Deck 22: Understanding Business Cycle Fluctuations

Question 1

The 2008 and 2009 tax cuts and the increase in government spending that occurred at the same time did not have the same inflationary impact as the similar policy in the 1960s because:

A)The fiscal stimulus came at a time when the economy was weakening due to other factors
B)Monetary policy makers, having perceived the inflation risk, responded appropriately
C)The timing was fortuitous
D)All of the answers provided are correct

Answer 1

D

Question 2

Which of the following would be classified as a negative supply shock?

A)An increase in the legal minimum wage
B)A decrease in the price of oil
C)An increase in government purchases
D)An increase in demand for exports

Answer 2

A

Question 3

If an economy is initially at a state of long-run equilibrium, the short-run effect(s) from a decrease in aggregate demand will include:

A)An expansionary gap
B)A higher rate of inflation
C)A higher level of potential output
D)A recessionary gap

Answer 3

D

Question 4

Permanent declines in inflation such as those seen in Chile and Sweden must have been a result of:

A)An increase in the central bank's inflation target
B)A decrease in the central bank's inflation target
C)Less independence for their central banks
D)A change to targeting interest rates instead of inflation rates

Question 5

If inflation increases, this could be illustrated as a:

A)Rightward shift of the long-run aggregate supply curve
B)Leftward shift of the long-run aggregate supply curve
C)Rightward shift of the short-run aggregate supply curve
D)Movement down along the short-run aggregate supply curve

Question 6

During the Vietnam War, monetary policy officials reacted to the increases in aggregate demand resulting from military expenditures by:

A)Not shifting the monetary policy reaction function
B)Dramatically slowing money growth
C)Shifting the monetary policy reaction curve to the left
D)Keeping the same inflation target and raising the real interest rates

Question 7

An increase in aggregate demand with no adjustment in monetary policy will result in:

A)An increase in potential output and higher inflation
B)A decrease in potential output and higher inflation
C)No change in potential output but higher inflation
D)No change in inflation

Question 8

A reduction in the central bank's inflation target shifts the dynamic aggregate demand curve to the left resulting in:

A)Lower current output and higher inflation
B)Higher current output and higher inflation
C)Lower current output and lower inflation
D)Higher current output and lower inflation

Question 9

An increase in the price of oil should cause the short-run aggregate supply curve to:

A)Shift to the right
B)Become vertical
C)Become horizontal
D)Shift to the left

Question 10

If monetary policymakers do not change their inflation target and aggregate demand shifts left:

A)There will be a temporary decrease in output
B)Potential output will decrease
C)There will be an increase in inflation in the long run
D)It will result in a permanent reduction in inflation

Question 11

Focusing on the last fifty years in U.S.history, one would say that the number of recessions has:

A)Decreased
B)Increased but their duration has decreased
C)Increased and their duration has increased
D)Decreased but their duration has increased

Question 12

If monetary policymakers do not want an increase in government purchases, which increases aggregate demand, to cause an increase in inflation, they would:

A)Shift the monetary policy reaction curve to the right, raising inflation at every real interest rate
B)Do nothing and let the economy's self-correcting mechanism work
C)Shift the monetary policy reaction function left, increasing the real interest rate at every rate of inflation
D)Increase the growth rate of money

Question 13

Without a change in target inflation, anything that shifts the aggregate demand curve to the right will cause:

A)A temporary increase in output
B)A permanent reduction in inflation
C)A temporary increase in inflation
D)A decrease in inflation in the long run

Question 14

The period 1974-1975 is somewhat unique in U.S.economic history due to the fact that:

A)The output was growing rapidly and the inflation rate was falling
B)Both the output and the inflation rate were falling
C)Output was falling yet the inflation rate rose dramatically
D)Output and the inflation rate were both rising

Question 15

A "shock" is something that creates a shift in:

A)The demand curve only
B)The supply curve only
C)Either the demand curve or the supply curve
D)Both the demand curve and the supply curve at the same time

Question 16

An increase in the price of oil should:

A)Shift the dynamic aggregate demand curve to the right
B)Reduce the level of potential output
C)Shift the short-run aggregate supply curve upward
D)Create a temporary expansionary gap

Question 17

Which of the following statements is incorrect?

A)A fall in the central bank's target inflation rate shifts the monetary policy reaction curve to the left
B)A decrease in the central bank's inflation target raises the real interest rate policymakers set at each level of output
C)Shifts in the monetary policy reaction curve shift the dynamic aggregate demand curve in the same direction
D)A fall in the central bank's target inflation rate causes the monetary policy reaction curve to flatten

Question 18

A reduction in the central bank's inflation target will result in:

A)An increase in potential output
B)No change in potential output
C)A decrease in potential output
D)The long-run aggregate supply curve having an upward slope

Question 19

Which of the following would be classified as a negative supply shock?

A)An increase in the price of oil
B)An increase in government purchases
C)An increase in export demand
D)Either an increase in the price of oil or an increase in government purchases

Question 20

An increase in aggregate demand will have the following effect on potential output:

A)Potential output will increase
B)Potential output will decrease
C)Potential output will increase at first and then decrease
D)There won't be a change in potential output from an increase in aggregate demand

Question 21

The longest recession since the 1940's began in:

A)1952
B)1973
C)1981
D)2007

Question 22

Which of the following is not correct with regard to the definition of a recession as used by the NBER?

A)A recession occurs when there is a dip in the growth rate
B)The exact length of time needed for a downturn to be declared a recession is not specified
C)Many key economic indicators are used, some of which may move in opposite directions
D)A recession is characterized by lower levels of economic activity

Question 23

"Official" recessions in the United States are declared by:

A)The Federal Reserve
B)The U.S.department of the Treasury
C)The National Bureau of Economic Research
D)Congress

Question 24

If consumer and business sentiment were to increase dramatically, causing an expansionary gap:

A)Monetary policymakers could stabilize the economy by shifting their monetary policy reaction curve to the right
B)Fiscal policymakers could stabilize aggregate demand by cutting income and business taxes
C)Monetary policymakers would likely shift the monetary policy reaction curve to the left to shift the dynamic aggregate demand left
D)Fiscal policymakers could stabilize aggregate demand by increasing government purchases

Question 25

Which of the following statements is most correct?

A)A recession is officially defined as two consecutive quarters where the real growth rate is negative
B)A recession officially begins when unemployment exceeds 5.0 percent
C)There is no hard and fast definition of a recession
D)The official date of a recession is determined by the Federal Reserve Board, but usually with at least a three-month delay

Question 26

Stagflation occurs when:

A)The inflation rate decreases and current output decreases
B)The inflation rate increases and current output decreases
C)The inflation rate decreases and current output increases
D)The inflation rate increases and current output increases

Question 27

Policymakers can stabilize the economy by shifting:

A)The short-run aggregate supply curve
B)The dynamic aggregate demand curve
C)The long-run aggregate supply curve
D)Neither the short-run aggregate supply curve nor the dynamic aggregate supply curve

Question 28

A review of economic data suggests that:

A)Expansions are shorter than recessions
B)Business cycles are recurrent and periodic
C)Over the last fifty years, recessions are becoming more common
D)Recessions are shorter in duration than expansions

Question 29

What tool is available to monetary policymakers to shift the short-run aggregate supply curve to the left following a positive inflation shock?

A)A rightward shift of the monetary policy reaction curve
B)A leftward shift of the monetary policy reaction curve
C)Open market purchases of government securities
D)None of the answers given are correct; the actions of monetary policymakers affect the dynamic aggregate demand curve

Question 30

An increase in the rate of inflation:

A)Can only result from increases in aggregate demand
B)Can only result from upward shifts in the short-run aggregate supply curve
C)Will result only if the long-run aggregate supply curve is vertical
D)Can result from shifts in either the dynamic aggregate demand curve or the short-run aggregate supply curve

Question 31

Negative supply shocks cause shifts in:

A)The short-run aggregate supply curve
B)The dynamic aggregate demand curve
C)The monetary policy reaction curve but only if policymakers do not change their inflation target
D)The long-run supply curve

Question 32

Stabilization policy refers to the use of:

A)Only fiscal policy
B)Only monetary policy
C)Either fiscal or monetary policy
D)Policy to shift the long-run aggregate supply curve

Question 33

Which of the following would shift the short-run aggregate supply curve to the right?

A)An increase in oil prices
B)A reduction in the minimum wage
C)A change in the law requiring overtime pay for anyone working more than 30 hours a week
D)An increase in payroll taxes

Question 34

Business cycles vary in:

A)The length of recessions only
B)The time between recessions only
C)Both the length of recessions and the time between recessions
D)None of the answers given is correct; business cycles are by definition recurring waves that rise and fall in a periodic pattern

Question 35

Which of the following statements is most correct?

A)Policymakers can eliminate the effects of negative supply shock
B)Policymakers can neutralize movements in aggregate demand
C)Policymakers can shift the short-run aggregate supply curve
D)Shifts in the monetary policy reaction function used to stabilize the economy shift the short-run aggregate supply curve

Question 36

An inflation shock that shifts the short-run aggregate supply curve upward means the economy's potential level of output will:

A)Increase
B)Not change
C)Decrease
D)Decrease only if monetary policymakers do not respond

Question 37

Stagflation is a term that usually describes an economy experiencing:

A)Low inflation.
B)Low inflation coupled with low growth.
C)High inflation with a recessionary gap.
D)Low unemployment rates and low inflation rates.

Question 38

Suppose that consumer and business confidence fall.What is the ultimate outcome for the economy if monetary policymakers respond to keep inflation on an unchanged target?

A)If monetary policymakers respond, output would remain close to potential output
B)If monetary policymakers respond, output would fall below potential output
C)If monetary policymakers respond, output would rise above potential output
D)If monetary policymakers respond, output would remain close to potential output but inflation would still rise despite their actions

Question 39

Almost all recessions identified by the NBER are characterized by:

A)Declining real GDP.
B)Higher interest rates.
C)Durations exceeding.two years.
D)Higher rates of inflation.

Question 40

According to the NBER, a severe decline in economic activity that lasted less than two quarters:

A)Could not be considered a recession
B)Could still be considered a recession
C)Would not be called a recession until more than two years had passed
D)Would immediately be called a recession

Question 41

Increases in potential output shift:

A)The long-run aggregate supply curve
B)The short-run aggregate supply curve
C)Both the long-run aggregate supply curve and the short-run aggregate supply curve
D)The long-run aggregate supply curve, the short-run aggregate supply curve, and the dynamic aggregate demand curve

Question 42

Monetary policymakers can take advantage of the impact that positive inflation shocks have on output by shifting the:

A)Monetary policy reaction curve left
B)Monetary policy reaction curve right
C)Short-run aggregate supply curve to the left
D)Short-run aggregate supply curve to the right

Question 43

During the Great Moderation experienced in the United States during the 1990s:

A)Output never decreased and inflation fell steadily
B)Output and inflation both fell steadily
C)Output and inflation both increased
D)Output never decreased and inflation rose only slightly

Question 44

Opportunistic disinflation occurs when policymakers:

A)Change the target inflation rate
B)Take advantage of positive supply shocks
C)Are able to permanently lower inflation
D)All of the answers given are correct

Question 45

Fiscal policy suffers from the problem of:

A)Being formulated and implemented by politicians
B)Being slow to implement
C)Being influenced by special interest groups
D)All of the answers given are correct

Question 46

The U.S.economy has likely experienced:

A)More periods of deflation than disinflation
B)More periods of disinflation than deflation
C)An equal number of periods of deflation and disinflation since they are synonymous
D)None of the answers provided is correct

Question 47

Tax cuts would have the same affect on the dynamic aggregate demand curve as:

A)Decreases in government purchases
B)The Federal Reserve selling U.S.treasury securities
C)The Federal Reserve buying U.S.treasury securities
D)Temporary tax increases

Question 48

In practice, it is difficult to keep inflation and output from fluctuating when aggregate expenditures change because:

A)It takes time for policymakers to recognize that shifts have occurred
B)Changes in interest rates do not have an immediate impact on the economy
C)Changes in consumer or business confidence can be very difficult to recognize as they are occurring
D)All of the answers given are correct

Question 49

An increase in potential output will result in:

A)A temporary expansionary gap
B)A higher rate of inflation eventually
C)A temporary recessionary gap
D)An immediate shift upward in the short-run aggregate supply curve

Question 50

During the Great Moderation experienced in the United States during the 1990s the volatility of inflation and growth:

A)Moved in opposite directions.
B)Both dropped significantly.
C)Both increased but only slightly.
D)Disappeared.

Question 51

Comparing monetary and fiscal policy:

A)Fiscal policy has an advantage because it is faster to implement than monetary policy
B)Fiscal policy is easier to implement
C)Monetary policy is easier to implement
D)History has shown fiscal policy to be more effective at stabilization

Question 52

Higher potential output levels:

A)Put upward pressure on real interest rates
B)Put downward pressure on real interest rates and upward pressure on inflation rates
C)Put upward pressure on real interest rates and downward pressure on inflation rates
D)None of the answers given is correct

Question 53

Possible explanations that have been offered for the Great Moderation experienced in the United States during the 1990s include all of the following except:

A)Good fortune
B)Economies that have become more flexible in absorbing shocks
C)Calm financial markets
D)Better understanding and use of monetary policy

Question 54

Consider the period from 1995 to 1999.The U.S.economy:

A)Experienced the great productivity slowdown
B)Experienced increases in productivity that allowed the Fed the opportunity to raise the inflation rate
C)Experienced increases in productivity that allowed the Fed the opportunity to let the inflation rate fall
D)Saw its potential level of output decrease

Question 55

Monetary policy has the following advantage(s) over fiscal policy:

A)It is less influenced by politics
B)It can be implemented faster
C)It can be fine-tuned
D)All of the answers given are correct

Question 56

If a positive inflation shock occurs and monetary policymakers do not change the inflation target:

A)Output will return to potential output and inflation will equal the inflation target
B)Output will rise above potential output while inflation will equal the inflation target
C)Output will fall below potential output while inflation will equal the inflation target
D)Output will return to potential output and but inflation will exceed the inflation target

Question 57

Unemployment insurance and the proportional nature of the tax system are examples of:

A)Discretionary fiscal policy
B)Automatic fiscal policy
C)Both discretionary and automatic fiscal policy
D)Expansionary fiscal policy

Question 58

Disinflation occurs when:

A)The inflation rate is negative
B)The inflation rate is 2 percent or less
C)The inflation rate goes above ten percent
D)The rate of inflation declines

Question 59

Most economists attribute the Great Moderation experienced in the United States during the 1990s mainly to:

A)Good fortune
B)Improved technology
C)Aggressive fiscal policy
D)Better understanding and use of monetary policy

Question 60

The dynamic aggregate demand curve shifts as a result of:

A)Discretionary fiscal policy
B)Automatic fiscal policy
C)Either discretionary or automatic fiscal policy
D)Fiscal policy but only when it's used in conjunction with monetary policy

Question 61

The effect of a decrease in import prices on overall inflation can be best described as:

A)Nonexistent
B)A modest increase
C)A modest decrease
D)A significant decrease, particularly as globalization and trade increase

Question 62

To set the target interest rate, central banks need to know the size of the output gap.This requires measuring:

A)Only the level of current gross domestic product
B)Only the levels of current gross domestic product and potential gross domestic product
C)Not only the levels of current gross domestic product and potential gross domestic product but also their growth rates
D)Only the growth rates of current gross domestic product and potential gross domestic product

Question 63

Globalization and trade:

A)Can be seen as a source of productivity enhancing technological progress
B)Shifts both the short-run and long-run aggregate supply curves to the right
C)Provide an opportunity to reduce inflation permanently
D)All of the answers provided are correct

Question 64

In which situation would policymakers be unable to neutralize the effect on the economy?

A)The federal government runs a deficit
B)An increase in the price of oil
C)Imports exceed exports
D)Consumer confidence declines

Question 65

If a recession results from higher oil prices:

A)Inflation should increase as output decreases
B)Inflation should fall as output falls
C)Output should not change but inflation should increase
D)An expansionary gap should occur

Question 66

Which of the following statements best describes the level of potential output in the U.S.?

A)It never changes year to year
B)It is very erratic year to year
C)It usually increases year to year
D)It has been decreasing since 1999

Question 67

If a negative supply shock is associated with a decline in potential output, policymakers need to:

A)Raise the real interest rate by even less than they would in the case of a recessionary gap
B)Raise the real interest rate by even more than they would in the case of a recessionary gap
C)Raise the real interest rate by the same amount as they would in the case of a recessionary gap
D)Not shift the monetary policy reaction curve

Question 68

Policymakers can neutralize:

A)Supply shocks, but only in the short run
B)Supply shocks, but only in the long run
C)Supply shocks in both the short run and the long run
D)Only demand shocks

Question 69

Increases in productivity result in:

A)Higher inflation as output increases
B)Lower inflation as output decreases
C)Opportunities for policymakers to reduce their inflation target without inducing a recession
D)None of the answers provided is correct

Question 70

Real business cycle theory seeks to explain business cycle fluctuations by focusing on:

A)Shifts in potential output
B)The inflexibility of prices and wages
C)Aggregate demand
D)Changes in monetary policy

Question 71

The assumption that prices and wages are flexible implies that the:

A)Short-run aggregate supply curve is irrelevant
B)Short-run aggregate supply curve shifts slowly in response to deviations of current output from potential output
C)Long-run aggregate supply curve is irrelevant
D)Long-run aggregate supply curve could not shift

Question 72

Policymakers could neutralize all of the following except:

A)An increase in federal government spending on defense
B)An increase in the price of oil
C)A trade deficit
D)A decrease in business confidence

Question 73

If prices and wages are slow to adjust ("sticky," rather than flexible):

A)Inflation would adjust rapidly
B)Output gaps would disappear quickly
C)Inflation would adjust to output gaps sluggishly
D)The short-run aggregate supply curve would not shift

Question 74

If a negative supply shock is associated with a decline in potential output, keeping inflation at its target requires:

A)A leftward shift in the monetary policy reaction curve because there is an expansionary gap
B)A rightward shift in the monetary policy reaction curve because there is an expansionary gap
C)A leftward shift in the monetary policy reaction curve because there is a recessionary gap
D)A rightward shift in the monetary policy reaction curve because there is an recessionary gap

Question 75

Real business cycle theory explains fluctuations in output through:

A)Changes in aggregate demand
B)Changes in productivity
C)Shifts of the short-run aggregate supply curve
D)Changes in monetary policy

Question 76

If prices were to adjust quickly:

A)Output gaps would be persistent
B)Output gaps would disappear quickly
C)Inflation would adjust slowly
D)The short-run aggregate supply curve would not shift

Question 77

Estimates of gross domestic product (GDP) are revised:

A)Quickly and often
B)Many years after the fact
C)In the following quarter
D)Each month

Question 78

If the economy's output response to changes in current inflation is small, the slope of the dynamic aggregate demand curve will be:

A)Flat
B)Steep
C)Positive
D)Zero

Question 79

The key part of the real business cycle theory model is:

A)The importance of monetary policy
B)The short-run aggregate supply curve
C)Changes in aggregate demand
D)Changes in potential output

Question 80

Globalization and trade:

A)Reduce inflation in the short run but not in the long run
B)Reduce inflation in the short run and in the long run
C)Increase inflation in the short run but not in the long run
D)Reduce inflation in the short run but increase inflation in the long run