Question

Real business cycle theory suggests the business cycle is caused by:

Select one:

a. discretionary monetary policy.

b. “animal spirits.”

c. protectionism.

d. fluctuations in the rate of productivity.

The school of thought that monetary policy should be the main tool of stabilization policy, that is skeptical about the use of fiscal policy, and that recognizes constraints on policy imposed by the natural rate of unemployment and the political business cycle is:

Select one:

a. classical macroeconomics.

b. the Great Moderation consensus.

c. Keynesian macroeconomics.

d. monetarism.

In the classical model of the price level, prices are _____, the short-run aggregate supply curve is vertical, and as a result, a decrease in the money supply leads to _____ in the aggregate price level.

Select one:

a. sticky; a more than proportional decrease

b. flexible; a proportional decrease

c. sticky; a more than proportional increase

d. flexible; a proportional increase

Answer 1

1) Real buisness cycles suggest that buisness cycles are caused by fluctuations in the rate of productivity.

Explanation

RBC theory states that fluctuations in the buisness are caused by real factors such as productivity or changes in technology, which in turn cause changes in output and employment

2) The school of thought that monetary policy should be the main tool of stabilization policy, that is skeptical about the use of fiscal policy, and that recognizes constraints on policy imposed by the natural rate of unemployment and the political business cycle is: Monetarism

Explanation

Monetarism believes that money supply drives the economy and hence emphasizes on money supply.

3) In the classical model of the price level, prices are flexible, the short-run aggregate supply curve is vertical, and as a result, a decrease in the money supply leads to a proportional decrease in the aggregate price level.

Explanation

Classical economists believe that prices and wages are fully flexible and adjust quickly. In classical models, money is neutral that is any change in money supply only affects nominal variables and not real variables. The proportional decrease in the prices, when money supply is reduced means that there is no change in purchasing power. If money supply decreases, price and money wages will be reduced in the same proportion.