Question

7. We have discussed two models that describe the relationship between inflation and economic growth. Which of the following is a property of the New Keynesian Model but NOT the Real Business Cycle (RBC) Model?
   1. Monetary policy has no effect on long run economic growth
   2. Recessions can be caused by a fall in aggregate demand.
   3. Prices are fully flexible in both the short and long run.
   4. All the above are properties of the RBC model.
   5. None of the above are properties of the New Keynesian model.

8. Consider both/either model of inflation and economic growth. In the long run, lower rates of money supply growth result in:
   1. higher GDP growth.
   2. lower GDP growth.
   3. higher inflation.
   4. lower velocity growth.
   5. lower inflation.

9. In the RBC model, if you observe unemployment levels rising, what is the likely cause?
   1. A negative real shock
   2. A negative aggregate demand shock
   3. A negative SRAS shock
   4. A&B only
   5. None of the above

10. In the RBC model, if businesses react to a pessimistic outlook and decrease spending, the model predicts
    1. the aggregate demand curve shift left.
    2. equilibrium inflation rates fall.
    3. no change in long run growth rates.
    4. a&b only
    5. all of the above

11. Irrigation technology that changes how farmers utilize rainfall
    1. will have no effect on economic growth if rain fall levels do not also increase.
    2. represents a positive aggregate demand (AD) shock.
    3. may lead to higher levels of productivity growth and lower levels of unemployment.
    4. represents a negative real shock and will increase unemployment.
    5. None of the above.

Answer 1

1 b

2 e

3 c

4 c

5 c

Real business cycle models state that macroeconomic fluctuations in the economy can be largely explained by technological shocks and changes in productivity.

These changes in technological growth affect the decisions of firms on investment and workers (labour supply). Hence changes in output can be traced to microeconomic and supply-side factors.

Real business cycle models either completely reject or play down the role of aggregate demand in influencing the economic cycle.

Real business cycle models suggest that government intervention to influence demand in the economy is generally counterproductive and the optimal policy is to concentrate on supply-side reforms which help the economy to be more efficient and flexible.

Real business cycle models reject the Keynesian approach to the macroeconomy and also reject monetarism.