Use the market-clearing real business cycle model
Macroeconomics
1. Conservative commentators in the US often attribute the slow recovery to market
concerns about what Obama might do in the future. In particular, it is often argued
that people are worried that he might raise taxes and spending in the future, and
that this is holding back the recovery today.
(a) Use the market-clearing Real Business Cycle model developed in chapters 9-11,
to analyze the effects of expectations of higher future government spending and
(lump-sum) taxes. Under what conditions can this explain a slow recovery?
(b) Now suppose that taxes are not lump-sum, but instead have the effect of
reducing incentives and productivity. Explain how this would change your analysis.
Would the ‘Obama effect’ become more or less convincing?
2. There has been much debate among economists about Classical versus Keynesian
business cycle models. It would be nice to be able to distinguish between them.
Some people have argued that we can do this by looking at how employment responds
to productivity shocks. Explain why this is. Compare and contrast what each model
predicts about how employment responds to productivity shocks. If possible, use
graphs to illustrate your answers.
3. There has been much debate among economists about Classical versus Keynesian
business cycle models. It would be nice to be able to distinguish between them.
Some people have argued that we can do this by looking at the correlation between
output and the price level. Explain why this is. Compare and contrast what each
model predicts about the correlation between output and the price level. If
possible, use graphs to illustrate your answers.
4. Use the Keynesian IS-LM model to provide one possible explanation of the recent
financial crisis. Use a graph to illustrate your answer. Describe how monetary and
fiscal policies could be used to respond to the crisis, and discuss the pros and
cons of each
