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Question from Past Macroeconomics Qualifying ExamEdit

Spring, 2004 - Question six- at George Mason University

Take one of two positions and argue in its favor, negating what you perceive to be the primary objections to your position in the process.

  • Position # 1: New Classical macro of the real business cycle is antagonistic to Austrian macro.
  • Position # 2: Real business cycle and Austrian macro are highly complementary, or at least can be construed in such a fashion.

AnswerEdit

  • Position # 1: The real business cycle and the Austrian cycle are highly antagonistic. The Real business cycle asserts that the monetary authority cannot change the fundamentals of the the economy. This follows from the New classical assumptions of rational expectations. In the Austrian theory the fundamental signals of the economy (specifically the interest rate) are permutated unrecognizeably by the monetary authority. The individual entreprenuer then will make systematic mistakes (a provision not allowed for under the rational expectations of the new classicals).
  • Position # 2: The Austrians believe that business cycles are "corrections" to mal-adjustments. The Real-Business cycle theorists believe that the cycle represents a different equilibrium. These two theories can be reconciled in that they assume the "potential GDP" is the same as the current GDP. An analogy that reconciles the two is the "desk-clearing" example presented by Tyler Cowen. There is a time during the day where it pays to clear the desk of work in order to be more productive later. This acceptance of periods of lower productivity as a natural part of the economy is consistant between the two methods of descriptive analysis, even though in details they are dissimilar.

Other QuestionsEdit


This macro-stub needs improving.

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