Deck 9: Business Cycles

Question 1

The costs incurred by a firm due to changing its prices are called

A) transition costs.
B) menu costs.
C) price expenses.
D) "surge" costs.

Answer 1

B

Question 2

From 1886 to 1955,the price of a 6.5-ounce glass bottle of Coca Cola was priced at 5 cents.In the case of this size bottle of Coca Cola,the price could be considered

A) as remaining sticky in the short run but flexible in the long run.
B) as remaining sticky in both the short run and the long run.
C) as being flexible in the short run, but returning to price stickiness in the long run.
D) as being flexible in both the short run and the long run.

Answer 2

B

Question 3

Which of the following statements is false?

A) Firms in the service sector typically change prices less frequently then manufacturing firms.
B) Most retailers in Western Europe and the United States change prices more than five times a year.
C) Wholesale prices are changed more often than retail prices.
D) Firms are more likely to change prices due to shocks to its respective sector as opposed to shocks to the aggregate economy.

Answer 3

B

Question 4

From the Keynesian perspective,when during a recession the quantity supplied is greater than the quantity demanded in the market for some goods and services,there is

A) a decline in potential GDP.
B) a decline in potential GDP relative to real GDP.
C) a decline in real GDP relative to both nominal GDP and potential GDP.
D) a decline in real GDP relative to potential GDP.

Question 5

From the Keynesian perspective,an increase in cyclical unemployment during a recession represents

A) an equivalent increase in the natural rate of unemployment.
B) a roughly equal mix of voluntary and involuntary unemployment.
C) involuntary unemployment.
D) a decrease in the number of discouraged workers in an economy.

Question 6

One reason why an economy may not smoothly adjust to a macroeconomic shock is that

A) prices are flexible in the long run.
B) prices are sticky in the short run.
C) wages are sticky in the long run.
D) prices and wages are sticky in the long run.

Question 7

One reason why,in reality,prices are sticky in the short run is because

A) there are often costs to firms from changing prices.
B) purely competitive firms have no control over the price of their product and therefore cannot change the price, even if the market warrants a price change.
C) in the short run, the cost to changing prices always outweighs any benefit.
D) firms do not have time to react to macroeconomic shocks in the short run.

Question 8

Economists have found that firms are

A) less likely to change prices as a result of shocks to the aggregate economy than shocks limited to the firm's particular sector.
B) more likely to change prices as a result of shocks to the aggregate economy than shocks limited to the firm's particular sector.
C) equally likely to change prices as a result of shocks to the aggregate economy or shocks limited to the firm's particular sector.
D) unlikely to change prices as a result of both shocks to the aggregate economy and shocks limited to the firm's particular sector.

Question 9

From the classical perspective,an increase in unemployment during a recession represents

A) voluntary unemployment.
B) a roughly equal mix of voluntary and involuntary unemployment.
C) involuntary unemployment.
D) a decrease in the number of discouraged workers in an economy.

Question 10

Prices and wages are considered "sticky" if

A) their rates of increase and decrease are identical.
B) as prices increase, wages increase by the same percentage.
C) their rates of change are directly connected to the rate of change in unemployment.
D) they do not fully adjust to changes in demand and supply.

Question 11

If the demand for the Ford Mustang increases,we would expect Ford to

A) keep the price of Mustangs constant, regardless of the cost or benefit of a price change.
B) increase the price of Mustangs to keep pace with the increase in demand.
C) increase the price of Mustangs only if the benefit of a price increase outweighs the cost.
D) decrease the price of Mustangs to maintain the increase in demand.

Question 12

An unexpected exogenous event that has a significant impact on an important sector of the economy or on the economy as a whole is called a(n)

A) macroeconomic shock.
B) countercyclical fluctuation.
C) downward economic spiral.
D) autonomous destabilizer.

Question 13

Classical economics refers to the perspective that the business cycle can be explained

A) using equilibrium analysis.
B) using disequilibrium analysis.
C) by long-run macroeconomic fluctuations.
D) by short-run macroeconomic instability.

Question 14

Most economists see the business cycle

A) as a regular pattern of recessions and expansions of the same length and intensity.
B) occurring as a result of anticipated macroeconomic changes in the marketplace.
C) as randomly occurring, resulting from unpredictable long-run changes in the macroeconomy.
D) as resulting from the response of households and firms to macroeconomic shocks.

Question 15

Research shows that prices tend to remain sticky for a longer period of time

A) in the manufacturing sector than in the service sector.
B) in the service sector than in the manufacturing sector.
C) in Western Europe than in the United States.
D) in the United States than in Western Europe.

Question 16

From the classical perspective,a decrease in output during a recession is a result of

A) firms voluntarily supplying fewer goods and services in the marketplace.
B) a greater quantity of goods and services supplied than is the quantity demanded for these goods and services.
C) the decrease in the overall level of production due to those firms which were forced to shut down.
D) the decline in availability of factors of production that naturally occurs at the onset of a recession.

Question 17

Which of the following would likely be the most affected when the economy is in the recession phase of the business cycle?

A) gasoline sales
B) housing sales
C) beer and wine sales
D) movie ticket sales

Question 18

Which of the following events would most likely be considered a macroeconomic shock?

A) A drought destroys 25% of the strawberry crop in British Columbia.
B) Mismanagement results in a federal takeover of the largest credit union in Canada.
C) OPEC unexpectedly announces a 40% reduction in oil production.
D) The Bank of Canada decides to increase the overnight rate by 0.25% for the third time in 12 months.

Question 19

When economists address the concept of price and wage stickiness in relation to the business cycle,they are referring to

A) nominal prices and nominal wages.
B) real prices and real wages.
C) both nominal and real prices and wages.
D) both nominal and real prices, but only real wages.

Question 20

Keynesian economics refers to the perspective that the business cycle represents

A) equilibrium.
B) disequilibrium.
C) long-run macroeconomic fluctuations.
D) short-run macroeconomic stability.

Question 21

The percentage deviation of real GDP from potential GDP is called

A) nominal GDP.
B) the output gap.
C) the multiplier.
D) Okun's law.

Question 22

Suppose that the demand for labour decreases due to an economic downturn,and union workers are in the first year of a three-year labour contract.With respect to these union labourers,the economic downturn will most likely ________ the nominal wage and ________ the quantity of labour hired.

A) decrease; not change
B) decrease; decrease
C) not change; decrease
D) not change; not change

Question 23

Explain why price and wage stickiness in the short run are reasons that macroeconomic shocks can result in fluctuations in total employment and total production.

Question 24

The economy is in an expansion when it is

A) moving from a peak to a trough.
B) moving from a trough to a peak.
C) at its peak.
D) at its trough.

Question 25

If potential GDP for the third quarter of 2013 = $20.4 billion,and the deviation from potential GDP for the third quarter of 2013 = $1.6 billion,then real GDP for the third quarter of 2013 equals

A) $6.5 billion.
B) $18.8 billion.
C) $22 billion.
D) $32.64 billion.

Question 26

Explain what a macroeconomic shock is,and give one example of a macroeconomic shock to the Canadian economy in the past 10 years.

Question 27

From 1950 to 2009,the average length of recessions in Canada has been

A) less than 1 year.
B) between 1 year and 2 years.
C) between 2 years and 3 years.
D) longer than 3 years.

Question 28

From 1950 to 2009,the average length of expansions in Canada has been

A) less than 2 years.
B) between 2 year and 3 years.
C) between 3 years and 4 years.
D) longer than 4 years.

Question 29

On average,expansions in Canada have become ________,and recessions have become ________ since 1950.

A) longer; longer
B) longer; shorter
C) shorter; longer
D) shorter; shorter

Question 30

As the best measure of the size of economic fluctuations associated with a business cycle,economists typically use

A) real GDP.
B) the deviation of real GDP from potential GDP.
C) potential GDP.
D) the deviation of real GDP from nominal GDP.

Question 31

Table 9.1

The table shows the growth rate of real GDP for the nation of Gigantica for the years 2010-2012.
Refer to Table 9.1.Using the simple definition given in the text,in which quarter did Gigantica first enter into a recession during the years 2010-2012.

A) 2010 Q4.
B) 2011 Q2.
C) 2011 Q4
D) Gigantica did not enter a recession from the years 2010-2012.

Question 32

Which of the following is an explanation as to why fluctuations in real GDP have become less volatile in Canada since 1950?

A) The government has become less inclined to intervene to stabilize the economy.
B) Employment insurance and other government transfer programs have become more prevalent.
C) The government and the Bank of Canada have decreased regulation and scrutiny of the financial system.
D) Goods manufacturing has become a larger fraction of GDP.

Question 33

Suppose the average price of gasoline in Canada doubled.Accompanying the increase in gas prices was a decrease in new automobile sales.Other things equal,if this trend continued,real GDP would likely ________ and the output gap would become ________.

A) rise; more negative
B) rise; less negative
C) fall; more negative
D) fall; less negative

Question 34

The increasing importance of services and declining importance of goods since 1950 can help explain

A) why Canada has only experienced one recession since 1950.
B) the severity of the 2007-2009 recession.
C) the increase in the gap between potential GDP and real GDP.
D) the decrease in severity of business cycle fluctuations.

Question 35

List three reasons why nominal wages can be sticky in the short run.

Question 36

What is the business cycle and why does it occur?

Question 37

Which of the following best describes real GDP?

A) Real GDP = Potential GDP - Nominal GDP
B) Real GDP = Potential GDP + Deviation from potential GDP
C) Real GDP = Deviation from potential GDP / Potential GDP
D) Real GDP = Nominal GDP / Potential GDP

Question 38

In which of the following situations are wages the least likely to be sticky?

A) Unionized workers are in the second year of a three-year labour contract.
B) A firm that pays efficiency wages to its employees is experiencing an economic recession.
C) A firm has an implicit contract with its employees regarding wages during recessions and expansions.
D) A firm hires hourly workers based on changes in the supply and demand for its products.

Question 39

Since the 1950s,

A) Canada's business cycle fluctuations have not changed.
B) Canada's business cycle fluctuations have become milder.
C) Canada's business cycle fluctuations have become more severe.
D) Canada has experienced more economic recessions than expansions.

Question 40

If potential GDP for the third quarter of 2012 = $20.4 billion,and the deviation from potential GDP for the third quarter of 2012 = -$1.6 billion,then the output gap was

A) -7.8%.
B) -12.8%.
C) -18.8%.
D) -32.6%.

Question 41

Which of the following best explains the cause of the change in the unemployment rate at the end of a recession?

A) Firms rapidly hire new workers at the first sign of an increase in demand for their goods.
B) Labour hoarding by firms results in an unemployment rate that is not fully responsive to increasing output.
C) Discouraged workers begin to return to the labour force, causing the unemployment rate to fall.
D) Frictionally unemployed workers find it easier to gain employment, lowering the natural rate of unemployment.

Question 42

Okun's law summarizes the relationship between

A) unemployment and inflation.
B) potential GDP and real GDP.
C) potential GDP and the deviation from potential GDP.
D) the output gap and the cyclical rate of unemployment.

Question 43

Inflation tends to ________ during a business cycle expansion and ________ during a business cycle recession.

A) increase; decrease
B) decrease; increase
C) increase; increase further
D) decrease; decrease further

Question 44

If a variable moves in the opposite direction from real GDP and other measures of aggregate economic activity,it is a ________ variable.

A) procyclical
B) countercyclical
C) coincidental
D) recessionary

Question 45

If the output gap is greater than zero,real GDP is ________ potential GDP,and the economy will ________ to reach full employment.

A) greater than; expand
B) greater than; contract
C) less than; expand
D) less than; contract

Question 46

If potential GDP for the first quarter of 2013 = $75.8 billion,and real GDP for the first quarter of 2013 = $80.3 billion,then the output gap was

A) -5.9%.
B) -5.6%.
C) 5.6%.
D) 5.9%.

Question 47

Assume that for the third quarter of 2012,actual real GDP was $176.1 billion and potential real GDP was $163.9 billion.According to Okun's law,the cyclical unemployment rate during the third quarter of 2012 was

A) -6.1%.
B) -3.7%.
C) 3.5%.
D) 6.1%.

Question 48

If the housing index is rising,real GDP is most likely

A) getting ready to increase.
B) falling.
C) remaining stable.
D) getting ready to fall.

Question 49

Suppose that,in 2013,potential GDP in the nation of Bologna is $150 000,real GDP is $138 000,and potential GDP grows at a rate of 5% per year.
a. Calculate potential GDP for the next 3 years.
b. If real GDP is $143 000 in 2014,what is the output gap?
c. If real GDP is $160 000 in 2015,what is the output gap?
d. If real GDP is $182 000 in 2016,what is the output gap?

Question 50

If the money supply is decreasing,real GDP is most likely

A) beginning to rise.
B) remaining stable.
C) already decreasing.
D) getting ready to decrease.

Question 51

If manufacturers' new orders received for consumer goods are starting to fall,real GDP is most likely

A) beginning to rise.
B) bottoming out.
C) getting ready to decrease.
D) already decreasing.

Question 52

When an economy begins to move from a recession to an expansion,the output gap typically

A) remains positive.
B) remains negative.
C) switches from negative to positive.
D) switches from positive to negative.

Question 53

If potential GDP for the first quarter of 2013 = $75.8 billion,nominal GDP for the first quarter of 2013 = $80.3 billion,and the GDP deflator = 109,then the output gap was

A) -2.8%.
B) 4.7%.
C) 5.6%.
D) 5.9%.

Question 54

Typically,as an economy begins to emerge from a recession,

A) unemployment falls immediately.
B) inflation begins to fall.
C) unemployment continues to rise.
D) investment begins to fall.

Question 55

Assume that for the second quarter of 2012,actual real GDP was $125.5 billion and potential real GDP was $142.7 billion.According to Okun's law,the cyclical unemployment rate during the second quarter of 2012 was

A) 5.7%.
B) 6.0%.
C) 6.9%.
D) 7.4%.

Question 56

As the economy nears the end of a recession,which of the following would we most likely see?

A) further decreases in consumer spending
B) falling wages relative to output prices
C) increased spending on capital goods by firms
D) increasing interest rates

Question 57

Assume that for the fourth quarter of 2012,nominal GDP was $245 billion,potential real GDP was $260 billion,and the GDP deflator was 112.According to Okun's law,the cyclical unemployment rate during the fourth quarter of 2012 was

A) 2.9%.
B) 3.1%.
C) 8.0%.
D) 8.4%.

Question 58

All of the following are typically considered procyclical variables except

A) the inflation rate.
B) investment expenditures.
C) the unemployment rate.
D) expenditures on durable goods.

Question 59

What are some of the explanations offered for why the Canadian economy experienced a period of relative stability from 1950-2007?

Question 60

If potential GDP for the fourth quarter of 2012 = $58.5 billion,and real GDP for the fourth quarter of 2012 = $53.7 billion,then the output gap was

A) -8.9%.
B) -8.2%.
C) 8.2%.
D) 8.9%.

Question 61

Which of the following schematics most accurately represents economic fluctuations during a business cycle?

A) Shock → Spending response by households and firms → Multiplier effect → Change in real GDP
B) Shock → Multiplier effect → Spending response by households and firms → Change in real GDP
C) Shock → Multiplier effect → Change in real GDP → Spending response by households and firms
D) Shock → Change in real GDP → Spending response by households and firms → Multiplier effect

Question 62

Suppose for every dollar change in household wealth,consumption expenditures change by $0.05.If real household wealth declines by $45 billion,potential GDP is $120 billion,and the multiplier effect for the first year after an expenditure shock is 1.4,what is the total change in output relative to potential for the first year?

A) -1.63%
B) -2.63%
C) -2.8%
D) -7.0%

Question 63

Suppose consumer confidence declines and as a result,consumer spending decreases by $4 billion dollars.Other things equal,if households spend $0.75 of each extra dollar of income and save the remaining $0.25,by how much will spending decrease during the third round through the circular flow?

A) $1 billion
B) $2.25 billion
C) $3 billion
D) $4 billion

Question 64

Suppose for every dollar change in household wealth,consumption expenditures change by $0.05.If real household wealth declines by $45 billion,potential GDP is $120 billion,and the multiplier effect for the second year after an expenditure shock is 1.1,what is the total change in output relative to potential for the second year?

A) -1.28%
B) -1.73%
C) -2.06%
D) -5.78%

Question 65

All of the following are reasons for the downward-sloping aggregate demand curve except

A) as the price level decreases, the quantity demanded of real GDP decreases because goods and services are more expensive.
B) as the price level increases, the real value of household wealth declines, reducing consumption.
C) a higher price level increases the demand for money, causing an increase in the interest rate which reduces spending on investment goods and consumer durables.
D) if the price level rises in a country relative to price levels in other countries, net exports will decrease in the original country.

Question 66

What is the multiplier effect and when do multiplier effects occur?

Question 67

If oil prices decrease,

A) the short-run aggregate supply curve will shift down.
B) the long-run aggregate supply curve will shift to the left.
C) the short-run aggregate supply curve will shift up.
D) the long-run aggregate supply curve will shift to the right.

Question 68

Explain whether sales of durable goods is a procyclical or countercyclical variable: If spending on durable goods is increasing,is the economy likely in a recession,heading for a recession,in an expansion,or heading for an expansion?

Question 69

Suppose for every dollar change in household wealth,consumption expenditures change by $0.05.If real household wealth declines by $45 billion,potential GDP is $120 billion,and the multiplier effect for the third year after an expenditure shock is 0.7,what is the total change in output relative to potential for the third year?

A) -1.31%
B) -1.84%
C) -2.68%
D) -3.57%

Question 70

Suppose consumer confidence declines and as a result,consumer spending decreases by $4 billion dollars.Other things equal,if households spend $0.75 of each extra dollar of income and save the remaining $0.25,by how much will spending decrease during the first round through the circular flow?

A) $1 billion
B) $2.25 billion
C) $3 billion
D) $4 billion

Question 71

Suppose consumer confidence declines and as a result,consumer spending decreases by $4 billion dollars.Other things equal,if households spend $0.75 of each extra dollar of income and save the remaining $0.25,by how much will spending decrease during the second round through the circular flow?

A) $1 billion
B) $2.25 billion
C) $3 billion
D) $4 billion

Question 72

Multiplier effects occur when there is a change in spending that does not depend on income.Spending that does not depend on income is referred to as

A) coincident spending.
B) nominal spending.
C) autonomous expenditures.
D) induced expenditures.

Question 73

Suppose that in 2013,potential GDP in the nation of Octavia is $85 000,real GDP is $75 000,and potential GDP grows at a rate of 2% per year.
a. If real GDP is $78 000 in 2014,using Okun's law,calculate the cyclical rate of unemployment.
b. If real GDP is $83 000 in 2015,using Okun's law,calculate the cyclical rate of unemployment.

Question 74

Suppose consumer confidence improves and as a result,consumer spending increases by $50 billion dollars.Assume households spend $0.80 of each extra dollar of income and save the remaining $0.20.Other things equal,calculate by how much spending will increase during:
a. the first round through the circular flow.
b. the second round through the circular flow.
c. the third round through the circular flow.
d. the fourth round through the circular flow.

Question 75

Explain the relationship between business cycles in different countries.

Question 76

A shock that increases the costs of production is a

A) positive aggregate demand shock.
B) positive aggregate supply shock.
C) negative aggregate demand shock.
D) negative aggregate supply shock.

Question 77

Suppose for every dollar change in household wealth,consumption expenditures change by $0.10.If real household wealth increases by $200 billion and potential GDP is $950 billion,what is the total change in output relative to potential for:
a. the first year,if the multiplier effect for the first year after an expenditure shock is 1.7?
b. the second year,if the multiplier effect for the second year after an expenditure shock is 1.3?
c. the third year,if the multiplier effect for the third year after an expenditure shock is 0.9?

Question 78

Often,the farther real GDP is below potential GDP,

A) the smaller the multiplier effect.
B) the larger the multiplier effect.
C) the less effective is the multiplier effect.
D) the less meaningful is the multiplier effect.

Question 79

At full-employment GDP,

A) the long-run aggregate demand curve is horizontal.
B) the long-run aggregate demand curve is vertical.
C) the long-run aggregate supply curve is horizontal.
D) the long-run aggregate supply curve is vertical.

Question 80

If the price level is constant in the short run,

A) the short-run aggregate demand curve is horizontal.
B) the short-run aggregate demand curve is vertical.
C) the short-run aggregate supply curve is horizontal.
D) the short-run aggregate supply curve is vertical.