Question 1

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

Accepted Answer

A dynamic, stochastic, general-equilibrium model incorporates time and uncertainty while allowing for economic agents to make decisions in their own interest. It also takes into account the interdependence of all markets and the adjustments of prices, wages, and interest rates to bring about equilibrium. This type of model is commonly used in macroeconomic analysis and forecasting.

Question 2

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.

Accepted Answer

DSGE models that contain identical households and firms are known as homogeneous-agent models. Heterogeneous-agent models involve multiple household and/or firm types with different characteristics and behaviors. Dynamic models refer to any model that incorporates intertemporal dynamics, which is a key feature of DSGE models. Multi-layered models refer to models with multiple levels of analysis or complexity, which may or may not be DSGE models.

Question 3

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.

Accepted Answer

In Real Business Cycle (RBC) models, the government is typically considered to play a minimal role in the business cycle. These models emphasize real (rather than monetary) shocks and technological changes as the primary drivers of economic fluctuations.

Question 4

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.

Accepted Answer

The view that a change in the timing of taxes does not affect people's consumption is known as the Ricardian equivalence proposition. This proposition states that a government's decision to finance its spending through taxes or debt issuance should not affect people's behavior because they understand that the government will eventually have to pay back its debt by raising taxes or reducing spending in the future. Therefore, they save more in anticipation of this future tax increase, offsetting any temporary increase in disposable income resulting from a tax cut.

Question 5

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.

Accepted Answer

Critics argue that RBC models are subject to measurement errors, particularly in the context of measuring technology shocks, which are central to these models.

Question 6

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.

Accepted Answer

The answer of An economy has 100 households.The ten rich...

Question 7

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.

Accepted Answer

Calibrating a model involves choosing parameters that are consistent with long-run averages or other empirical realities, so the researcher described in the question is most likely calibrating a model. The other answer choices are not as fitting: using econometric analysis would involve more rigorous statistical techniques to estimate relationships between variables, replicating a model would involve recreating an existing model from scratch, and solving a model analytically would involve deriving equations that describe the model's behavior mathematically.

Question 8

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

Accepted Answer

The answer of Under which of the following situations can...

Question 9

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

Accepted Answer

Researchers who support the Real Business Cycle (RBC) model have found that it could account for as much as 70 percent of the fluctuations in output growth. This highlights the model's ability to explain a significant portion of economic variability through productivity shocks and other real factors, without relying on monetary or demand-side explanations.

Question 10

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.

Accepted Answer

RBC models are usually solved numerically through simulation since the models involve dynamic stochastic optimization problems that are too complex to solve analytically.

Question 11

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.

Accepted Answer

Rational expectations theory holds that people form their expectations using all available information, including current and past economic conditions, policy changes, and market trends. This is different from uninformed or irrational expectations, which may be based on incomplete or outdated information or subjective biases. Rational expectations play an important role in macroeconomic models and policy decisions, as they can help predict how individuals and markets will respond to changes in economic conditions or government policies.

Question 12

People's beliefs about future economic variables are known as
A)microeconomic foundations.
B)real interest rates.
C)expectations.
D)permutations.

Accepted Answer

People's beliefs about future economic variables are commonly referred to as expectations.

Question 13

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

Accepted Answer

The answer of In a two-period model, assume that there...

Question 14

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.

Accepted Answer

In real business cycle (RBC) models, the primary assumption is that fluctuations in the business cycle are mainly due to exogenous shocks to productivity. These models assume that agents have rational expectations and are typically homogeneous, and they use a single framework to explain both economic growth and business cycles, contrasting with the notion that different variables explain these phenomena.

Question 15

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.

Accepted Answer

Real business-cycle models attribute business cycles to fluctuations in total factor productivity, which refers to changes in the efficiency and effectiveness of inputs used in the production process. This can include changes in technology, natural resources, and human capital. Demand shocks, government intervention, and erratic monetary policies are not emphasized in this model.

Question 16

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.

Accepted Answer

RBC models typically suggest that output growth is closely related to growth in labor hours over the business cycle. This is because changes in labor input are often the primary driver of changes in output levels. The other options are not consistent with typical RBC model predictions.

Question 17

Economic research over the last 20 years suggests that expectations are best modeled as_____ variables?.
A)?dummy
B)?ordinal
C)?endogenous
D)?preference

Accepted Answer

Economic research has shown that expectations cannot be treated as exogenous or independent variables. Instead, they are endogenous, which means they are affected by the same factors that determine other economic variables. Therefore, it is important to model expectations as endogenous variables in economic analysis.

Question 18

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

Accepted Answer

The household is equally well off because the present value of the tax rebate in the first period is exactly offset by the present value of the higher tax in the second period, given the real interest rate.

Question 19

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.

Accepted Answer

In period 1, the 40 rich households have a total income of $2 million and the 60 poor households have a total income of $1.2 million. Each household decides to consume 50 percent of the present value of its income, which is equal to the income in period 1 plus half of the income in period 2 (because the discount rate is 50 percent).

So, the total consumption in period 1 is $1.2 million (from the poor households) plus $1.5 million (from the rich households who consume $37,500 each) for a total of $2.7 million.

Total output in period 1 is $1.6 million (since there are 100 households consuming $16,000 each), so there is excess demand for the good. The interest rate will need to rise to encourage some households to postpone consumption to period 2, which will increase the supply of the good in period 1.

In equilibrium, the interest rate will be such that the present value of the total consumption in both periods equals the total income in both periods. The present value of the consumption in period 1 is $2.7 million, and the present value of the consumption in period 2 is $1.5 million (from the rich households) plus $0.6 million (from the poor households who consume $10,000 each) for a total of $2.1 million. The total present value of consumption is $4.8 million.

The total present value of income is $3 million (from the rich households who earn $125,000 each) plus $1.44 million (from the poor households who earn $22,500 each) for a total of $4.44 million.

Therefore, the equilibrium real interest rate is (4.8/4.44-1) = 40%.

Question 20

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.

Accepted Answer

The third step in conducting research using a DSGE model is to match up the model with economic data, using statistical techniques to calculate the size of shocks that occur.

Quiz 13: Modern Macroeconomic Models

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

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

In RBC models, the government

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

Critics of RBC models argue that

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

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

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

Because RBC models are complicated, researchers generally

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

People's beliefs about future economic variables are known as

In a real business cycle (RBC) model,

Which of the following is true of real businesscycle models?

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.

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

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