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.