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assign1-key - Suggested Answers to Discussion Questions...

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Suggested Answers to Discussion Questions Econ 102 Week 1 A.C.S. Brown University of California, Los Angeles 1. Lucas de&nes business cycles as "co-movements among di/erent aggrega- tive time series" such as output, pro&ts, prices, interest rates and mone- tary aggregates (the stock of money). 1 These series ±uctuate repeatedly around a general time trend, behaving in essentially the same way across developed nations. Business cycles can be described by a stochastically is disturbed by a random shock. 2. Friedrich August von Hayek was a Nobel-prize-winning economist who is among the founders of what is known as the Austrian school. Aus- trian school economists blamed the interference of government agencies for business cycles, which they called "credit cycles." In an e/ort to ex- low, leading to credit expansion in a bubble that would burst. The credit boom causes capital resources to be misallocated into areas unattractive to investors under a stable monetary supply. A recession occurs as a correction to this misallocation. 2 3. Lucas criticizes the Keynesian general theory for being an incomplete gen- eral equilibrium model, as it cannot fully explain the behavior of the labor market. While the Keynesian models may mimic the historical time series by adding the assumption of rigid prices, they cannot make conditional forecasts under policy variations. Lucas illustrates his point by using the experience of "stag±ation," which Professor Farmer discussed in his with high unemployment, was inexplicable using the traditional Keynesian
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assign1-key - Suggested Answers to Discussion Questions...

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