (for example, they may need to purchase more raw materials). For this reason, current real money demand rises when expected future output rises. a. Under the assumption that real money demand depends on expected future output, use the classical IS-LM model to find the effects of an increase in expected future output on the current price level. For simplicity, assume that any effects of the increase in expected future output on the labor market or on desired saving and investment are small and can be ignored. A. higher future output increases money demand, so the price level declines in equilibrium B. higher future output decreases money demand, so the price level increases in equilibrium C. higher future output decreases money demand, so the price level declines in equilibrium D. higher future output increases money demand, so the price level increases in equilibrium b. Suppose that the Fed wants to stabilize the current price level. How will the Fed respond to the increase in expected future output? A. The Fed will increase the money supply in response to the increase in money demand, which shows a lack of reverse causation. B. The Fed will decrease the money supply in response to the increase in money demand, which shows a lack of reverse causation. C. The Fed will increase the money supply in response to the increase in money demand, which shows reverse causation. D. The Fed will decrease the money supply in response to the increase in money demand, which shows reverse causation.
A. higher future output increases money demand, so the price level declines in equilibrium C. The Fed will increase the money supply in response to the increase in money demand, which shows reverse causation.
The misperceptions theory concludes that: A. in the short run, anticipated monetary changes are neutral but unanticipated monetary changes are not neutral. B. in the short run, unanticipated monetary changes are neutral but anticipated monetary changes are not neutral. C. in the short run, both anticipated and unanticipated monetary changes are not neutral. D. unanticipated monetary changes are not neutral in either the short run or the long run.
A. in the short run, anticipated monetary changes are neutral but unanticipated monetary changes are not neutral.
The growth rate of the Solow residual A. is equal to the growth in productivity as measured by the parameter A. B. is less than the growth in productivity as measured by the parameter A. C. is greater than the growth in productivity as measured by the parameter A. D. may be greater than, less than or equal to the growth in A, depending on the production function.
A. is equal to the growth in productivity as measured by the parameter A.
What conclusion does the basic classical model (with no misperceptions of the price level) allow about the neutrality or nonneutrality of money? A. money is neutral in both the short run and the long run B. money is neutral in neither the short run nor the long run C. money is neutral in the short run but not in the long run D. money is neutral in the long run but not in the short run In what ways is this conclusion modified by the extended classical model based on the misperceptions theory? A. anticipated monetary changes are neutral in the short run, but unanticipated monetary changes are not neutral in the short run B. unanticipated monetary changes are neutral in the short run, but anticipated monetary changes are not neutral in the short run C. neither anticipated nor unanticipated monetary changes are neutral in the short run D. both anticipated and unanticipated monetary changes are neutral in the short run
A. money is neutral in both the short run and the long run A. anticipated monetary changes are neutral in the short run, but unanticipated monetary changes are not neutral in the short run
Under the rational-expectations hypothesis, A. a central bank solely depends on fiscal policy to stabilize output and employment. B. a central bank cannot surprise the public systematically, and hence cannot use monetary policy to stabilize output. C. a central bank can always surprise the public systematically about the timing and the size of changes in money supply and hence can effectively use monetary policy to stabilize output. D. a central bank can rationally expect the public's reaction to any possible changes in monetary policy.
B. a central bank cannot surprise the public systematically, and hence cannot use monetary policy to stabilize output.
1.) The goal of calibration is to A. compare one researcher's results with another's. B. create a numerical example from a more general theoretical model. C. produce a more general model from detailed numerical data. D. produce policy implications from economic models. 2.) Which step in calibration is done with the assistance of a computer's random number generator? A. Comparison of simulation results to actual economic behavior. B. Assignment of numbers to a theory's general functions. C. Creation of economic shocks. D. None of the above. 3.) Edward Prescott's calibration work, as described in the Application, A. used GDP to measure economic output. B. revealed no correlation between GNP and investment. C. indicated that his model did a good job modeling volatilities in output. D. did best at predicting the correlation between output and productivity.
B. create a numerical example from a more general theoretical model. C. Creation of economic shocks. C. indicated that his model did a good job modeling volatilities in output.
In order to explain the link between money growth and economic expansion, real business cycle theorists use the concept of: A. rational expectations. B. reverse causation. C. a misperception of price changes. D. the neutrality of money.
B. reverse causation.
The main components that any theory of the business cycle must contain or describe are A. how expectations are formed and how they affect the macroeconomy. B. how the central bank adjusts money supply and maintains an interest rate target. C. a specification of the types of shocks affecting the economy and a model of the macroeconomy that explains how the economy responds to such shocks. D. how government spending and taxation decisions are made. In the real business cycle theory, the primary source of cyclical fluctuations is A. productivity shocks. B. foreign trade shocks. C. government spending shocks. D. real interest rate shocks. The model of the macroeconomy that is used in the real business cycle theory is A. the classical IS-LM model that assumes that prices adjust quickly to restore equilibrium. B. the classical IS-LM model that assumes that prices adjust slowly to restore equilibrium. C. the Mundell-Fleming model under fixed exchange rates. D. the efficiency-wage model.
C. a specification of the types of shocks affecting the economy and a model of the macroeconomy that explains how the economy responds to such shocks. A. productivity shocks. A. the classical IS-LM model that assumes that prices adjust quickly to restore equilibrium.
According to the misperceptions theory, producers are unable to determine whether an increase in prices is an increase in relative prices or an increase in the general price level. This inability generates: A. a vertical short-run aggregate supply curve. B. a horizontal short-run aggregate supply curve. C. an upward sloping short-run aggregate supply curve. D. reverse causation.
C. an upward sloping short-run aggregate supply curve.
Consider a permanent increase in government purchases of 100 per year (in real terms). The increase in purchases is financed by a permanent increase in lump-sum taxes of 100 per year. a. As compared with a temporary increase in government purchases that is also financed by a tax increase, such a permanent increase in government purchases A. causes a smaller income effect than a temporary increase in government purchases. B. causes a larger substitution effect than a temporary increase in government purchases. C. causes a larger income effect than a temporary increase in government purchases. D. causes a smaller substitution effect than a temporary increase in government purchases. b. Because the tax increase is permanent, assume that at any constant levels of output and the real interest rate, consumers respond by reducing their consumption each period by the full amount of the tax increase. Also, assume that investment is unaffected by any change in government purchases. Under these assumptions, determine how a permanent increase in government purchases affect the following curves: - The national saving curve does not shift. - The IS curve does not shift. c. Suppose that after such a permanent increase in taxes, consumers respond by reducing their consumption each period by less than the full amount of the tax increase, in contrast to the behavior assumed in part b. Also, suppose that investment is unaffected by any change in government purchases. Under these assumptions, determine how a permanent increase in government purchases financed by a permanent increase in taxes affect the following curves: - The national saving curve shifts to the left. - The IS curve shifts up and to the right. d. Assume that consumers respond to permanent increase in taxes by reducing their consumption in each period by the full amount of the tax increase. Also assume that investment remains unchanged. Using the classical IS-LM model determine the effects of a permanent increase in government purchases which is financed by an increase in taxes, on the following curves: - The FE line shifts to the right. - The IS curve does not shift. - The LM curve shifts down and to the right. e. Determine the effects of a permanent increase in government purchases financed by a permanent increase in lump-sum taxes on the following variables in the current period, assuming that consumers respond to permanent increase in taxes by reducing their consumption in each period by the full amount of the tax increase and assuming that investment remains unchanged. - Output increases. - The price level decreases. - The real interest rate decreases. f. Consider a permanent increase in government purchases of 100 per year (in real terms). The increase in purchases is financed by a permanent increase in lump-sum taxes of 100 per year. Assume that after such a permanent increase in taxes, consumers respond by reducing their consumption each period by less than the full amount of the tax increase. Also, assume that investment is unaffected by any change in government purchases. As a result of these fiscal changes A. the IS curve does not shift, but the FE line shifts to the right and the LM curve shifts down and to the right; output increases, but the price level and the real interest rate fall. B. the IS curve shifts up and to the right, the FE line shifts to the right, and the LM curve shifts down and to the right; output increases, the real interest rate remains unchanged and the price level declines. C. the IS curve shifts up and to the right and the FE line shifts to the right; output, the price level, and the real interest rate all increase. D. the IS curve shifts up and to the right and the FE line shifts to the right; output increases, but the effects on the price level and real interest are ambiguous; they depend on the relative shifts of the IS curve and the FE line.
C. causes a larger income effect than a temporary increase in government purchases. D. the IS curve shifts up and to the right and the FE line shifts to the right; output increases, but the effects on the price level and real interest are ambiguous; they depend on the relative shifts of the IS curve and the FE line.
In the context of the relationship between the money supply and real economic activity, what is meant by reverse causation? A. expected future increases in the current money supply cause increases in output B. expected future increases in output cause increases in the current government budget deficit C. expected future increases in output cause increases in the current money supply D. expected future increases in the current government budget deficit cause increases in output Which of the following is an example of reverse causation? A. businesses increase their money demand for transactions before they increase output B. consumers increase their credit card debt before they increase demand for output C. building contractors spend more cash before they build more houses, increasing output D. financial firms make fewer loans, which leads to increased output What business cycle fact is reverse causation intended to explain? A. the fact that industrial production is procyclical and a coincident variable B. the fact that money is procyclical and a leading variable C. the fact that unemployment is countercyclical and a lagging variable D. the fact that government spending is procyclical and a leading variable
C. expected future increases in output cause increases in the current money supply A. businesses increase their money demand for transactions before they increase output B. the fact that money is procyclical and a leading variable
This problem asks you to work out in more detail the example of reverse causation described in the text. Suppose that firms that expect to increase production in the future have to increase their current transactions (for example, they may need to purchase more raw materials). For this reason, current real money demand rises when expected future output rises. a. Under the assumption that real money demand depends on expected future output, use the classical IS-LM model to find the effects of an increase in expected future output on the current price level. For simplicity, assume that any effects of the increase in expected future output on the labor market or on desired saving and investment are small and can be ignored. A. higher future output decreases money demand, so the price level declines in equilibrium B. higher future output decreases money demand, so the price level increases in equilibrium C. higher future output increases money demand, so the price level declines in equilibrium D. higher future output increases money demand, so the price level increases in equilibrium b. Suppose that the Fed wants to stabilize the current price level. How will the Fed respond to the increase in expected future output? A. The Fed will increase the money supply in response to the increase in money demand, which shows a lack of reverse causation. B. The Fed will decrease the money supply in response to the increase in money demand, which shows reverse causation. C. The Fed will decrease the money supply in response to the increase in money demand, which shows a lack of reverse causation. D. The Fed will increase the money supply in response to the increase in money demand, which shows reverse causation.
C. higher future output increases money demand, so the price level declines in equilibrium D. The Fed will increase the money supply in response to the increase in money demand, which shows reverse causation.
The discovery of a new technology increases the expected future marginal product of capital (MPK Superscript fMPKf). a. Use the classical IS-LM model (with no misperceptions) to determine the direct effects of such an increase in the expected future marginal product of capital on the following curves. Answer only concerning which curves are directly affected by the change in the MPKf; do not list curves that shift to restore general equilibrium. - The LRAS curve does not shift. - The FE line does not shift. - The LM curve does not shift. - The IS curve shifts up and to the right. - The AD curve shifts up and to the right. b. Using the classical IS-LM model (with no misperceptions), determine the general-equilibrium effects of an increase in the expected future marginal product of capital on the following variables: - Employment remains unchanged. - Output remains unchanged. - The price level increases. - The real interest rate increases. - Consumption decreases. - Investment increases. c. Under the misperceptions theory, an increase in expected future marginal product of capital causes all of the following in general equilibrium except that A. the SRAS and LRAS curves do not shift, the AD curve shifts up and to the right, and the economy moves along the SRAS curve. B. both the price level and output increase. C. the SRAS and LRAS curves do not shift, the AD curve shifts up and to the right, the price level increases, but output remains unchanged at the full-employment level. D. producers misperceive the change in the price level as a change in relative prices and increase labor demand and output.
C. the SRAS and LRAS curves do not shift, the AD curve shifts up and to the right, the price level increases, but output remains unchanged at the full-employment level.
1.) When economists say that people have rational expectations, they mean that A. their decisions are based on past observations and experiences. B. they understand and follow basic economic concepts. C. they utilize available information in making decisions. D. they are governed by logic instead of emotion. 2.) Classical economists A. do not tend to support the idea of rational expectations, which goes along with their assumption that people do not tend to pursue their own self-interest. B. tend to support the idea of rational expectations, although it does not go along with their assumption that people do not tend to pursue their own self-interest. C. tend to support the idea of rational expectations, which goes along with their assumption that people pursue their own self-interest. D. do not tend to support the idea of rational expectations, although it would go along with their assumption that people pursue their own self-interest. 3.) One way to test whether people have rational expectations is to A. ask people to make predictions about future economic events. B. put people in groups and see if their opinions about the economy tend to converge (move together). C. ask people to explain past economic events. D. test their knowledge of theoretical economic concepts. If rational expectations do indeed exist, the error term in such studies should be A. negative and falling. B. unpredictable and random. C. positive and rising. D. zero.
C. they utilize available information in making decisions. C. tend to support the idea of rational expectations, which goes along with their assumption that people pursue their own self-interest. A. ask people to make predictions about future economic events. B. unpredictable and random.
a. The Solow residual, the most common measure of productivity shocks is strongly procyclical. b. Which of the following does not cause a change in the Solow residual? A. A change in the labor utilization rate. B. A change in the capital utilization rate. C. A change in total factor productivity. D. A change in expectations.
D. A change in expectations.
In the classical model with misperceptions, in the short run, an unanticipated increase in the money supply: A. causes the short-run aggregate supply curve to shift down and to the right, leaving the aggregate demand curve unchanged. B. causes the aggregate demand curve to shift up and to the right and causes the short-run aggregate supply curve to shift up and to the left. C. causes the aggregate demand to shift up and to the right and causes the short-run aggregate supply curve to shift down and to the right. D. causes the aggregate demand curve to shift up and to the right, leaving the short-run aggregate supply curve unchanged.
D. causes the aggregate demand curve to shift up and to the right, leaving the short-run aggregate supply curve unchanged.
Starting from a situation with no government spending and no taxes, the government introduces a foreign aid program (in which domestically produced goods are shipped abroad) and pays for it with a temporary 10% tax on current wages. Future wages are untaxed. What effects will the temporary wage tax have on labor supply? A. ambiguous B. increases C. unchanged D. decreases Use the classical IS-LM model to find the effects of the fiscal change on output, employment, the (before-tax) real wage, the real interest rate, and the price level. The before-tax real wage A. ambiguous B. decreases C. unchanged D. increases Employment A. increases B. ambiguous C. decreases D. unchanged Output A. unchanged B. ambiguous C. increases D. decreases The price level A. unchanged B. decreases C. ambiguous D. increases The real interest rate A. increases B. ambiguous C. unchanged D. decreases
D. decreases D. increases C. decreases D. decreases D. increases A. increases
According to the classical theory, a temporary increase in government purchases A. does not affect employment or the real wage. B. increases both labor demand and supply, increases employment, but does not affect the real wage. C. does not affect labor supply but increases labor demand, increases the real wage, and increases employment. D. does not affect labor demand but increases labor supply, lowers the real wage, and increases employment. According to the classical theory, a temporary increase in government purchases A. shifts the IS curve up and to the right and the FE line to the right. If the shift of the FE line is smaller than the shift to the right of the IS curve, it leads to a reduction in the real interest rate and an increase in the price level. B. shifts the IS curve up and to the right and the FE line to the right. If the shift of the FE line is smaller than the shift to the right of the IS curve, it leads to an increase in the real interest rate and an increase in the price level. C. shifts only the FE line to the right and increases both the price level and the real interest rate. D. shifts only the IS curve up and to the right and increases both the price level and the real interest rate. According to classical economists, fiscal policy should not be used to smooth out the business cycle.
D. does not affect labor demand but increases labor supply, lowers the real wage, and increases employment. B. shifts the IS curve up and to the right and the FE line to the right. If the shift of the FE line is smaller than the shift to the right of the IS curve, it leads to an increase in the real interest rate and an increase in the price level.
The main difference between the classical IS-LM model and the Keynesian IS-LM model is that A. in the classical model, demand for money is less interest elastic than in the Keynesian model. B. in the classical model, prices are assumed to be fixed, while in the Keynesian model prices are flexible. C. in the Keynesian model, prices are assumed to adjust quickly to restore equilibrium, while in the classical model, prices are slow to adjust to restore equilibrium. D. in the classical model, prices are assumed to adjust quickly to restore equilibrium, while in the Keynesian model, prices are slow to adjust to restore equilibrium. The distinction between the classical IS-LM model and the Keynesian IS-LM model is important because classicals are less likely than/as Keynesians to recommend government intervention to restore equilibrium.
D. in the classical model, prices are assumed to adjust quickly to restore equilibrium, while in the Keynesian model, prices are slow to adjust to restore equilibrium.
In the classical model, money is neutral. This seems to be inconsistent with the business cycle fact that: A. money is a non-cyclical variable, which is not related with the business cycle. B. money is a countercyclical variable. C. the real wage is weakly procyclical. D. money is a leading, procyclical variable.
D. money is a leading, procyclical variable.
