Macroeconomics Module 3 - Chapter 4

True/False: Investment's share of GDP, IY, is countercyclical.

False

True/False: It is best to use one model of the macro-economy to describes both normal (typical) business cycles as well as economic crises, like depressions.

False

True/False: Net operating surplus is procyclical, but it will only start to increase after real GDP increases and it decreases only after real GDP decreases.

False

True/False: Real Business Cycle (RBC) theory is unconcerned with short-run fluctuations in real GDP. Rather, it is a theory about long-run growth.

False

True/False: Real Business Cycle models do a good job of explaining prolonged and severe depressions.

False

True/False: Simple RBC models predict that C is more volatile than is shown to actually be in the data.

False

True/False: Since personal consumption expenditure, C, is strongly procyclical consumption's share of GDP, C/Y, is also procyclical.

False

True/False: The macroeconomic data show that C is just as volatile as Y.

False

True/False: The ultimate purpose of RBC is to solve complicated math problems on computers.

False

How would you find the growth trend in the unemployment rate over some period of time? Find the different between the unemployment rate between the two endpoints of the time period. Find the maximum unemployment rate within the time period. Find the total number of individuals who became unemployed within the time period. Find the average unemployment rate within the time period. Divide the total number of unemployed by the length of the time period.

Find the average unemployment rate within the time period.

What has been the trend in annual U.S. GDP growth since 1930? The trend growth rate for U.S. has been between 4% and 5% since 1930. The trend growth rate for U.S. has been between 3% and 4% since 1930. The trend growth rate for U.S. has been between 1% and 2% since 1930. The trend growth rate for U.S. has been between 5% and 6% since 1930. The trend growth rate for U.S. has been between 2% and 3% since 1930.

The trend growth rate for U.S. has been between 2% and 3% since 1930.

What can an RBC model be used to analyze? The volatility in the intangible capital stock within a region. The volatility in labor productivity within a region. The long-run trend in real GDP growth. The volatility in the money supply within a region. The long-run trend in population growth.

The volatility in labor productivity within a region.

True/False: The representative consumer in RBC models does more consumption smoothing than actual consumers do in the real world.

True

True/False: The share G/Y, is countercyclical.

True

True/False: The unemployment rate is countercyclical.

True

True/False: Total factor productivity is procyclical.

True

Why would we want to focus on detrended economic data? When you wish to see if the variable is increasing or decreasing over time. When you wish to see if the variable is a real or nominal variable. When you wish to see if the variable is increasing or decreasing faster than it usually does. When you wish to compute the long run growth trend of the variable. When you wish to see if the value of the variable is changing.

When you wish to see if the variable is increasing or decreasing faster than it usually does.

An economic variable that is negatively correlated with real GDP is said to be _____________. synthetic acyclical countercyclical procyclical contrarian

countercyclical

The unemployment rate is an example of a(n) _____________ economic variable. acyclical countercyclical synthetic procyclical averaged

countercyclical

Suppose you are looking at some country's GDP growth rate between 1980-2010. The average GDP growth rate over this time period has been subtracted from the GDP growth rate for each period within 1980-2010. This data is said to be _____________ data. procyclical countercyclical detrended acyclical smoothed

detrended

Which phenomenon would have increased labor productivity in the 20th Century? population growth real GDP growth the abandonment of the gold standard development of electrical power oil price shocks

development of electrical power

A(n) _____________ refers to the stage of the business cycle where the economy is shrinking. economic recession unemployment spell economic shortage market equilibrium economic denouement

economic recession

An economy is undergoing an economic _____________ if real GDP is growing. expansion, or boom growth rate business cycle contraction surplus

expansion, or boom

Total _____________ productivity is the portion of output that is not explained by capital and labor inputs. labor capital investment firm factor

factor

If an economic variable increases when real GDP increases and decreases when real GDP decreases then it is said to be _____________. synthetic procyclical acyclical countercyclical trendy

procyclical

Real GDP divided by the total supply of labor equals the _____________ of labor. marginal efficiency of productivity marginal productivity marginal return average output

productivity

A(n) _____________ is an event such as a widespread bank panic or the outbreak of a war. business cycle boom financial crisis trend rare event

rare event

What drives short-term fluctuations in capital productivity in an RBC model? shocks to aggregate supply shocks to aggregate demand shocks to total factor productivity shocks to labor productivity shocks to human capital

shocks to total factor productivity

If a consumer only changes their consumption when their permanent income changes, then the consumer is _____________. smoothing their income responding to transitory shocks smoothing their consumption averaging their consumption averaging their income

smoothing their consumption

One _____________ about the business cycle is that investment is more volatile than real GDP. curiosity unusual fact statistical forecast stylized fact

stylized fact

One of the _____________ facts of business cycles is that investment's GDP share, IY, is _____________. fundamental; countercyclical nominal; countercyclical counterintuitive; procyclical stylized; procyclical synthetic; acyclical growth; procyclical

stylized; procyclical

What is short summary of the consumption-output puzzle? The RBC model predicts lower output and consumption than seen in actual economic data. The RBC model predicts more volatility in Y and C than is seen in actual economic data. The RBC model predicts less volatility in Y and C than is seen in actual economic data. The RBC model predicts more less similar volatility between Y and C than is seen in actual economic data.

The RBC model predicts more less similar volatility between Y and C than is seen in actual economic data.

Net operating surplus as a fraction of GDI is said to be procyclical in a(n) _____________ because it tends to rise before real GDP rises. more volatile way lagging fashion less volatile way procyclical way leading fashion

leading fashion

The fact that the data show that the volatilities of C and Y are more similar than expected is known as _____________. consumption smoothing a stylized fact a rare event the consumption-output puzzle the permanent income hypothesis

the consumption-output puzzle

Which of the following macro variables is countercyclical? the unemployment rate net operating surplus' share of GDI investment's share of GDP nominal GDP labor productivity

the unemployment rate

A simple calibrated RBC model generates about what percentage of the volatility observed for real GDP in the actual data? 90 80 70 60 50

70

How would the representative consumer in the RBC model respond to receiving a small, unexpected Christmas bonus from her employer? She would increase her spending, but only temporarily. She would permanently increase her spending. She would not change her spending. She would permanently reduce her spending.

She would not change her spending.

What creates short-run fluctuations in real GDP according to RBC theorists? Sustained investment in human capital (education, training, etc.). Shocks to total factor productivity. Shocks to population or the total fertility rate. Increases in the capital stock. Shocks to aggregate demand.

Shocks to total factor productivity

Why do RBC theorists calibrate their models? So they are easier to solve without a using a computer. So that the data they generate more closely resemble the real-world economic data. So they remain informative about real, rather than nominal, economic data. So that they are structured as dynamic, not static, economic models.

So that the data they generate more closely resemble the real-world economic data.

How would the representative consumer in the RBC model respond to being laid off? The consumer would reduce his spending, but not as much as his income falls. The consumer would increase his spending, but only plan do so temporarily. The consumer would reduce his spending as much or more than his income falls. The consumer would increase his savings, but plan to do so only temporarily. The consumer would increase his savings permanently.

The consumer would reduce his spending, but not as much as his income falls.

Identify an acyclical variable. The unemployment rate. Investment's share of GDP. The number of senators in the U.S. Congress. Government expenditures share of GDP.

The number of senators in the U.S. Congress.

True/False: The productivity of labor, Y/L, will increase when total factor productivity (denoted by A in the production function) increases.

True

What is a good explanation for why investment, I, more volatile than consumption, C? Consumers are less rational in their economic decision-making than those in managerial decision-making roles within firms. Firms are more risk-averse than consumers and so are more concerned about saving for the future. Firms face larger shocks to their income and budgets than do households. Consumers generally smooth their consumption across the business cycle, while business and residential investors have no analogous desire to smooth investment spending. Firms generally smooth more of their consumption across the business cycle, while the consumption-output puzzle shows that households have less of a consumption smoothing motive.

Consumers generally smooth their consumption across the business cycle, while business and residential investors have no analogous desire to smooth investment spending.

Identify a procyclical economic variable. The unemployment rate. Personal consumption expenditures share of GDP. Government expenditures share of GDP. Employee compensation's share of GDI.

Employee compensation's share of GDI.

True/False: Bankruptcies are procyclical.

False

True/False: Calibrated models have very few, if any parameters. They are "nonparametric" models.

False

How would you detrend data for a variable which turns out to be countercyclical? For all times in the data set, add the growth trend of the variable to the value of the variable at that time. For all times in the data set, add the difference between the end and start value of the variable to the current value of the variable. At all times in which there was a recession, add the growth trend of the variable to the value of the variable at that time. At all times in which there was an economic expansion, add the growth trend of the variable to the value of the variable at that time. For all times in the data set, subtract the growth trend of the variable to the value of the variable at that time.

For all times in the data set, subtract the growth trend of the variable to the value of the variable at that time.

Why is detrended data useful? It emphasizes the fluctuations around a longer-term trend. It is simpler to analyze. It displays more regularity than other types of data. It characterizes and displays the long-run trends. It is focused more changes in real economic variables, rather than nominal variables.

It emphasizes the fluctuations around a longer-term trend.

What is one way to interpret a shock to A in the aggregate production function? It represents a shock to the capital stock. It represents a shock to the population, or population growth rate. It represents a sudden change in the technology used to produce output. It represents a monetary shock. It represents a sudden change in aggregate demand.

It represents a sudden change in the technology used to produce output.

Would and RBC model be a good model to use to explain a banking crisis? Yes, but only if the banking crisis is a rare event. Yes, but only if the banking crisis leads to a prolonged recession or depression No. A banking crisis is a rare event that can lead to a prolonged recession or depression. No. A banking crisis is an example of a short-run fluctuation. Maybe, if the banking crisis was created by fiscal policy.

No. A banking crisis is a rare event that can lead to a prolonged recession or depression.

Which of the following would not be useful to someone wishing to smooth consumption across time? a savings account at a bank a credit card loans from parents all would be useful

all would be useful

RBC theory is concerned with understanding _____________ business cycles, which are the frequent and short-term periods of economic expansions and contractions. nominal normal unusual monetary cyclical

normal