Chapter 8 - An Equilibrium Business-Cycle Model

Name:

True/False
Indicate whether the statement is true or false.

Intertemporal substitution effects are substitution effects over time.

When the marginal product of labor increases due to a positive technology change, the real wage falls.

The model predicts that in response to a permanent positive change in technology real consumption will be procyclical.

An increase in the interest rate makes future consumption cheaper and future leisure more expensive.

The income effect on labor supply is positive.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

The cyclical part of real GDP is

a.	trend real GDP less real GDP.
b.	real GDP less trend real GDP.
c.	real GDP/trend real GDP.
d.	trend real GDP/real GDP.

Real GDP equals:

a.	trend real GDP plus the cyclical part of GDP
b.	trend real GDP times the cyclical part of GDP.
c.	trend real GDP less the cyclical part of GDP.
d.	trend real GDP divided by the cyclical part of GDP.

An equilibrium business-cycle model:

a.	uses shocks to GDP to find equilibrium conditions.
b.	uses GDP to find equilibrium shocks to the economy.
c.	uses equilibrium conditions to determine how shocks affect real GDP and other macroeconomic variables. .
d.	uses GDP to find equilibrium conditions.

An increase in the level of technology, A, causes:

a.	an increase in the MPL
b.	a decrease in the MPL
c.	a movement along the MPL hiring more labor
d.	a movement along the MPL hiring less labor

10.

The model predicts that an economic expansion caused by an increase in technology, A, will:

a.	drive down the real wage.
b.	cause labor supply to be greater than labor demand.
c.	drive up the real wage.
d.	lead to a relatively low real wage.

11.

The model predicts that in a recession caused by an decrease in technology, A, we would observe:

a.	a relatively low real wage.
b.	an excess demand for labor.
c.	a relatively high real wage.
d.	an increase in the MPL.

12.

If technology, A, increases, then:

a.	the MPK and the demand for capital services increase.
b.	the MPK and the demand for capital services decrease.
c.	the MPK increases and the demand for capital services decreases.
d.	the MPK decreases and the demand for capital services increases.

13.

The model predicts that if there is a technology, A, shock, the real rental price of capital will:

a.	be relatively high during an economic expansion or a recession.
b.	be relatively low during an economic expansion or a recession.
c.	be relatively high during an economic expansion and relatively low during a recession.
d.	be relatively low during an economic expansion and relatively high during a recession.

14.

The model predicts that if there is a technology, A, shock, the interest rate, i, will be:

a.	relatively high during an economic expansion or a recession.
b.	relatively low during an economic expansion or a recession.
c.	relatively high during an economic expansion and relatively low during a recession.
d.	relatively low during an economic expansion and relatively high during a recession.

15.

During an economic expansion due to an increase in technology, A, consumption will:

a.	tend to rise due to the income effect.
b.	may rise or fall depending on whether the income effect is greater than the substitution effect or not.
c.	tend to fall due to the intertemporal substitution effect of the interest rate rising.
d.	all of the above.

16.

During an economic expansion due to an increase in technology, A, consumption will:

a.	tend to fall due to the income effect.
b.	may rise or fall depending on whether the income effect is greater than the substitution effect or not.
c.	tend to rise due to the intertemporal substitution effect of the interest rate rising.
d.	all of the above.

17.

During an economic expansion due to an increase in technology, A, consumption will:

a.	tend to rise due to the income effect.
b.	be unchanged.
c.	tend to rise due to the intertemporal substitution effect of the interest rate rising.
d.	tend to fluctuate.

18.

During an economic expansion due to an increase in technology, A, consumption will:

a.	tend to fall due to the income effect.
b.	be unchanged.
c.	tend to fall due to the intertemporal substitution effect of the interest rate rising.
d.	tend to fluctuate.

19.

If technology, A, increases permanently then we would expect:

a.	consumption to decrease as the substitution effect would be greater than the income effect of the change.
b.	consumption to increase as the income effect would be greater than the substitution effect of the change.
c.	consumption to increase as the substitution effect would be greater than the income effect of the change.
d.	consumption to decrease as the income effect would be greater than the substitution effect of the change.

20.

If there is a permanent increase in technology, A, then we expect consumption to:

a.	increase by more than real GDP.
b.	increase by the same amount as real GDP.
c.	increase but by less than real GDP.
d.	be unchanged.

21.

If there were a permanent increase in technology, A, we would expect real saving to:

a.	increase as the increase in real consumption is less than real GDP.
b.	increase as the increase in real consumption is more than real GDP.
c.	decrease as the increase in real consumption is more than real GDP.
d.	decrease as the increase in real consumption is less than real GDP.

22.

A variable that moves in the same direction as real GDP is known as:

a.	acyclical.
b.	procyclical.
c.	countercyclical.
d.	exogenous.

23.

A variable that has little tendency to move during a business cycle is known as:

a.	acyclical.
b.	procyclical.
c.	countercyclical.
d.	exogenous.

24.

A variable that moves in the opposite direction as real GDP is known as:

a.	acyclical.
b.	procyclical.
c.	countercyclical.
d.	exogenous.

25.

An acyclical variable is one that:

a.	moves the same direction as real GDP.
b.	has little tendency to move during a business cycle.
c.	moves the opposite direction as real GDP.
d.	determined outside the model.

26.

An procyclical variable is one that:

a.	moves the same direction as real GDP.
b.	has little tendency to move during a business cycle.
c.	moves the opposite direction as real GDP.
d.	determined outside the model.

27.

An countercyclical variable is one that:

a.	moves the same direction as real GDP.
b.	has little tendency to move during a business cycle.
c.	moves the opposite direction as real GDP.
d.	determined outside the model.

28.

US real consumer expenditure since 1954 has been:

a.	procyclical.
b.	countercyclical.
c.	a cyclical.
d.	exogenous.

29.

US real gross domestic private investment since 1954 has been:

a.	procyclical.
b.	countercyclical.
c.	a cyclical.
d.	exogenous.

30.

Since 1954, in the US:

a.	real gross private investment has varied more than real GDP, while real consumer expenditure has varied less than real GDP.
b.	real gross private investment and real consumer expenditure have varied more than real GDP.
c.	real gross private investment has varied less than real GDP, while real consumer expenditure has varied more than real GDP.
d.	real gross private investment and real consumer expenditure have varied less than real GDP.

31.

US real average earnings of production workers since 1954 has been:

a.	procyclical.
b.	countercyclical.
c.	a cyclical.
d.	exogenous.

32.

US real rental price of capital since 1954 has been:

a.	procyclical as the model predicts.
b.	countercyclical as the model predicts.
c.	procyclical rather countercyclical as the model predicts.
d.	countercyclical rather procyclical as the model predicts.

33.

An example of a temporary change in technology would be:

a.	a new discovery.
b.	a new invention.
c.	a harvest failure.
d.	all of the above.

34.

An example of a temporary change in technology would be:

a.	a new discovery.
b.	a general strike.
c.	a new invention.
d.	all of the above.

35.

With a temporary change in technology the model predicts:

a.	the interest rate will be procyclical.
b.	a lower interest rate will motivate households to increase current real consumption.
c.	a higher interest rate will motivate households to increase current real saving.
d.	all of the above.

36.

With a temporary change in technology the model predicts:

a.	the interest rate will be procyclical.
b.	a lower interest rate will motivate households to decrease current real consumption.
c.	a higher interest rate will motivate households to decrease current real saving.
d.	all of the above.

37.

With a temporary change in technology, we would expect:

a.	the income effect of consumption to be larger.
b.	the income effect of consumption to be smaller.
c.	the intertemporal substitution effect on consumption to be larger.
d.	the intertemporal substitution effect on consumption to be larger.

38.

With a temporary positive change in technology we would expect real current consumption:

a.	to increase a lot.
b.	to decrease a lot.
c.	to remain unchanged.
d.	to either increase or decrease a little.

39.

With a temporary change in technology, A, we expect little change in consumption because:

a.	the income effect on consumption is larger.
b.	the income effect on consumption is smaller.
c.	the intertemporal-substitution effect is larger.
d.	the intertemporal-substitution effect is smaller.

40.

The model predicts that an economic expansion caused by a temporary increase in technology, A, would lead to:

a.	high real GDP and investment.
b.	low real GDP and high real investment.
c.	low real GDP and investment.
d.	high real GDP and low real investment.

41.

Temporary changes in technology, A, conflict with the data in that:

a.	investment is clearly acyclical.
b.	consumption is clearly procyclical.
c.	the wage rate is clearly countercyclical.
d.	all of the above.

42.

A higher real wage:

a.	makes consumption more expensive.
b.	makes it a worse deal for households to work an extra hour.
c.	makes leisure less expensive.
d.	makes leisure more expensive.

43.

A higher real wage:

a.	increases the income of households inducing them to work more.
b.	decreases the income of households inducing them to work more.
c.	increases the income of households inducing them to work less.
d.	decreases the income of households inducing them to work less.

44.

The overall effect of a higher real wage is:

a.	to increase labor as the income and substitution effect reinforce each other.
b.	ambiguous on labor as the income and substitution effect work against each other.
c.	to decrease labor as the income and substitution effect reinforce each other.
d.	ambiguous because the income and substitution effect reinforce each other.

45.

We expect that an increase in real wages will:

a.	increase labor supply, if temporary.
b.	increase labor supply, if permanent.
c.	increase labor supply, whether permanent or temporary.
d.	reduce labor supply, whether permanent or temporary.

46.

An increase in the interest rate induces worker to:

a.	work more in the current period and less in the future.
b.	work more in the current period and in the future.
c.	work less in the current period and more in the future
d.	work less in the current period and in the future.

47.

A higher interest rate makes:

a.	future consumption cheaper.
b.	future leisure cheaper.
c.	current consumption more expensive.
d.	all of the above.

48.

A higher interest rate makes:

a.	future consumption and leisure more expensive.
b.	future consumption cheaper and future leisure more expensive.
c.	future consumption and leisure cheaper.
d.	future consumption more expensive and future leisure cheaper.

49.

A higher interest rate makes:

a.	current consumption and leisure more expensive.
b.	current consumption cheaper and current. leisure more expensive.
c.	current consumption and leisure cheaper.
d.	current consumption more expensive and current leisure cheaper.

50.

A higher interest rate makes:

a.	current consumption and future leisure more expensive.
b.	current consumption cheaper and future. leisure more expensive.
c.	current consumption and future leisure cheaper.
d.	current consumption more expensive and future leisure cheaper.

51.

Intertemporal substitution effects motivate households to:

a.	supply more labor when the wage rate is temporarily low.
b.	supply more labor when the wage rate is permanently low.
c.	supply less labor when the wage rate is temporarily low.
d.	supply more labor when the wage rate is permanently low.

52.

In the US since 1964 total hours worked and employment have been:

a.	acyclical.
b.	countercyclical.
c.	procyclical.
d.	exogenous.

53.

The measure of labor productivity used in the popular media is:

a.	Y/L.
b.	average product of labor.
c.	procyclical.
d.	all of the above.

54.

In the model with an upward sloping supply curve of labor and increase demand for labor due to a positive technological, A, change:

a.	increases employment and the real wage.
b.	decreases employment and increases the real wage.
c.	decreases employment and the real wage.
d.	decreases employment and increases the real wage.

55.

When the labor supply of households is allowed to slope upward:

a.	the model predictions match the observed data that employment and real wages are countercyclical.
b.	the model predictions do not match the observed data that employment and real wages are countercyclical.
c.	the model predictions do not match the observed data that employment and real wages are procyclical.
d.	the model predictions match the observed data that employment and real wages are procyclical.

Short Answer

56.

If there is a positive technological change, what happens in the labor market?

57.

What does the model predict about investment when technology increases and why and what do the data show about investment in the US?

58.

What happens to consumption when there is a permanent and temporary increase in technology, A, and why?

59.

What is the relationship between real GDP and the cyclical part of GDP?

60.

What happens in the model, if a temporary technology change increase real wages temporarily?