Question 1

In real business cycle theory, _______ are the main source of economic fluctuations.

Accepted Answer

Real business cycle theory asserts that random fluctuations in productivity are the primary source of economic fluctuations. This theory suggests that business cycles are the result of technology shocks, changes in production efficiency or other productivity-related factors.

Question 2

Which of the following would cause the aggregate demand curve to keep shifting rightward year after year?

Accepted Answer

A persistent increase in the quantity of money would cause an increase in spending and aggregate demand over time, leading to a rightward shift of the aggregate demand curve. Inflation (A) and excess wage demands (B) would not cause a continuous rightward shift, as they would eventually lead to a decrease in aggregate demand. A one-time increase in government expenditures (C) or a one-time tax cut (D) would only have a temporary effect on aggregate demand.

Question 3

Real business cycle theorists believe that the intertemporal substitution effect _______.Many other economists believe that the intertemporal substitution effect _______.

Accepted Answer

Real business cycle theorists believe that the intertemporal substitution effect is large, meaning that changes in interest rates and other economic factors lead to changes in consumption and production decisions over time. Many other economists, however, believe that the intertemporal substitution effect is negligible, meaning that people do not significantly alter their behavior in response to changes in interest rates or other economic factors.

Question 4

According to real business cycle theory, an increase in productivity _______ the demand for loanable funds, _______ the demand for labour, and _______  the supply of labour.The real interest rate will _______.

Accepted Answer

According to real business cycle theory, an increase in productivity will increase the demand for loanable funds as firms invest in more productive projects. This will also increase the demand for labor as firms hire more workers to produce more output. As the demand for labor increases, workers may also choose to supply more labor in order to take advantage of higher wages. This increase in labor supply may partially offset the increase in wages due to the higher demand, leading to a smaller increase in wages than would occur in a simple supply and demand model. Therefore, the supply of labor may increase somewhat, but not as much as the demand for labor. Finally, as the demand for loanable funds increases, the real interest rate will rise as the market equilibrates supply and demand.

Question 5

According to real business cycle theory, if the Bank of Canada increases the quantity of money when real GDP decreases, real GDP

Accepted Answer

Real business cycle theory suggests that changes in the money supply do not affect real variables like real GDP in the long run. Instead, such changes primarily affect nominal variables like the price level. Therefore, if the Bank of Canada increases the quantity of money, it would not affect real GDP according to this theory, but it would lead to an increase in the price level due to inflation.

Question 6

According to real business cycle theory, workers' decisions to work now versus later depend on

Accepted Answer

Real business cycle theory suggests that workers' decisions are influenced by the real interest rate, as it affects the opportunity cost of working today versus saving and working later. As the real interest rate increases, the opportunity cost of working today becomes higher, which may lead workers to choose to save and work later instead.

Question 7

Suppose that the business cycle in Canada is best described by RBC theory.An advance in technology increases productivity.The when- to- work decision depends on the real interest rate.The _______ the real interest rate, other things remaining the same, the _______ is the supply of labour today.RBC theorists believe the when- to- work effect is _______.

Accepted Answer

The answer of Suppose that the business cycle in Canada...

Question 8

Which one of the following can start a demand- pull inflation?

Accepted Answer

A cut in the interest rate can stimulate borrowing and spending, increasing demand for goods and services, which can lead to demand-pull inflation.

Question 9

According to the real business cycle theory, during a recession the demand for labour _______ and the supply of labour _______.

Accepted Answer

During a recession, the demand for labor decreases as businesses reduce production, and the supply of labor increases as workers are laid off.

Question 10

Suppose that a severe shock that decreases the demand for loanable funds hits Canada.Which of the following can we expect to occur according to real business cycle theory?

Accepted Answer

According to real business cycle theory, a decrease in the demand for loanable funds can lead to a decrease in investment, which in turn can cause a decrease in productivity and economic output. This can lead to people working fewer hours (A) as businesses cut back on production. The real wage rate may fall (B) due to decreased demand for labor. The premise of the question already states that the demand for loanable funds will decrease (C), which is a direct effect of the shock. Finally, with decreased demand for loanable funds, the real interest rate is likely to fall (D) as there is less competition for borrowing money. Therefore, all of the statements (A, B, C, D) are expected outcomes according to real business cycle theory, making E correct.

Question 11

According to mainstream business cycle theory, _______ grows at a steady rate and _______ grows at a fluctuating rate.

Accepted Answer

Potential GDP grows at a steady rate, reflecting the economy's capacity to produce goods and services over the long term, while aggregate demand grows at a fluctuating rate, influenced by various factors such as consumer confidence, government spending, and monetary policy, leading to the cyclical nature of the economy.

Question 12

In real business cycle theory, the supply of labour

Accepted Answer

In real business cycle theory, the supply of labour decreases when the real interest rate falls. This is because lower interest rates make it more attractive for individuals to save and accumulate capital, reducing the supply of labour available for production.

Question 13

At full employment, an increase in the quantity of money ceteris paribus) can start

Accepted Answer

At full employment, an increase in the quantity of money would lead to an increase in aggregate demand. This, in turn, can lead to demand-pull inflation, where increased demand for goods and services push up their prices. Similarly, an increase in government expenditure can also increase aggregate demand and lead to demand-pull inflation. Cost-push inflation arises due to an increase in production costs, such as wages or raw materials, and a rise in prices to maintain profit margins. An increase in government expenditure, by itself, cannot lead to cost-push inflation.

Question 14

Suppose that in response to a decrease in real interest rates, a person decides to reduce his supply of labour today and increase it in the future.This behaviour is most consistent with the

Accepted Answer

In real business cycle theory, changes in real interest rates are seen as primarily driven by changes in productivity, which can cause people to change their labor supply decisions. Specifically, a decrease in real interest rates could signal an increase in expected future income, encouraging someone to reduce their labor supply today and increase it in the future when their wages are higher. This behavior is consistent with the idea of intertemporal substitution in labor supply, which is a key component of real business cycle theory.

Question 15

Stagflation occurs when the economy experiences both a

Accepted Answer

Stagflation is a situation where an economy experiences a combination of rising price levels and decreasing real GDP. It is characterized by high unemployment, high inflation, low economic growth, and low productivity. Option A is not correct because stagflation is not directly related to the performance of exports and imports. Option C is incorrect because falling price levels and decreasing real GDP refer to deflation and recession, respectively, not stagflation. Option D is not correct because stagflation cannot occur with falling price levels and increasing real GDP. Option E is also incorrect because stagflation occurs with rising price levels and decreasing real GDP, not rising price levels and increasing real GDP.

Question 16

Suppose the economy is in long- run equilibrium when the price of oil rises.Which one of the following is not a short- run effect of this situation?

Accepted Answer

An increase in the price level (A), a decrease in short-run aggregate supply (C), and a decrease in consumer spending (E) are all possible short-run effects of a rise in the price of oil. An increase in unemployment (B) could also occur in the short run as firms face higher input costs and reduce production. However, an increase in real GDP above long-run real GDP (D) is not a short-run effect, as it implies that the economy has moved beyond its potential output level, which is not sustainable in the long run.

Question 17

According to real business cycle theory, a fall in the real interest rate _______ the supply of labour and _______ employment.

Accepted Answer

The answer of According to real business cycle theory, a...

Question 18

Inflation that starts because aggregate demand increases is called

Accepted Answer

Demand-pull inflation occurs when there is an increase in aggregate demand, meaning that consumers are demanding more goods and services than the economy can supply. As a result, prices of goods and services rise to meet the demand.

Question 19

Demand- pull inflation can start when

Accepted Answer

Demand-pull inflation occurs when aggregate demand increases, leading to an increase in prices due to a shortage of goods and services. This is typically caused by an increase in consumer and business confidence, a decrease in taxes, or an increase in government spending. Input costs rising, aggregate supply decreasing, unemployment being above the natural rate, and incorrect inflation forecasts may all contribute to inflation, but they do not necessarily start demand-pull inflation.

Question 20

In real business cycle theory, the supply of labour

Accepted Answer

In real business cycle theory, the supply of labor increases if the real interest rate rises because higher real interest rates increase the opportunity cost of leisure, making individuals more inclined to work.

Quiz 12: The Business Cycle, Inflation, and Deflation

In real business cycle theory, _______ are the main source of economic fluctuations.

Which of the following would cause the aggregate demand curve to keep shifting rightward year after year?

Real business cycle theorists believe that the intertemporal substitution effect _.Many other economists believe that the intertemporal substitution effect _.

According to real business cycle theory, an increase in productivity ___ the demand for loanable funds, _ the demand for labour, and _ the supply of labour.The real interest rate will ___.

According to real business cycle theory, if the Bank of Canada increases the quantity of money when real GDP decreases, real GDP

According to real business cycle theory, workers' decisions to work now versus later depend on

Which one of the following can start a demand- pull inflation?

According to the real business cycle theory, during a recession the demand for labour _ and the supply of labour _.

Suppose that a severe shock that decreases the demand for loanable funds hits Canada.Which of the following can we expect to occur according to real business cycle theory?

According to mainstream business cycle theory, _ grows at a steady rate and _ grows at a fluctuating rate.

In real business cycle theory, the supply of labour

At full employment, an increase in the quantity of money ceteris paribus) can start

Suppose that in response to a decrease in real interest rates, a person decides to reduce his supply of labour today and increase it in the future.This behaviour is most consistent with the

Stagflation occurs when the economy experiences both a

Suppose the economy is in long- run equilibrium when the price of oil rises.Which one of the following is not a short- run effect of this situation?

According to real business cycle theory, a fall in the real interest rate _ the supply of labour and _ employment.

Inflation that starts because aggregate demand increases is called

Demand- pull inflation can start when

In real business cycle theory, the supply of labour