Deck 11: Business Cycles

Question 1

Internationally,recessions

A) are likely to begin in the smallest economies and spread to larger ones
B) are isolated events, uncorrelated across countries
C) in one region mean that world demand has shifted elsewhere, so other countries do not fall prey to downturns at the same time
D) are especially contagious among trade partners
E) are most pronounced among Socialist countries

Answer 1

are especially contagious among trade partners

Question 2

Business cycles affect long run growth because

A) uncertainty caused by business cycles deters investment
B) installation costs for new plant and equipment are lower during recessions than during periods of expansion
C) human capital depreciates during recessions
D) the competition to survive a recession provides incentives for firms to reorganize for greater efficiency
E) all of the above

Answer 2

all of the above

Question 3

Over the course of the business cycle

A) the public sector is the most procyclical sector of the economy
B) manufacturing tends to be countercyclical
C) the service sector displays greater volatility than manufacturing
D) construction is the most volatile sector of the economy
E) the amplitude of fluctuations in the public sector exceeds that of GDP as a whole

Answer 3

construction is the most volatile sector of the economy

Question 4

Which of the following is not assumed in Real Business Cycle theory?

A) labor supply curves are relatively flat
B) markets allocate resources efficiently
C) economic expansions are caused by technological improvements
D) recessions are caused by reductions in aggregate demand
E) the marginal product of labor changes over the course of the business cycle

Question 5

Which of the following plays a central role in Real Business Cycle theory?

A) monopoly pricing
B) the marginal product of labor
C) the marginal propensity to consume
D) expectations
E) monetary policy

Question 6

The economy's capacity to produce is defined in such a way that

A) output cannot exceed capacity
B) the growth of potential GDP corresponds to the economy's long run trend
C) the economy is always operating at its current potential
D) there is always a degree of slack or inefficiency in production, so output is always below capacity
E) when workers work overtime, capacity expands

Question 7

The next two questions refer to the following.
Consider the following hypothetical annual growth rates of real GDP:

7. 1998 appears to have been a year of
a) economic expansion
b) recession
c) depression
d) growth recession
e) stagflation
Economic recovery from recession appears to have begun in

A) 1999
B) 2000
C) 2001
D) 2002
E) 2003

Question 8

The impact of recession

A) is, in the aggregate, a more significant factor in social welfare than long run growth
B) is more severe for professionals than for semi-skilled manual laborers
C) is more severe for skilled workers than for unskilled workers
D) causes larger declines in consumption among those aged 26 to 45 than among teenagers
E) is most severe for the poorest members of society

Question 9

Okun's law refers to

A) The tendency for recessions in the USA to spread throughout the world
B) The generally stable negative relationship between the output gap and deviations of unemployment from the natural rate
C) The generally stable positive relationship between the output gap and deviations of unemployment from the natural rate
D) The tendency for business cycle volatility to fall over time
E) The negative relationship between unemployment and job vacancies

Question 10

The most controversial element of the Frisch-Slutsky paradigm concerns

A) the direction in which employment moves during business cycles
B) the duration of business cycles
C) which types of events can cause business cycles
D) the manner in which exogenous shocks are translated into business cycles
E) whether the business cycle creates impulses or propagation mechanisms

Question 11

Comparing State economies to that of the US as a whole shows that

A) about half the States are in recession at any point in time
B) when the US enters a recession, about 20% of the States experience economic expansion, and vice versa
C) there is very little correlation between the national and regional economies
D) there is a highly positive correlation between the national economy and most State economies
E) the 12 Federal Reserve districts experience business cycles independently of each other

Question 12

Output in excess of potential GDP

A) implies a negative output gap
B) describes a recession
C) is impossible
D) is unsustainable
E) creates deflation

Question 13

According to Real Business Cycle theory,

A) lack of consumer confidence causes most business cycles
B) price fluctuations are unimportant because they affect nominal, not real GDP
C) recessions are an optimal response to negative technology shocks
D) fiscal policy is the most appropriate way to smooth out economic fluctuations
E) labor supply curves are extremely steep

Question 14

Business cycles are

A) seasonal changes in output
B) quarterly profit and loss fluctuations around a company's fiscal-year average
C) long run trends upward or downward in employment
D) medium-term fluctuations of aggregate output around its long term trend
E) gyrations of share prices on the stock market

Question 15

A large negative output gap

A) represents a shortage of goods due to excessive demand for output
B) is the result of overtime work by the labor force
C) creates inflation
D) means the business cycle is at a peak
E) implies excessive unemployment

Question 16

Which of the following variables typically moves in the opposite direction from national income?

A) the inflation rate
B) the unemployment rate
C) consumption
D) investment
E) GDP

Question 17

The Great Moderation refers to

A) Dramatic fall in business cycle volatility that occurred from the mid-1980s to the mid-2000s
B) The general fall in business cycle volatility after the second world war
C) The fall in global output that occurred after 2007
D) Improved monetary policy since the mid-1980s
E) Improved fiscal policy since the mid-1980s

Question 18

A growth recession occurs when

A) there are two successive quarters of negative GDP growth
B) economic growth is so rapid that it creates inflation
C) real GDP is growing but nominal GDP is not
D) potential GDP declines
E) GDP grows at a slower rate than its long run trend

Question 19

A traditional definition of recession is

A) any GDP gap which persists for 9 months or more
B) deflation or a slowing of the inflation rate for one year or more
C) a temporary shock to the economy resulting in the need for fiscal or monetary stimulus
D) at least two successive quarters of positive unemployment
E) negative GDP growth for half a year or more

Question 20

Comparisons of business cycles before and after World War II show that

A) there has been no significant change in the nature of business cycles
B) the amplitude of business cycles has increased in recent years
C) diminishing foreign trade has successfully reduced volatility in the post-war period
D) expansions have lengthened and contractions have shortened
E) recessions have become shorter but deeper, while expansions have become shorter with higher growth rates

Question 21

Which of the following is characteristic of business cycles?

A) consumption displays greater volatility than GDP
B) investment remains relatively stable throughout the business cycle
C) the inflation rate is a leading indicator of recessions and expansions in GDP
D) the unemployment rate is a leading indicator of recessions and expansions in GDP
E) the growth rate of wages fluctuates less than the growth rate of GDP

Question 22

Which of the following can create a "real rigidity" in price setting?

A) constant marginal cost as output rises
B) fixed contracts to sell at a given price
C) existing advertisements which include prices
D) item prices for goods on store shelves
E) menu costs

Question 23

If firms are producing below capacity,

A) it is not possible to increase output
B) they will charge higher prices to maintain profit levels
C) resources, especially labor, are in short supply
D) output can be expanded by hiring extra workers
E) an increase in aggregate demand will force firms into bankruptcy

Question 24

A sudden,unexpected increase in the economy's prevailing wage level due to a general strike threat would

A) shift the aggregate demand curve out and push equilibrium prices down
B) shift the aggregate demand curve in and push equilibrium output down
C) shift the short run aggregate supply curve in and push equilibrium prices up
D) shift the Phillips Curve in and increase the natural rate of unemployment
E) shift the long run aggregate supply curve out and push equilibrium prices down

Question 25

As firms raise output in response to rising aggregate demand,

A) resources become scarce, wages eventually rise, and a point is reached beyond which output cannot expand
B) they become increasingly efficient and are thus able to pass the cost savings on to consumers in the form of lower prices
C) real wages fall, interest rates rise, and consumers buy less
D) they hire fewer workers and substitute capital for labor
E) the level of nominal GDP falls, though real GDP rises

Question 26

The slope of the aggregate demand curve is generally believed to be

A) an increasing function of the interest rate
B) an increasing function of the price level
C) a decreasing function of the price level
D) horizontal
E) initially upward-sloping, then eventually becoming vertical

Question 27

The shape of the short run aggregate supply curve is generally believed to be

A) a decreasing function of the price level
B) an increasing function of the interest rate
C) an increasing function of the price level
D) vertical
E) backward-bending

Question 28

In contrast to the long run,in the short run

A) changes in wages may lag behind changes in employment
B) the economy produces at full capacity
C) GDP follows a steady trend without fluctuations
D) the aggregate supply curve is vertical
E) the quantity of money has no effect on output

Question 29

Survey data suggest that most firms

A) respond to increased demand by utilizing overtime
B) respond to increased demand by sub-contracting work to other firms
C) review their pricing policies either daily or weekly
D) change the prices of output monthly
E) adjust wages and output prices with equal frequency

Question 30

Which of the following would cause an outward shift of aggregate demand?

A) an increase in interest rates
B) an increase in tax rates
C) the expectation of higher income
D) improvements in technology
E) an increase in imports

Question 31

One of Keynes' most profound insights was that

A) markets allocate resources efficiently, as if by an invisible hand
B) comparative advantage allows all nations to gain from trade
C) capitalists exploit workers by paying them less than the total value of what they produce
D) the same factor that drives long run growth-technological change-also causes business cycles
E) the economy can achieve an equilibrium below its capacity

Question 32

The long run can be distinguished from the short run because in the long run

A) an equilibrium is reached between aggregate supply and aggregate demand
B) resources are no longer scarce
C) firms produce at capacity
D) the inflation rate is zero
E) technological advances come to an end

Question 33

In the long run,

A) nominal wages rise more slowly than prices
B) output is independent of the price level
C) real wages are higher than money wages
D) a higher price level elicits a sustained increase in production
E) the aggregate demand curve is perfectly horizontal

Question 34

Over the course of the business cycle,most firms respond

A) to negative shocks by cutting wages
B) to positive shocks by raising prices
C) to negative shocks by cutting prices
D) to positive shocks by raising output
E) all of the above

Question 35

All other things being equal,in the absence of public policy,an economy producing more than its sustainable capacity will eventually

A) reduce its long run capacity by wearing out its capital and depleting its natural resources
B) increase its long run capacity to meet the demand
C) experience wage and price increases and cutbacks in supply until output is at capacity
D) export the excess output to other countries
E) exhibit improved technology

Question 36

Strategic complementarity refers to

A) two trade partners producing goods in which they have the greatest relative efficiency, and sharing the benefits through trade
B) the increase in demand for one good when the price of another good falls
C) a market failure in which individual decisions are not coordinated
D) the relationship between capital and labor during a business cycle
E) government subsidies for investment

Question 37

Which of the following correctly describes a theory of wage behavior during the business cycle?

A) Real Business Cycle theory holds that workers are relatively unresponsive to wage changes
B) Classical theory holds that nominal wages are inflexible
C) Keynesian theory holds that real wages may rise during recessions, preventing labor markets from clearing
D) Rational expectations theory holds that workers continue to anticipate wage increases during recessions
E) Marxist theory holds that unions cause recessions by keeping wages too high

Question 38

In the long run,the shape of the aggregate supply curve is

A) upward-sloping, because output can be increased only at higher costs
B) horizontal, because all inputs are variable
C) horizontal, because markets become perfectly competitive
D) vertical, because further expansion of output is unprofitable, regardless of prices
E) downward-sloping, because firms must ultimately charge lower prices in order to sell more output

Question 39

One of the reasons why higher prices affect the quantity of real output demanded is

A) at higher prices, business people become richer, so demand rises
B) at higher prices, real household wealth is reduced, so the quantity of output demanded falls
C) when prices are high, consumers fear that a recession is approaching
D) when pricing are rising, the central bank tends to reduce interest rates, thereby reducing demand
E) at higher prices, time becomes more valuable, so people buy now instead of later

Question 40

Which of the following is inconsistent with Keynesian models of business cycles?

A) wage and price stickiness
B) coordination failure
C) multiple equilibria
D) efficient market allocation
E) the need for stabilization policy

Question 41

Compared to Keynesians,Real Business Cycle theorists

A) have greater optimism regarding markets
B) give a larger role to stabilization policy
C) believe technology plays a relatively minor role in short run fluctuations
D) are more likely to claim that individuals are unresponsive to price changes
E) are relatively unconcerned with productivity shocks

Question 42

Consider the following hypothetical annual growth rates of real GDP:

1998 appears to have been a year of

A)economic expansion
B)recession
C)depression
D)growth recession
E)stagflation

Question 43

Consider the following hypothetical annual growth rates of real GDP:

Economic recovery from recession appears to have begun in

A) 1999
B) 2000
C) 2001
D) 2002
E) 2003

Question 44

Which of the following could cause a recession?

A) An increase in consumption
B) An increase in saving
C) An increase in investment
D) An increase in government purchases
E) An increase in exports

Question 45

Assuming aggregate supply is upward-sloping and aggregate demand is downward-sloping,a sudden reduction in a nation's exports will

A) cause inflation
B) cause recession
C) cause stagflation
D) increase GDP and reduce prices
E) increase GDP and raise equilibrium prices

Question 46

Increases in aggregate demand are likely to create

A) deflation during recessions
B) inflation when the output gap is quite negative
C) higher output when the output gap is negative, and inflation when output is at capacity
D) reductions in output if the output gap is already positive
E) both inflation and recession

Question 47

If the price of imported inputs suddenly rises,

A) we buy less, so aggregate demand falls
B) we pay more for the same quantity, so aggregate demand rises
C) we substitute domestic sources of inputs, so aggregate demand rises
D) our ability to produce is reduced, so aggregate supply shifts inward
E) GDP in unaffected because imports are netted out of gross domestic product