Quiz 12: Real Business Cycles and New Keynesian Economics


A representative agent means that all individuals are exactly the same so that determining macroeconomic behavior is as simple as adding up the behavior of individuals.Obviously,this makes macroeconomic analysis much simpler.However,this prohibits the discussion of the distributional effects of economic occurrences.

Real Business Cycle models would explain the Great Depression as caused by a large,negative,and persistent productivity shock.One problem with this analysis is that it is very difficult to identify exactly what this shock could be.Another problem is that the Great Depression was characterized by excess supply,not a fall in supply,as evidenced by the falling price level throughout the Great Depression.

These developments are likely to increase the costs of labor turnover and increase the benefits of hiring people with special skills.In an efficiency wage model,this should increase efficiency wages and increase equilibrium unemployment.