Deck 13: Modern Macroeconomic Models

Question 1

Precautionary savings is

A)forced savings, which occurs when the government implicitly saves for people through the Social Security system.
B)additional savings people make in order to profit from the high returns to the stock market.
C)savings made by the poor.
D)the extra amount of savings a household maintains because of uncertainty about its future income.

Answer 1

D

Question 2

In a two-period model, a household has an income of $20,000 in period one and an income of $25,000 in period two. The household faces an interest rate of 50 percent.What is the present value of the household's income if the income in period one increases to $30,000?

A)​$39,000
B)​$46,666.66
C)​$40,555.65
D)​$50,000

Answer 2

B

Question 3

In the two-period model, suppose a household's income in the first period is $40,000, income in the second period is $50,000, and the real interest rate is 25 percent.By how much would the household's maximum spending in the first period increase if income in the second period increased to 60,000?

A)$6,000
B)$8,000
C)$10,000
D)$12,000

Answer 3

B

Question 4

In the two-period model, a higher real interest rate

A)increases the present value of income.
B)causes the budget constraint to rotate in a counterclockwise direction.
C)makes households that had initially planned to save better off.
D)makes households that had initially planned to borrow better off.

Question 5

General equilibrium is a situation in which all markets are in _____and all economic agents have made decisions____.

A)equilibrium; in their own best interests
B)shortage; in their own best interests
C)surplus; based on only partial information
D)equilibrium; based on only partial information

Question 6

In the two-period model, suppose a household's income in the first period is $30,000, income in the second period is $60,000, and the real interest rate is 30 percent.What is the household's maximum spending in the second period, if it decides to save the entire amount in the first period?

A)$40,000
B)$50,000
C)$80,000
D)$99,000

Question 7

A model that is based on the decisions of economic agents is known as

A)a rational-expectations model.
B)a decision-theoretic model.
C)a model with microeconomic foundations.
D)a fully compatible real business cycle model.

Question 8

Which of the following is an advantage of using dynamic models?

A)​They help us understand how people form expectations about future economic variables.
B)​They help us understand the consumption decision of economic agents at a given point in time.
C)​They help us understand the production decisions of firms at a given point in time.
D)​They help us understand the movements in the business cycle.

Question 9

The amount of goods and services that a household can consume, given its income, is represented ​by a(n)

A)​indifference curve.
B)​budget line.
C)​demand curve.
D)supply curve.

Question 10

A model that focuses on what is happening at just one point in time is known as

A)a dynamic model.
B)a static model.
C)a general-equilibrium model.
D)a partial-equilibrium model.

Question 11

In the two-period model, a decrease in income in period 2 causes the budget constraint to

A)shift to the left in a parallel fashion.
B)shift to the right in a parallel fashion.
C)rotate in a clockwise direction along the horizontal axis.
D)rotate in a counterclockwise direction along the vertical axis.

Question 12

A model in which actions that occur at one time affect what happens at other times is known as

A)a dynamic model.
B)a static model.
C)a general-equilibrium model.
D)a partial-equilibrium model.

Question 13

In the two-period model, suppose a household's income in period one is $30,000 and its income in period two is $40,000.Also assume that the household face the real interest rate of 25 percent.What is the present value of the
Household's income?​

A)​$62,000
B)​$46,000
C)​$20,000
D)​$30,000

Question 14

In the two-period model, suppose a household's income in the first period is $40,000, income in the second period is $50,000, and the real interest rate is 25 percent.A sudden shock leads to an increase in the household's income in the first period to $45,000 and a decrease in the household's income in the second period to $43,750.The household is _____in the new situation.

A)better off
B)worse off
C)equally well off
D)possibly better off and possibly worse off

Question 15

In the two-period model, a decrease in the real interest rate causes the budget constraint to

A)shift to the left in a parallel fashion.
B)shift to the right in a parallel fashion.
C)rotate in a clockwise direction.
D)rotate in a counterclockwise direction.

Question 16

In the two-period model, suppose a household's income in the first period is $40,000, income in the second period is $50,000, and the real interest rate is 25 percent.What is the maximum amount that the household would be able to spend in the first period?

A)$40,000
B)$50,000
C)$80,000
D)$100,000

Question 17

In the two-period model, an increase in the real interest rate causes the budget constraint to

A)shift to the left in a parallel fashion.
B)shift to the right in a parallel fashion.
C)rotate in a clockwise direction.
D)rotate in a counterclockwise direction.

Question 18

A situation in which all markets are in equilibrium and all economic agents have made decisions in their own best interest is called

A)general equilibrium.
B)the liquidity effect.
C)the real wealth effect.
D)dynamic equilibrium.

Question 19

In the two-period model, an increase in income in period 1 causes the budget constraint to

A)shift to the left in a parallel fashion.
B)shift to the right in a parallel fashion.
C)rotate in a clockwise direction along the horizontal axis.
D)rotate in a counterclockwise direction along the vertical axis.

Question 20

In the two-period model, a lower real interest rate

A)reduces the present value of income.
B)causes the budget constraint to rotate in a clockwise direction.
C)makes households that had initially planned to save better off.
D)makes households that had initially planned to borrow better off.

Question 21

A model that incorporates time and uncertainty in which prices, wages, and interest rates adjust to bring all markets to equilibrium and which allows economic agents to make decisions in their own interest is known as​

A)​A dynamic, stochastic, general­equilibrium model
B)​A structural macroeconomic model
C)​A business­cycle model
D)A statistical model

Question 22

DSGE models that contain households and firms that are identical are known as

A)heterogeneous-agent models.
B)homogeneous-agent models.
C)dynamic models.
D)multi-layered models.

Question 23

In RBC models, the government

A)is the main source of business cycles.
B)plays little role in the business cycle.
C)can affect the business cycle through predictable fiscal policy.
D)can affect the business cycle through predictable monetary policy.

Question 24

The view that a change in the timing of taxes does not affect people's consumption is known as the

A)tax equalization postulate.
B)fiscal policy equality law.
C)Lucas critique.
D)Ricardian equivalence proposition.

Question 25

Critics of RBC models argue that

A)they cannot be solved analytically.
B)are subject to measurement errors.
C)it is not possible to replicate the models.
D)the models are estimated imprecisely.

Question 26

An economy has 100 households.The ten rich households each have incomes of $50,000 in period 1 and $75,000 in period 2.The ninety poor households each have incomes of $20,000 in period 1 and $25,000 in period 2.Assume that the price of the good is $1 in both periods.Also assume that the households borrow from each other.Suppose that each household decides that its consumption in period 1 will equal 50 percent of the present value of its income from both periods.The equilibrium real interest rate is about

A)20 percent.
B)30 percent.
C)40 percent.
D)50 percent.

Question 27

An RBC researcher who picks a few key parameters based on long-run historical averages of the data is probably

A)calibrating a model.
B)using econometric analysis.
C)replicating a model.
D)solving a model analytically.

Question 28

Under which of the following situations can fiscal policy affect people's expectations​?

A)​If the interest rate on borrowing is higher than the interest rate on lending
B)​If the interest rate on lending is more than the interest rate on borrowing
C)​If the interest rate on borrowing and lending are the same
D)​If the interest rate on lending changes more than a change in the interest rate on borrowing

Question 29

Researchers who support the RBC model found out that an RBC model could account for as much as _____of the fluctuations in output growth.?

A)?70 percent
B)?60 percent
C)?50 percent
D)?75 percent

Question 30

Because RBC models are complicated, researchers generally

A)solve the models analytically.
B)use econometric analysis on the models.
C)replicate the models.
D)simulate the models.

Question 31

If people form their expectations using all the information available to them, they are said to have

A)informed expectations.
B)rational expectations.
C)irrational forecasts.
D)an information set.

Question 32

People's beliefs about future economic variables are known as

A)microeconomic foundations.
B)real interest rates.
C)expectations.
D)permutations.

Question 33

In a two-period model, assume that there are 20 households each with an income of $35,000 in period one and an income of $45,000 in period two.The equilibrium rate of interest faced by the household is 50 percent.The government decides to offer each household a tax rebate of $1,500 in period one.As a rational economic agent you know that the government will tax the households in period two, in order to repay its borrowing.With the interest rate unaffected by the government's action, the government will impose a tax of______ per household, in period two.

A)?$2,600
B)?$3,265
C)?$1,500
D)?$2,250

Question 34

In a real business cycle (RBC) model,

A)agents are heterogeneous.
B)agents do not have rational expectations.
C)economic growth and business cycles are explained by two different variables.
D)shocks to productivity are the sole source of the business cycle.

Question 35

Which of the following is true of real business­cycle models?​

A)According to real business-cycle models the demand shocks are responsible for the business cycles.
B)According to real business-cycle models government intervention is responsible for business cycles.
C)According to real business-cycle models fluctuations in total factor productivity are responsible for business cycles.
D)​According to real business­cycle models erratic monetary policies are responsible for business cycles.

Question 36

RBC models are said to reproduce some important relationships between variables over the U.S.business cycle. Identify one such relationship from the given options.​

A)​Output growth is closely related to growth in investment expenditure over the business cycle.
B)​Over the course of the business cycle, consumption spending on physical capital grow less than the investment spending on physical capital.
C)​Over the course of the business cycle, consumption spending on physical capital grow more than the investment spending on physical capital.
D)​Output growth is closely related to growth in labor hours over the business cycle.

Question 37

Economic research over the last 20 years suggests that expectations are best modeled as_____ variables?.

A)?dummy
B)?ordinal
C)?endogenous
D)?preference

Question 38

In the two-period model, suppose a household's income in the first period is $40,000, income in the second period is $50,000, and the real interest rate is 25 percent.The government proposes to give the household a tax rebate of $5,000 in the first period, but will tax the household an additional $5,000 × 1.25 = $6,250 in the second period.The household is _____under the government's tax rebate plan compared with before.

A)better off
B)worse off
C)equally well off
D)possibly better off and possibly worse off

Question 39

An economy has 100 households.The forty rich households each have incomes of $50,000 in period 1 and $75,000 in period 2.The sixty poor households each have incomes of $20,000 in period 1 and $25,000 in period 2.Assume that the price of the good is $1 in both periods.Also assume that the households borrow from each other.Suppose that each household decides that its consumption in period 1 will equal 50 percent of the present value of its income from both periods.The equilibrium real interest rate is about

A)20 percent.
B)30 percent.
C)40 percent.
D)50 percent.

Question 40

Which of the following is the third step in the procedure of conducting a research by researchers using a DSGE model?​

A)​To match up the model with economic data, using statistical techniques to calculate the size of shocks that occur.
B)​To pose the question to be answered.
C)​To simulate the model and compare statistical properties of the model with those of the data.
D)​To develop a model containing major elements needed to answer the question, and to analyze the decision that each economic agent must face.

Question 41

In a structural VAR, a restriction that describes the impact of the current-period value of one variable on the value of another variable in the distant future is known as a_____ restriction.

A)contemporaneous
B)long-run
C)short-run
D)structural

Question 42

What are the advantages and disadvantages of VAR models?

Question 43

In the two-period model, suppose a household's income in the first period is $30,000, income in the second period is $40,000, and the real interest rate is 20 percent.Draw a diagram showing the budget constraint.Now, suppose the real interest rate rises to 25 percent.Draw the new budget constraint.For the budget constraints you have drawn, be sure to show the values of the intercepts on each axis.Show your work.

Question 44

Describe the new neoclassical synthesis.

Question 45

DSGE models that contain many different types of households and firms are known as

A)heterogeneous-agent models.
B)homogeneous-agent models.
C)dynamic models.
D)multi-layered models.

Question 46

Which of the following is a criticism leveled against VAR models?

A)VAR models are based on classical rather than Keynesian economic theory.
B)Var models are not based on data.
C)VAR models are unable to isolate the effects of policy variables because those variables are not exogenous.
D)VAR models isolate the effects of policy variables because those variables are exogenous variables.

Question 47

In the two-period model, suppose a household's income in the first period is $40,000, income in the second period is $30,000, and the real interest rate is 25 percent.Draw a diagram showing the budget constraint.Now, suppose the real interest rate rises to 30 percent.Draw the new budget constraint.For the budget constraints you have drawn, be sure to show the values of the intercepts on each axis.If the household decides that its consumption in period 1 should always equal its consumption in period 2, determine whether the household is worse off or better off because of the decline in the real interest rate.Show your work.

Question 48

A statistical model that assumes that the value of a variable at any date depends on its own past values, plus the past values of other variables, plus an error term is known as a

A)vector autoregression (VAR) model.
B)univariate time-series model.
C)structural VAR model.
D)structural equilibrium model.

Question 49

Describe the general procedures followed by DSGE researchers creating a new model.

Question 50

Can VARs be used to analyze the effects of monetary policy?

Question 51

A disadvantage of univariate time-series models and VARs is

A)they cannot be used easily to analyze the effects of monetary policy.
B)they are based on classical, rather than Keynesian, economic theory.
C)they provide poor forecasts.
D)they are not based on data.

Question 52

A simple statistical model that assumes that the value of a variable at any date depends just on its own past values plus an error term is known as a

A)vector autoregression (VAR) model.
B)univariate time-series model.
C)structural VAR model.
D)structural equilibrium model.

Question 53

An economy has fifty households, all of which have incomes of $25,000 each in period 2.The twenty-five poor households have incomes of $10,000 each in period 1, while the twenty-five rich households have incomes of $20,000 each in period 1.Assume that the price of the good is $1 in both periods.Suppose that each household decides that its consumption in period 1 will equal 50 percent of the present value of its income from both periods.
a.Calculate the present value of income for poor households as a function of the interest rate.
Calculate the amount that poor households will spend on consumption, as a function of the interest rate.Calculate the amount that poor households will save as a function of the real interest rate.Show your work.

b.Calculate the present value of income for rich households as a function of the interest rate.
Calculate the amount that rich households will spend on consumption, as a function of the interest rate.Calculate the amount that rich households will save as a function of the real interest rate.Show your work.

c.Given the equations you calculated for savings for each type of household and assuming that the households borrow from each other, find the equilibrium value of the interest rate.Show your work.

Question 54

In the two-period model, suppose a household's income in the first period is $50,000, income in the second period is $60,000, and the real interest rate is 25 percent.Draw a diagram showing the budget constraint.Now, suppose the real interest rate declines to 20 percent.Draw the new budget constraint.For the budget constraints you have drawn, be sure to show the values of the intercepts on each axis.If the household decides that its consumption in period 1 should always be one half of the present value of income, determine whether the household is worse off or better off because of the decline in the real interest rate.Show your work.

Question 55

In a structural VAR, a restriction that describes the impact of the current-period value of one variable on the current-period value of another variable is known as a restriction.

A)contemporaneous
B)long-run
C)short-run
D)structural

Question 56

In the two-period model, suppose a household's income in the first period is $60,000, income in the second period is $100,000, and the real interest rate is 50 percent.Draw a diagram showing the budget constraint.Now, suppose the household's income in the second period increased to $120,000.Draw the new budget constraint.For the budget constraints you have drawn, be sure to show the values of the intercepts on each axis.Show your work.