Modern econometric models of this situation are based on the Arrow–Debreu model. For 10 points each:
[10e] Name this situation used to analyze monetary policy in DSGE models. In a market, this situation exists where the supply curve intersects the demand curve.
ANSWER: equilibrium [accept price equilibrium; accept dynamic stochastic general equilibrium]
[10m] In a DSGE model, the competitive equilibrium must have this property. On the PPF, a chosen allocation has this property if the marginal rate of transformation is equal to all consumers’ marginal rate of substitution.
ANSWER: Pareto efficiency [or Pareto optimality; prompt on efficiency or optimality]
[10h] DSGE models were initially proposed by Finn Kydland and Edward Prescott, who developed this theory in which governments are advised to ignore shocks in favor of long-term structural policy.
ANSWER: real business cycle theory [or RBC theory; prompt on business cycles]
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