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IV.F. - One source of a change in nominal spending is a...

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IV. F. Misperception Theory of Non-Neutrality In the RBC model money does not affect the real economy, only nominal values such as the price level. While the RBC model explains the data related to business cycle fluctuation well, many economists do not believe that real shocks are the source of the most severe recessions (e.g. the Great Depression, the Volcker Recession, and now the Housing Bubble recession). Monetary theories of the business cycle argue that nominal spending changes are the source of at least some of the more significant business cycle fluctuations.
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Unformatted text preview: One source of a change in nominal spending is a change in the money supply. This section develops our first theory of how money supply changes might cause real effects. The Price-Misperceptions Model is based on the idea that people are not always aware of what is happening to the average price level. 1. The Price-Misperception Model Barro Ch.15 PP1-5 2. Implications (i) real effect are only temporary—in the long-run money is neutral (as the data strongly suggests) (ii) real effects are more likely when the monetary authority keeps the money supply stable...
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