In the Smets-Wouters DSGE model, a negative TFP shock will cause real GDP to ________
By ________.
A) fall; more than the decline in the shock
B) rise; more than predicted by empirical models
C) not change; Okun's law
D) fall; less than consumption
E) fall; the same as the decline in inflation

Question

Quizplus · Accepted Answer

According to the Smets-Wouters DSGE model, a negative TFP (total factor productivity) shock will cause real GDP to fall, and the magnitude of the decline will be greater than the actual size of the shock. This is because the model incorporates various frictions and adjustment costs that amplify the impact of shocks on the economy.

In the Smets-Wouters DSGE Model, a Negative TFP Shock Will