Download Mankiw 5e Chapter 19

Mankiw 5e Chapter 19
The theory of real business cycles postulates that
A. the classical dichotomy does not apply to the short run.
B. business cycles are not an exclusively short-run phenomenon.
C. fluctuations in nominal variables are caused by long-run real changes in the
economy.
D. prices are fully flexible, even in the short run.
0 out of 1
Incorrect. The correct answer is D. See the introduction to Chapter 19
for a discussion of the assumptions underlying real business cycle
theories.
One day a crate of food washes up on Robinson Crusoe's island. While the food lasts,
he doesn't do any fishing. Instead he spends more time enjoying leisure and making
nets. Which of the following is true?
A. Both GDP and investment on the island will rise.
B. GDP on the island will fall, but investment will rise.
C. GDP on the island will remain constant, but investment will rise.
D. GDP on the island will rise, but investment will fall.
1 out of 1
Correct. The answer is B. Recall that GDP on the island includes the
number of fish caught and the number of nets made weighted by
some "price". See Section 19-1.
Real-business-cycle theorists believe that fluctuations in output and employment
are
A. deviations of output and unemployment from their natural rate.
B. caused by price stickiness.
C. changes in the natural rate of output and unemployment.
D. non-existent.
0 out of 1
Incorrect. The correct answer is C. Real-business-cycle theorists
believe that markets clear quickly and that the economy is always at
its natural rate. See Section 19-1.
Intertemporal substitution of labor suggests that, if the real interest rate rises, a
worker would
A. increase her labor supply today relative to next year.
B. decrease her labor supply today relative to next year.
C. be indifferent to working today and working tomorrow.
D. be indifferent between receiving a dollar today and receiving a dollar
tomorrow.
1 out of 1
Correct. The answer is A. When the real interest rate rises the return
to working today increases relative to the return to working tomorrow.
See Section 19-1.
Intertemporal substitution of labor suggests that if wages were temporarily high,
then a worker would
A. increase his labor supply today relative to next year.
B. decrease his labor supply today relative to next year.
C. be indifferent to working today and working tomorrow.
D. be indifferent between receiving a dollar today and receiving a dollar
tomorrow.
1 out of 1
Correct. The correct answer is A. When the wage is temporarily high,
the return to working today is high relative to the return to working
tomorrow. See Section 19-1.
According to the theory of real business cycles, if the interest rate rises, then
A. both employment and output will fall.
B. employment will fall and output will rise.
C. employment will rise and output will fall.
D. both employment and output will rise.
0 out of 1
Incorrect. The correct answer is D. Real-business-cycle theory
predicts that if the interest rate rises, workers will choose to work
more today relative to the future. Employment and output are
therefore higher. See Section 19-1.
Interest rates are an important part of real-business-cycle theory because they
A. are monetary policy instruments.
B. affect the intertemporal substitution of labor.
C. affect only real variables.
D. link nominal and real variables.
1 out of 1
Correct. The answer is B. Interest rates represent the relative price of
labor and determine agents' choices between labor and leisure. See
Section 19-1.
With respect to the labor market, real-business-cycle theorists believe that most
unemployment is
A. voluntary.
B. involuntary.
C. caused by high interest rates.
D. caused by labor-market imperfections.
0 out of 1
Incorrect. The correct answer is A. See Section 19-1.
According to the real-business-cycle theorists, the major type of shocks to the
economy consists of shocks to
A. technology.
B. money supply.
C. money demand.
D. aggregate demand.
0 out of 1
Incorrect. The correct answer is A. Most real-business-cycle theorists
emphasize technology shocks. See Section 19-1.
In a recession, firms may keep workers that they do not need, so they will have
these workers when the recession is over. This is called
A. the Solow residual.
B. the intertemporal substitution of labor.
C. labor hoarding.
D. involuntary unemployment.
1 out of 1
Correct. The answer is C. See Section 19-1.
The theory of real business cycles implies that
A. changes in the money supply have no effect on real output.
B. changes in the money supply have no effect on prices.
C. nominal prices are sticky.
D. real prices are sticky.
1 out of 1
Correct. The answer is A. See Section 19-1.
Which of the following is NOT an explanation for variations in the Solow residual?
A. Unmeasured output
B. Technology shocks
C. Labor hoarding
D. Capital stock growth
0 out of 1
Incorrect. The correct answer is D. Since the Solow residual measures
growth in output NET of growth in factors, changes in the capital stock
do not affect it. See Section 19-1.
In real-business-cycle models, money is
A. unimportant because it does not affect real variables.
B. unimportant because demand for it does not depend on interest rates.
C. important because it affects real variables.
D. important because it exacerbates aggregate fluctuations.
1 out of 1
Correct. The answer is A. In real-business-cycle models, money is
"neutral"; it does not affect real variables. See Section 19-1.
In real-business-cycle models, aggregate fluctuations are largely caused by
A. technology shocks.
B. money demand shocks.
C. market imperfections.
D. nominal rigidities.
0 out of 1
Incorrect. The correct answer is A. Technology shocks cause
aggregate fluctuations in real-business-cycle models. Money demand
shocks, market imperfections, and nominal rigidities are either
unimportant or do not exist in real-business-cycle models. See
Section 19-1.
In real-business-cycle theory, involuntary unemployment
A. does not exist.
B. reflects the intertemporal substitution of labor for leisure.
C. reflects the fact that markets do not clear.
D. shows the presence of labor hoarding.
1 out of 1
Correct. The answer is A. There is no involuntary unemployment in
real-business-cycle models. Instead, workers choose not to work
when the value of leisure is high. See Section 19-1.
In contrast to Keynesian models, real-business-cycle models
A. attach great importance to money.
B. rely on market imperfections to generate their results.
C. allow for involuntary unemployment.
D. emphasize labor supply and the labor-leisure trade-off.
0 out of 1
Incorrect. The correct answer is D. Real-business-cycle models
explain unemployment through the intertemporal substitution of
labor for leisure. See Section 19-1.
The macroeconomic impact of one firm's price adjustment on the demand for all
other firms' products is called
A. menu costs.
B. an aggregate demand externality.
C. shoeleather costs.
D. the sacrifice ratio.
0 out of 1
Incorrect. The correct answer is B. See Section 19-2.
Choose the best pair of words to complete the following:
If menu costs increased, firms would be _____ likely to change their prices in
response to shocks. This in turn causes shocks to have ______ effects on the
economy.
A. more; smaller
B. less; bigger
C. more; bigger
D. less; smaller
0 out of 1
Incorrect. The correct answer is B. Changing prices becomes more
costly when menu costs increase. Prices are then more sticky which
causes more fluctuations. See Section 19-2.
New Keynesian economists believe that coordination failures
A. are valid explanations for booms.
B. cannot occur.
C. are the consequence of people not optimizing.
D. can be avoided if people could coordinate their actions.
1 out of 1
Correct. The answer is D. Coordination failure refers to the failure of
achieving the better equilibrium. People are nevertheless behaving
optimally, given what they believe the other person is doing. If they
could coordinate their behavior together, they could achieve the
better outcome. See Section 19-2.
New Keynesian economists believe that government policies
A. cannot be used to stabilize the economy.
B. should be used to stabilize the economy.
C. interrupt the natural behavior of the economy.
D. reduce the efficiency of the economy's response to shocks.
1 out of 1
Correct. The answer is B. New Keynesian economists believe that
price and wage stickiness are market imperfections that lower
economic well-being and are the source of economic fluctuations.
They believe that government policies could alleviate these
imperfections. See Section 19-3.
The fact that firms do not synchronize their changes in price means that
A. deviations of output from its natural rate last longer than they would if price
changes were synchronized.
B. deviations of output from its natural rate may be permanent.
C. output will never deviate from its natural rate.
D. deviations of output from its natural rate do not last as long as they would if
price changes were synchronized.
0 out of 1
Incorrect. The correct answer is A. When firms do not synchronize
their price changes, the overall level of prices adjusts more slowly
than it would otherwise. See Section 19-2.