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?

 

8. 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?

 

10. 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?

C10: Numerical

2. An economy is described as follows.

Desired consumption	?? = 600 + 0.5(? − ?) − 50?
Desired Investment	?? = 450 − 50?
Real money demand	? = 0.5? − 100?

                           Full-employment output                ?? = 2,210

 

 

                          Expected inflation                          ?^? = 0.05

 

 

 

 

C10: Analytical

1. The discovery of a new technology increases the expected future marginal product of capital.

                 

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?

 

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

 

4. 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.

 

5. 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?

                 

 

6. 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?

 

7. 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?

                 

C11: Numerical

1. A firm identifies the following relationship between the real wage it pays and the effort exerted by its workers:

 

Real Wage	8	10	12	14	16	18
Effort	7	10	15	17	19	20
E/w	0.875	1.00	1.25	1.21	1.19	1.11

The above table now includes the effort per unit of real wages (E/w).

 

2. An economy is described by the following equations:

 

Desired Consumption	?? = 130 + 0.5(? − ?) − 500?
Desired Investment	?? = 100 − 500?
Government Purchases	? = 100
Taxes	? = 100
Real Money Demand	? = 0.5? = 1,000?
Money Supply	? = 1,320
Full-Employment Output	?? = 500

 

                                                     

C11: Analytical

1. According to the Keynesian IS-LM model, what is the effect of each of the following on output, the real interest rate, employment, and the price level? Distinguish between the short run and the long run.

In Figures 11.15 and 11.16, point A is the starting point, point B shows the short-run equilibrium after the change, and point C shows the long-run equilibrium after the change.

                 

3. Suppose that the Fed has a policy of increasing the money supply when it observes that the economy is in recession. However, suppose that about six months are needed for an increase in the money supply to affect aggregate demand, which is about the same amount of time needed for firms to review and reset their prices. What effects will the Fed’s policy have on output and price stability? Does your answer change if (a) the Fed has some ability to forecast recessions or (b) price adjustment takes longer than six months?