Describe, in general terms, how an economist calibrates a macroeconomic model. What statistics can be usefully examined to see how well the model corresponds to the data?
What will be an ideal response?
A model is calibrated by working out a detailed numerical example. First, write down a model of the economy with specific functions. Second, express the functions in numerical terms. Third, find out how the numerically specified model behaves when it is hit by random shocks. Fourth, compare the results of this simulation to the behavior of the actual economy to determine how well the model fits reality. Useful statistics in this comparison are the volatilities of key variables and their correlations with output.
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An inferior good exhibits
A) a negative income elasticity. B) a downward sloping Engel curve. C) a decline in the quantity demanded as income rises. D) All of the above.
Disposable income is defined to be:
A. total income minustaxes. B. total income plus taxes. C. total income minus depreciation. D. All of these are true.
Suppose a McDonalds Big Mac costs $4.40 in the United States and 3.30 euros in the euro area and 5.72 Australian dollars in Australia. If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar, where does purchasing-power parity hold?
a. both the euro area and Australia b. the euro area but not Australia c. Australia but not the euro area d. neither the euro area nor Australia
Which of the following would be considered an economic function of government?
A. promoting competition B. providing a legal system C. providing public goods D. All of these are correct.