Homework answers / question archive / 1)What main feature of the classical IS-LM model distinguishes it from the Keynesian IS-LM model? Why is the distinction of practical importance?       What are the two main components of any theory of the business cycle? Describe these two components for the real business cycle theory

1)What main feature of the classical IS-LM model distinguishes it from the Keynesian IS-LM model? Why is the distinction of practical importance?       What are the two main components of any theory of the business cycle? Describe these two components for the real business cycle theory

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1)What main feature of the classical IS-LM model distinguishes it from the Keynesian IS-LM model? Why is the distinction of practical importance?

 

 

 

2. What are the two main components of any theory of the business cycle? Describe these two components for the real business cycle theory.

 

3. Define real shock and nominal shock. Give an example of each. What type of real shock do real business cycle economists consider the most important source of cyclical fluctuations?

 

4. What major business cycle facts does the RBC theory explain successfully? Does it explain any business cycle facts less well?

 

5. What is the Solow residual and how does it behave over the business cycle? What factors cause the Solow residual to change?

 

 

 

 

6. What effects does a temporary increase in government purchases have on the labor market, according to the classical theory? What effects does it have on output, the real interest rate, and the price level? According to classical economists, should fiscal policy be used to smooth out the business cycle? Why or why not?

 

7. According to the misperceptions theory, what effect does an increase in the price level have on the amount of output supplied by producers? Explain. Does it matter whether the increase in the price level was expected?

 

8. Define rational expectations. According to the classical model, what implications do rational expectations have for the ability of the central bank to use monetary policy to smooth business cycles?

                 

Chapter 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity C11: Review

1. Define efficiency wage. What assumption about worker behavior underlies the efficiency wage theory? Why does it predict that the real wage will remain rigid even if there is an excess supply of labor?

 

2. What is price stickiness? Why do Keynesians believe that allowing for price stickiness in macroeconomic analysis is important?

 

3. What does the Keynesian model predict about monetary neutrality (both in the short run and in the long run)? Compare the Keynesian predictions about neutrality with those of the basic classical model and the extended classical model with misperceptions.

                                                                                                                                           

4. In the Keynesian model, how do increased government purchases affect output and the real interest rate in the short run? In the long run? How do increased government purchases affect the composition of output in the long run?

                 

 

5. Describe three alternative responses available to policymakers when the economy is in recession. What are the advantages and disadvantages of each strategy? Be sure to discuss the effects on employment, the price level, and the composition of output. What are some of the practical difficulties in using macroeconomic stabilization policies to fight recessions?

 

6. According to the Keynesian analysis, in what two ways does an adverse supply shock reduce output? What problems do supply shocks create for Keynesian stabilization policies?