Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 10, Problem 3RQ
To determine
To Explain: The concepts of real and nominal shocks with examples and determine the most important type of real shock that creates cyclical fluctuations.
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In the context of Real Business Cycle theory explain the role played by the intertemporal substitution of labour supply in propagating the effects of real shocks in the economy. Do you think this propagation mechanism represents a good explanation for the business cycles we see in reality? Use a diagram to explain your answer.
The graph below shows the AD-AS diagram for Spain. Suppose that the economy experiences a
negative aggregate demand shock denoted by the move from AD1 to AD2.
Note that the new curve is shown in gray.
1200+
1100
ALDN
1000+
900
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700-
600-
500 -
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' 200
100+
LRAS
100 200 , 300 400 500 600 700 800 900 1000 1100 120
Real GDP
8. What has happened to the cyclical unemployment in Spain (select one)?
a. Cyclical unemployment remains the same.
b. Cyclical unemployment decreased.
c. Cyclical unemployment increased.
Price Level
According to the real business cycle theory, productivity shocks are an important source of business cycles. Using the Cobb–Douglas production function and annual data since 1961, calculate and graph U.S. total factor productivity. Use real GDP for Y, the capital stock from the source listed in Table 3.1 for K, and civilian employment for N. Look for periods marked by sharp changes up or down in productivity. How well do these changes match up with the dates of business cycle peaks and troughs?
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- How is cyclical unemployment illustrated in an AD/AS model?arrow_forwardExplain the Real-Business-Cycle (RBC) Theory, regarding economic fluctuations.arrow_forwardAre TFP shocks a reasonable explanation for the business cycles Are TFP shocks a reasonable explanation for the business cycles we see in modern economies? Why and why not? Are TFP shocks a reasonable explanation for the business cyclesarrow_forward
- Assess the view that when an economy experiences a negative economic shock there willalways be a sustained increase in unemployment.arrow_forwardWhat is the role of supply shocks in the Keynesian explanation of business cycles? What are the limitations of fiscal and monetary policy in the Keynesian model when an oil shock disturbs the economy? Explain and illustrate graphically.arrow_forwardExplain how the real business cycle model can explain why the price level is countercyclical at some times, and uncorrelated with output at other times.arrow_forward
- Explain the basic arguments stated by the Real-Business-Cycle (RBC) Theory, regarding economic fluctuations.arrow_forwardWhich of the following are business cycle theories that regard fluctuations in aggregate demand as the factor that is creating business cycles? I. Keynesian cycle theory II. real business cycle theory III. monetarist cycle theoryarrow_forwardAssume the labour market is in equilibrium initially. How would each of the following shock affect the equilibrium real wage? Explain briefly in both words and graphs. a. An increase in expected future real wage. b. A large number of immigrants enter the country.arrow_forward
- An economy has: R = 10 +.ly, C= 14 + 9YD, G= 25, I = 75 -r, NX = 30 -.06y - .5p, MD = 25y-r, MS = 15 and ASo = 2p. A negative AS shock occurs: AS, = 2p – 60. a. Provide a diagram showing AS/AD to illustrate how real GDP and the price level are affected by this AS shock. A government can offset this AS shock by increasing the money supply OR increasing government spending. They won't do both. Calculate level of money supply MS= b. and the level of government spending G = that would be necessary to offset this AS shock.arrow_forwardIn the basic New Keynesian model, suppose that there is an increase in the future marginal product of capital. Explain your results with the aid of diagrams. Suppose that the central bank keeps the nominal interest rate at its initial value. What will be the effect on current inflation and on output? Suppose that the economy initially faces an increase in anticipated future inflation and a zero output gap. When the shock occurs, what should the central bank do?arrow_forwardSummarize the factors that affect the cyclical flow of the economy and explain its roles.arrow_forward
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