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CHAPTER 12: REAL BUSINESS CYCLES AND NEW
KEYNESIAN ECONOMICS
Additional Questions
Essay Questions and/or Problems:
1. Explain what is meant by a representative agent. Why do real business cycle models make
this assumption? What is the problem with this assumption?
2. What would be the explanation of the Great Depression offered by proponents of real
business cycle models? Do you see any potential problems with their explanations?
3. Numerous studies of the labor market (and your own experience) suggest that the labor
market is becoming increasingly specialized, meaning that each job increasingly requires a
unique set of education and job training skills. Analyze this development within the context
of a model of efficiency wages. What impact do you think this has on unemployment?
Wage flexibility? How do you think that firms respond to these developments? Provide
graphs of the labor market to illustrate.
4. In what sense is unemployment voluntary in real business cycle and classical models? In
what sense is unemployment involuntary in Keynesian and new Keynesian models?
5. Explain the ways in which the real business cycle model is an extension of the Classical
model. In what ways are they different?
6. Define hysteresis. How do insider-outsider models explain hysteresis?
7. Consider the turnover cost model of efficiency wages. Suppose that the government
imposes a tax on hiring a worker. What should happen to wages and unemployment?
9. What role is there for monetary policy in a real business cycle model? Is there a role for
stabilization policy? Compare and contrast this with the traditional Keynesian model.
10. The simple real business cycle model production function is shown as
yt = ztF(Kt, Nt).
REAL BUSINESS CYCLES AND NEW KEYNESIAN ECONOMICS 131
Additional Essay Questions and/or Problems:
11. Real business cycle theorists part company with new classical economists on the question
of the causes of fluctuations in output and employment. How do real business cycle
theorists explain these fluctuations?
12. Both new Keynesian and real business cycle models are based upon the optimizing
behavior of individuals. Why the difference then between these models? How do these
differences affect how each model views stabilization policy?
13. Graphically show the effects of a positive technology shock in a real business cycle model.
14. If changes in productivity drive business cycles, discuss the implications for (i) the
persistence (or length) of recessions, (ii) the existence of involuntary unemployment, (iii)
the proper role of stabilization policy.
15. In real business cycle models, recessions are “efficient” and optimal responses to changes
in economic fundamentals. Explain this statement, and contrast it with new classical,
Keynesian, and new Keynesian models.
16. If changes in productivity drive business cycles in Real Business Cycle models, discuss the
implications for (i) the persistence (or length) of recessions, (ii) the existence of involuntary
unemployment, (iii) the proper role of stabilization policy.
17. Postwar recessions are less frequent than prewar recessions. Why? Provide an explanation
of this observation from the perspective of each of the following theories:
(i) Keynesian model.
(ii) The Monetarist model.
(iii) The Rational Expectations model.
(iv) The Real Business Cycle model.
(v) The New Keynesian Model
18. Consider the 2007-09 global financial crisis. How would the New Keynesian explanation of
this crisis differ from that of a proponent of the Real Business Cycle model. What evidence
might you bring to support or refute each model? Which explanation do you find most
plausible?
Multiple-Choice Questions:
1. The real business cycle theory is most closely related to
2. In the real business cycle model, business cycles are
3. Real business cycle proponents argue that
4. Which of the following statements are correct? In (the)
5. The real business cycle theory
6. A usual assumption in real business cycle models is that the economy is populated by a
group of identical individuals and the behavior of the group can then be explained in terms
of the behavior of one individual, called a(n)
7. The aggregate production function for real business cycle models is shown as
8. New Keynesian economics differs from real business cycle economics in that
9. In real business cycle models and new classical models
10. Which of the following statements is (are) correct? According to real business cycle theory,
11. Which of the following shocks have been emphasized most often with respect to real
business cycle theory?
12. In the new Keynesian models,
13. Which of the following cannot be used to justify efficiency wages
14. In any efficiency wage model, it must be true that
15. With respect to efficiency wage models, the efficiency of workers depends
16. New Keynesians would agree with all of the following except
17. New Keynesian economists
18. In real business cycle models, business cycles are caused by ______, while in new
Keynesian model, business cycles are caused by ________.
19. Which of the following models view changes in real supply-side factors as determinants of
short-run fluctuations in output and employment?
20. An example of negative productivity shocks that could cause recessions is
21. The real business cycle theory and the new classical theory agree that
22. Advocates of real business cycle theories argue that all of the following could cause a
recession except
23. Real business cycle and new Keynesian models disagree upon
24. In the real business cycle theory, during a period when output is falling,
25. According to real business cycle theory, business cycles
26. According to real business cycle theory, an increase in taxes
27. Many economists who accept the real business cycle explanations of economic fluctuations
28. Which of the following statements is (are) correct?
29. Which of the following statements is (are) correct? In the insider/outsider model there is
30. New Keynesian theories of efficiency wages imply
31. The new Keynesian theories of efficiency wages imply
32. New Keynesians and new classical economists both believe that
33. New Keynesian economists have examined whether real-world prices are, in fact, sticky. In
one study of 38 magazines, Stephen Cecchetti found
34. In a study of whether prices are sticky or not, Alan Blinder supervised interviews of
corporate executives on the frequency with which their firms change prices and found that
35. Which of the following is correct? A general assumption in real business cycle models is
that
36. The existence of heavy training costs would provide a rationale for
37. Which of the following statements is correct? With respect to efficiency wage models,
38. Which of the following efficiency wage models centers on the morale of a firm’s workers?
The
39. Which of the following models explains why high unemployment has persisted in some
European countries for such long periods—periods too long to be the result of fixed money-
wage contracts or backward-looking price expectations?
40. New Keynesian economists believe that
41. According to critics of new Keynesian economics, it is doubtful that
42. Which of the following statements is (are) correct? Critics of the real business cycle model
43. A key element of real business cycle theory is that
44. According to real business cycle theory, real wages are _____ correlated with employment
and the portion of the population that is not in the labor market _____ with higher real
wages.
45. Real business cycle proponents argue that
46. Real business cycle theorists agree with new classical economists that
47. New Keynesian explanations for sticky prices and wages include
48. Menu costs suggest that sticky prices are ____ for firms but _____ for the economy as a
whole.
49. In terms of unemployment, hysteresis models try to explain why
50. Real business cycle proponents would agree with all of the following except
51. New Keynesian theory says that
52. Real business cycle theorists agree with new Keynesian economists that
53. According to new Keyneisan theory, real wages are _____ correlated with employment and
54. According to efficiency wage models,
55. Which of the following statements is (are) correct?
56. The difference between voluntary and involuntary unemployment is that:
