Deck 8: Business Cycles

Question 1

By 1937,when a new recession began in the midst of the Great Depression,

A)GDP had almost recovered to its 1929 level,but unemployment was still above the 1929 level.
B)unemployment had almost fallen back to its 1929 level,but GDP had yet to recover to its 1929 level.
C)neither GDP nor unemployment had returned to near their 1929 levels.
D)both GDP and unemployment had returned to near their 1929 levels.

Answer 1

A

Question 2

Describe the major features of the business cycle.Be sure to discuss what variables are affected by the cycle,a description of the key features that are apparent in the data,how variables are related to one another,how regular the cycle is,and how predictable the cycle is.

Answer 2

The business cycle is defined as a fluctuation of aggregate economic activity.There are recurrent but not periodic movements of aggregate activity,with many variables moving in the same direction at the same time (comovement).Increases in aggregate economic activity are expansions,while reductions in aggregate economic activity are contractions,or recessions.Both expansions and contractions exhibit persistence,so once an expansion or contraction begins,it tends to last some time.

Question 3

Which group within the National Bureau of Economic Research officially determines whether the economy is in a recession or expansion?

A)The G-4
B)The Business Cycle Dating Committee
C)The Business Cycle Governors
D)The Turning Point Group

Answer 3

B

Question 4

The trough of a business cycle occurs when ________ hits its lowest point.

A)inflation.
B)the money supply.
C)aggregate economic activity.
D)the unemployment rate.

Question 5

Who officially determines whether the economy is in a recession or expansion?

A)The president of the United States
B)The U.S.Congress
C)The Federal Reserve Board of Governors
D)The National Bureau of Economic Research

Question 6

When aggregate economic activity is increasing,the economy is said to be in

A)an expansion.
B)a contraction.
C)a peak.
D)a turning point.

Question 7

The tendency for declines in economic activity to be followed by further declines,and for growth in economic activity to be followed by more growth is called

A)persistence.
B)comovement.
C)periodicity.
D)recurrence.

Question 8

Comovement is

A)the tendency for declines in economic activity to be followed by further declines,and for growth in economic activity to be followed by more growth.
B)the idea that the standard pattern of contraction-trough-expansion-peak occurs again and again in industrial economies.
C)the tendency of many economic variables to move together in a predictable way over the business cycle.
D)the idea that peaks and troughs of the business cycle occur at regular intervals.

Question 9

When a recession occurs,do economists expect it to be a temporary phenomenon? Or is there some degree of permanence? What is the empirical evidence?

Question 10

Persistence is

A)the tendency for declines in economic activity to be followed by further declines,and for growth in economic activity to be followed by more growth.
B)the idea that the standard pattern of contraction-trough-expansion-peak occurs again and again in industrial economies.
C)the tendency of many economic variables to move together in a predictable way over the business cycle.
D)the idea that peaks and troughs of the business cycle occur at regular intervals.

Question 11

Peaks and troughs of the business cycle are known collectively as

A)volatility.
B)turning points.
C)equilibrium points.
D)real business cycle events.

Question 12

The long boom occurred in the

A)1920s and 1930s.
B)1940s and 1950s.
C)1960s and 1970s.
D)1980s and 1990s.

Question 13

The idea that the business cycle is recurrent means that

A)declines in economic activity tend to be followed by further declines,and growth in economic activity tends to be followed by more growth.
B)the standard pattern of contraction-trough-expansion-peak occurs again and again in industrial economies.
C)many economic variables to move together in a predictable way over the business cycle.
D)peaks and troughs of the business cycle occur at regular intervals.

Question 14

The tendency of many different economic variables to have regular and predictable patterns over the business cycle is called

A)persistence.
B)comovement.
C)periodicity.
D)recurrence.

Question 15

The longest contraction in American history occurred

A)during the 1870s.
B)in the years right before World War I began.
C)during the 1930s.
D)during the 1970s.

Question 16

The Great Depression consisted of how many business cycles?

A)1
B)2
C)3
D)4

Question 17

One of the first organizations to investigate the business cycle was

A)the Federal Reserve System.
B)the National Bureau of Economic Research.
C)the Council of Economic Advisors.
D)the Brookings Institution.

Question 18

Research on the effects of recessions on the real level of GDP shows that

A)recessions cause only temporary reductions in real GDP,which are offset by growth during the expansion phase.
B)recessions cause large,permanent reductions in the real level of GDP.
C)recessions cause both temporary and permanent declines in real GDP,but most of the decline is temporary.
D)recessions cause both temporary and permanent declines in real GDP,but most of the decline is permanent.

Question 19

When aggregate economic activity is declining,the economy is said to be in

A)a contraction.
B)an expansion.
C)a trough.
D)a turning point.

Question 20

The low point in the business cycle is referred to as the

A)expansion.
B)boom.
C)trough.
D)peak.

Question 21

A variable that tends to move in advance of aggregate economic activity is called

A)a leading variable.
B)a coincident variable.
C)a lagging variable.
D)an acyclical variable.

Question 22

The NBER's Business Cycle Dating Committee picks recession dates by looking at many variables,the four most important of which are industrial production,manufacturing and trade sales,nonfarm employment,and real personal income.These variables are known as

A)leading indicators.
B)coincident indicators.
C)lagging indicators.
D)recession indicators.

Question 23

The 1973-1975 recession was caused by

A)the Fed's easy monetary policy.
B)the Fed's tight monetary policy.
C)business pessimism about investment caused by high tax rates on capital.
D)the quadrupling of oil prices by OPEC.

Question 24

Stock and Watson found that monetary policy was responsible for about ________ % of the reduction in output volatility that occurred in the mid-1980s.

A)0 to 10
B)10 to 20
C)20 to 30
D)30 to 40

Question 25

Christina Romer argued that

A)measured properly,GNP before 1929 varied substantially less over time than the official statistics showed.
B)measured properly,GNP after 1929 varied substantially more over time than the official statistics showed.
C)measured properly,economic expansions after 1929 were shorter than the official statistics showed.
D)measured properly,economic expansions before 1929 were shorter than the official statistics showed.

Question 26

The worst recessions after World War II occurred

A)during 1945-1946 and 1973-1975.
B)during 1957-1958 and 1973-1975.
C)during 1973-1975 and 1981-1982.
D)during 1945-1946 and 1981-1982.

Question 27

An economic variable that doesn't move in a consistent pattern with aggregate economic activity is called

A)procyclical.
B)countercyclical.
C)acyclical.
D)a leading variable.

Question 28

According to research by Stock and Watson,the recent decline in volatility in many macroeconomic variables was a

A)sudden drop that occurred around 1984.
B)gradual decline throughout the 1980s.
C)sudden drop that occurred around 1990.
D)gradual decline throughout the 1990s.

Question 29

A variable that tends to move at the same time as aggregate economic activity is called

A)a leading variable.
B)a coincident variable.
C)a lagging variable.
D)an acyclical variable.

Question 30

The recession of 2001 began in ________ and ended in ________.

A)March; November
B)February; December
C)April; October
D)February; October

Question 31

Stock and Watson found that ________ was responsible for about 20-30 % of the reduction in output volatility that occurred in the mid-1980s.

A)reduced shocks to productivity
B)reduced shocks to food and commodity prices
C)better monetary policy
D)better inventory control

Question 32

Christina Romer's criticism of the belief that business cycles had moderated since World War II depended on the fact that

A)estimates of the timing of business cycles since World War II had been inaccurate.
B)misuse of historical data had caused economists to understate the size of cyclical fluctuations in the post-World War II era.
C)economists had ignored the roles of the government and international trade in mitigating economic fluctuations prior to World War II.
D)economists had left out important components of GDP,such as wholesale and retail distribution,transportation,and services,in their pre-World War II estimates.

Question 33

The longest economic expansion in the United States occurred during the

A)1940s.
B)1960s.
C)1980s.
D)1990s.

Question 34

A variable that tends to move later than aggregate economic activity is called

A)a leading variable.
B)a coincident variable.
C)a lagging variable.
D)an acyclical variable.

Question 35

The ADS Business Conditions Index is a

A)leading index based on variables released with different frequencies.
B)coincident index based on variables released with different frequencies.
C)leading index based on 85 monthly variables.
D)coincident index based on 85 monthly variables.

Question 36

An economic variable that moves in the same direction as aggregate economic activity (up in expansions,down in contractions)is called

A)procyclical.
B)countercyclical.
C)acyclical.
D)a leading variable.

Question 37

The CFNAI is a

A)leading index based on variables released with different frequencies.
B)coincident index based on variables released with different frequencies.
C)leading index based on 85 monthly variables.
D)coincident index based on 85 monthly variables.

Question 38

If you were a member of the NBER business-cycle dating committee,would you declare that the U.S.economy is now in a recession? Why? Describe the major variables that you would look at to determine whether the economy is in a recession or not,and what features of the data you would look for.

Question 39

How has the severity and duration of business cycles changed over time in the United States?

Question 40

An economic variable that moves in the opposite direction as aggregate economic activity (down in expansions,up in contractions)is called

A)procyclical.
B)countercyclical.
C)acyclical.
D)a leading variable.

Question 41

Which of the following macroeconomic variables is procyclical and lags the business cycle?

A)Business fixed investment
B)Employment
C)Stock prices
D)Nominal interest rates

Question 42

Which of the following macroeconomic variables is procyclical and coincident with the business cycle?

A)Residential investment
B)Nominal interest rates
C)Industrial production
D)Unemployment

Question 43

Using the seasonal business cycle as your guide,during which quarter would you be most likely to expect an increase in your corporation's sales?

A)The first quarter of the year (January-March)
B)The second quarter of the year (April-June)
C)The third quarter of the year (July-September)
D)The fourth quarter of the year (October-December)

Question 44

Real interest rates are

A)procyclical,just like nominal interest rates.
B)acyclical,while nominal interest rates are procyclical.
C)acyclical,just like nominal interest rates.
D)countercyclical,while nominal interest rates are procyclical.

Question 45

Which of the following is true?

A)Employment and unemployment are both coincident with the business cycle.
B)Employment and unemployment are both procyclical.
C)Employment is procyclical and unemployment is coincident with the business cycle.
D)Employment is procyclical and unemployment is countercyclical.

Question 46

The job finding rate

A)equals 1 minus the job loss rate.
B)remains constant over the business cycle.
C)rises in recessions.
D)rises in expansions.

Question 47

You want to invest in a firm whose profits show large fluctuations throughout the business cycle.Which of the following would you invest in?

A)A corporation that depends heavily on business fixed investment
B)A corporation that depends heavily on consumer services
C)A corporation that depends heavily on consumer nondurables
D)A corporation that depends heavily on government purchases

Question 48

Industries that are extremely sensitive to the business cycle are the

A)durable goods and service sectors.
B)nondurable goods and service sectors.
C)capital goods and nondurable goods sectors.
D)capital goods and durable goods sectors.

Question 49

Which of the following is not a leading variable?

A)Inflation
B)Stock prices
C)Average labor productivity
D)Residential investment

Question 50

The job loss rate

A)equals 1 minus the job finding rate.
B)remains constant over the business cycle.
C)rises in recessions.
D)rises in expansions.

Question 51

Which of the following macroeconomic variables would you exclude from an index of leading economic indicators?

A)Money supply
B)Industrial production
C)Inventory investment
D)Residential investment

Question 52

The job finding rate is defined as

A)the probability that someone who has been unemployed for over a year will find a job in the next month.
B)the probability that someone who is not in the labor force will enter the labor force in the next month.
C)the probability that someone who is employed will change jobs in the next month.
D)the probability that someone who is unemployed will find a job in the next month

Question 53

Which of the following statements is true?

A)Both nominal and real interest rates are procyclical and leading.
B)Both nominal and real interest rates are procyclical and lagging.
C)Nominal interest rates are procyclical and real interest rates are countercyclical.
D)Nominal interest rates are procyclical and real interest rates are acyclical.

Question 54

Which of the following macroeconomic variables would you include in an index of leading economic indicators?

A)Employment
B)Inflation
C)Real interest rates
D)Residential investment

Question 55

Diebold and Rudebusch showed that the composite index of leading indicators did not improve forecasts of industrial production because

A)the index is not produced in a timely manner.
B)the government manipulates the index so it never predicts a recession.
C)the index is not designed for forecasting.
D)data on the components of the index are revised.

Question 56

Which of the following macroeconomic variables doesn't vary much over the seasons?

A)The nominal money stock
B)The unemployment rate
C)The real wage
D)Average labor productivity

Question 57

Which of the following macroeconomic variables is procyclical and leads the business cycle?

A)Business fixed investment
B)Residential investment
C)Nominal interest rates
D)Unemployment

Question 58

Which of the following macroeconomic variables is the most seasonally procyclical?

A)Expenditure on services
B)The unemployment rate
C)Expenditure on durable goods
D)The real wage

Question 59

Which of the following macroeconomic variables is acyclical?

A)Real interest rates
B)Unemployment
C)Money supply
D)Consumption

Question 60

The probability that an employed worker will lose his or her job in the next month is known as

A)the unemployment rate.
B)the job finding rate.
C)the underemployment rate.
D)the job loss rate.

Question 61

A decline in the stock market,which makes consumers poorer,would cause

A)the aggregate demand curve to shift to the right.
B)the aggregate demand curve to shift to the left.
C)a movement down and to the right along the aggregate demand curve.
D)a movement up and to the left along the aggregate demand curve.

Question 62

What are some of the problems with using the leading indicators to forecast recessions? If you were a policymaker,would you rely on them?

Question 63

In the long run,an increase in productivity would cause output to ________ and the aggregate price level to ________.

A)fall; rise
B)fall; fall
C)rise; fall
D)rise; rise

Question 64

Economists use the term shocks to mean

A)unexpected government actions that affect the economy.
B)typically unpredictable forces that have major impacts on the economy.
C)sudden rises in oil prices.
D)the business cycle.

Question 65

In the long run,a reduction in labor supply would cause output to ________ and the aggregate price level to ________.

A)fall; rise
B)fall; fall
C)rise; fall
D)rise; rise

Question 66

When plotted with the aggregate price level on the vertical axis and output on the horizontal axis,which of the following curves is vertical?

A)SRAS
B)AD
C)LRAS
D)None of the above

Question 67

When plotted with the aggregate price level on the vertical axis and output on the horizontal axis,which of the following curves slopes downward?

A)SRAS
B)AD
C)LRAS
D)None of the above

Question 68

According to classical macroeconomists,prices adjust ________ to shocks,so the government should ________.

A)slowly; do little
B)rapidly; do little
C)rapidly; fight recessions
D)slowly; fight recessions

Question 69

In the long run,an increase in consumer spending would cause output to ________ and the price level to ________.

A)rise; rise
B)rise; stay constant
C)stay constant; stay constant
D)stay constant; rise

Question 70

When plotted with the aggregate price level on the vertical axis and output on the horizontal axis,the long-run aggregate supply curve

A)slopes upward.
B)slopes downward.
C)is vertical.
D)is horizontal.

Question 71

According to Keynesian macroeconomists,prices adjust ________ to shocks,so the government should ________.

A)slowly; do little
B)rapidly; do little
C)rapidly; fight recessions
D)slowly; fight recessions

Question 72

Wars,new inventions,harvest failures,and changes in government policy are examples of

A)the business cycle.
B)economic models.
C)shocks.
D)opportunity costs.

Question 73

The key difference between classical and Keynesian macroeconomists is their differing beliefs about

A)the slope of the aggregate demand curve.
B)the speed at which prices adjust.
C)the natural rate of unemployment.
D)the full-employment level of output.

Question 74

A decrease in government spending on the park system would cause

A)the aggregate demand curve to shift to the right.
B)the aggregate demand curve to shift to the left.
C)a movement down and to the right along the aggregate demand curve.
D)a movement up and to the left along the aggregate demand curve.

Question 75

Suppose the economy is initially in long-run equilibrium.For each of the shocks listed below,explain the short-run effects on output and the price level.
(a)A stock market crash reduces consumers' wealth.
(b)Businesses decide to hold larger inventories.
(c)The government cuts defense spending.
(d)Foreign countries buy more U.S.goods.

Question 76

In the long run,an increase in government purchases of military equipment would cause output to ________ and the aggregate price level to ________.

A)stay constant; fall
B)fall; fall
C)fall; stay constant
D)stay constant; rise

Question 77

The three main components of the aggregate demand-aggregate supply model include

A)AD,SRAS,LM
B)SRAS,LRAS,IS
C)AD,IS,LM
D)AD,SRAS,LRAS

Question 78

What are the two main components of business cycle theories?

A)A description of shocks and a model of how the economy responds to them
B)A model of how people decide to spend and a description of the government's role in the economy
C)A model of how equilibrium is reached and a description of the government's role in the economy
D)A description of shocks and a description of the government's role in the economy

Question 79

The AD,SRAS,and LRAS curves each show a relationship between which two economic variables?

A)The aggregate price level and output
B)The aggregate price level and the interest rate
C)Output and unemployment
D)Output and the interest rate

Question 80

In the short run,an increase in export sales would cause output to ________ and the price level to ________.

A)rise; rise
B)rise; stay constant
C)fall; stay constant
D)fall; rise