Macroeconomics (9th Edition)
9th Edition
ISBN: 9780134167398
Author: Andrew B. Abel, Ben Bernanke, Dean Croushore
Publisher: PEARSON
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Chapter 10, Problem 3RQ
To determine
To Explain: The concepts of real and nominal shocks with examples and determine the most important type of real shock that creates cyclical fluctuations.
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In the context of Real Business Cycle theory explain the role played by the intertemporal substitution of labour supply in propagating the effects of real shocks in the economy. Do you think this propagation mechanism represents a good explanation for the business cycles we see in reality? Use a diagram to explain your answer.
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Macroeconomics (9th Edition)
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- 1. In the RBC (Real Business Cycle) model, if businesses react to a pessimistic outlook and decrease spending, the model predicts a. the aggregate demand curve shift left. b. equilibrium inflation rates fall. c. no change in long run growth rates. d. a&b only e. all of the above 2. In the RBC (Real Business Cycle) model, if you observe unemployment levels rising, what is the likely cause? a. A negative real shock b. A negative aggregate demand shock c. A negative SRAS shock d. A&B only e. None of the above 3. Irrigation technology that changes how farmers utilize rainfall a. will have no effect on economic growth if rain fall levels do not also increase. b. represents a positive aggregate demand (AD) shock. c. may lead to higher levels of productivity growth and lower levels of unemployment. d. represents a negative real shock and will increase unemployment. e. None of the above.arrow_forwardWhich of the following are business cycle theories that regard fluctuations in aggregate demand as the factor that is creating business cycles? I) Keynesian cycle theory II) Real business cycle theory III) Monetarist cycle theory Select one: (a) I, II and III (b) I and II (c) I and III (d) I onlyarrow_forwardAssess the view that when an economy experiences a negative economic shock there willalways be a sustained increase in unemployment.arrow_forward
- The real business cycle theory assumes that money wages are flexible and adjust quickly True Faslearrow_forwardHi, could you help me solve this problem? Consider an increase in global oil and gas prices from the point of the euro area (that does not produce much oil or gas itself). Think of this shock as a supply shock and use the AD-AS -model to explain how it is likely to affect output (or unemployment) and inflation. How does your result relate to the original Phillips curve? Your answer should include a graph and a short explanation in words.arrow_forwardIn the basic New Keynesian model, suppose that there is an increase in the future marginal product of capital. Explain your results with the aid of diagrams. Suppose that the central bank keeps the nominal interest rate at its initial value. What will be the effect on current inflation and on output? Suppose that the economy initially faces an increase in anticipated future inflation and a zero output gap. When the shock occurs, what should the central bank do?arrow_forward
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- . How would you expect velocity to typically behave overthe course of the business cycle?arrow_forwardTo study macroeconomics, one needs various models with different assumptions about the flexibility and/or stickiness of price levels. This is because: A.) the price flexibility is a short-run phenomenon while, the price stickiness is a long-run phenomenon. B.) the economy behaves so differently depending on how much time has passed after a demand shock. C.) various government policies are useless to eliminate the effects of an unexpected demand shock. D.) the economy behaves similarly to demand shocks regardless of the length of time.arrow_forwardConsider the original AD/AS model in steady state. If the central bank fights against inflation more aggressively, explain how would inflation and short-run output respond differently to aggregate demand shock? (Hint: m-bar)arrow_forward
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