Deck 13: Business Cycles and Economic Growth

Question 1

Which of the following is not a lagging indicator?

A) Outstanding commercial loans.
B) Duration of unemployment.
C) Prime rate.
D) Stock prices.

Answer 1

D

Question 2

Suppose the index of leading economic indicators begins to decline for several months. Which of the following economic events will likely follow?

A) A recession.
B) Severe inflation.
C) Greater employment.
D) Higher investment.

Answer 2

A

Question 3

Which of the following is a coincident indicator?

A) Average work week.
B) New building approvals.
C) Stock prices.
D) Household income.

Answer 3

D

Question 4

Retail sales data is an example of a:

A) leading indicator.
B) lagging indicator.
C) coincident indicator.
D) goal of macroeconomic policy.
E) countercyclical indicator.

Question 5

Which of the following is a lagging indicator?

A) Material prices.
B) Changes in inventories.
C) Industrial production.
D) Retail sales.

Question 6

Variables that change before real GDP changes are measured by the:

A) personal income index.
B) real GDP index.
C) forecasting gauge.
D) index of leading indicators.

Question 7

Economic indicators (e.g. unemployment claims and the average working week), which change before real GDP changes, are called:

A) leading.
B) lagging.
C) coincident.
D) structural.

Question 8

A phase in the business cycle in which the decline in the economy's real GDP persists for at least half a year is known as:

A) a depression.
B) a recession.
C) a downtick.
D) disequilibrium.

Question 9

A business cycle is:

A) the period of time in which the expansion and contraction of economic activity are equal.
B) the period of time in which there are three phases, which are: peak, depression
And recovery.
C) the recurring growth and decline in real GDP.
D) the period of time in which a business is established and ceases operations.

Question 10

The phase in the business cycle in which real GDP declines is called a:

A) trendline.
B) peak.
C) recession.
D) recovery.

Question 11

Which of the following is not a variable in the index of leading indicators?

A) Average working week.
B) Duration of unemployment.
C) Unemployment claims.
D) New businesses.

Question 12

The point at which real output reaches a maximum during a business cycle is called the:

A) depression.
B) recession.
C) peak.
D) trough.

Question 13

Which of the following is a coincident indicator?

A) CPI data.
B) Industrial production.
C) Building approvals.
D) Retail sales.

Question 14

A business cycle is the period of time in which:

A) a business is established and ceases operations.
B) there are three phases, which are: peak, depression and recovery.
C) real GDP declines.
D) expansion and contraction of economic activities are alternated.

Question 15

If you look for a job for 18 months after graduation, but fail to generate an offer, even after lowering your expectations, the economy is probably in the business cycle phase called:

A) recession.
B) peak.
C) boom.
D) recovery.

Question 16

The period during which real output falls during a business cycle is called:

A) peak.
B) recession.
C) recovery.
D) trough.

Question 17

The phase of the business cycle that follows a recession is known as the:

A) peak.
B) recession.
C) recovery.
D) trough.

Question 18

Economic growth is measured by the annual percentage increase in a nation's level of:

A) nominal GDP.
B) real GDP.
C) real GDP deflator.
D) economic indicators.

Question 19

What stage of the business cycle immediately follows the trough?

A) Peak.
B) Recovery.
C) Recession.
D) Depression.

Question 20

A recession is a decline in real GDP lasting at least:

A) one year.
B) six months.
C) three months.
D) one month.

Question 21

What stage of the business cycle immediately follows the peak?

A) Peak.
B) Recovery.
C) Recession.
D) Depression.

Question 22

The business cycle occurs from:

A) changes in industry demand.
B) changes in local supply and taxes.
C) changes in weather.
D) changes in the costs of production and in total spending.

Question 23

If the GDP gap is zero, we can conclude that:

A) unemployment is zero.
B) we are below our potential output level.
C) cyclical unemployment is zero.
D) we are above our potential output level.

Question 24

Over time, real GDP tends to:

A) fluctuate.
B) trend upward.
C) slow down.
D) trend downward.

Question 25

A coincident indicator:

A) highlights future changes in economic growth.
B) highlights previous changes in economic growth.
C) highlights current changes in economic growth.
D) always runs countercyclically to the business cycle.

Question 26

Which of the following is not a part of the business cycle?

A) Peak.
B) Trough.
C) Existence.
D) Recession.

Question 27

Total spending influences the business cycle because:

A) increases in spending flow through to higher output, employment and income.
B) it allows GDP to increase well beyond the full-employment level of output.
C) decreases in spending will increase inflation, which then reduces real GDP.
D) increases in spending will decrease inflation, which then increases real GDP.

Question 28

The GDP gap is the difference between:

A) seasonal unemployment and actual real GDP.
B) the unemployment rate and real GDP deflator.
C) full-employment real GDP and actual real GDP.
D) full-employment real GDP and real GDP deflator.

Question 29

The GDP gap is the difference between:

A) full-employment real GDP and nominal GDP chain price index.
B) unemployment rate and real GDP chain price index.
C) full-employment real GDP and actual real GDP.
D) discouraged workers and actual real GDP.

Question 30

The GDP gap measures:

A) the value of non-market goods.
B) the cost of additional labour.
C) total value of final goods and services.
D) the cost of cyclical unemployment.

Question 31

The GDP gap is the difference between:

A) full-employment real GDP and nominal GDP.
B) the full employment rate and real GDP chain price index.
C) full-employment real GDP and actual real GDP.
D) seasonal unemployment and nominal GDP.

Question 32

The trough is the point:

A) at which the economy reaches its maximum.
B) at which unemployment is at the lowest level relative to recent years.
C) where the level of real GDP is at a maximum.
D) at which employment is at the lowest level relative to recent years.

Question 33

The level of GDP that could be produced at full employment is:

A) aggregated GDP.
B) desirable nominal GDP.
C) potential real GDP.
D) unattainable.

Question 34

Which of the following is true?

A) The business cycle is a maximum period of economic growth.
B) The rise and fall in nominal GDP is a significant indicator of the business cycle.
C) Employment growth indicates a downturn in the business cycle.
D) Increase in employment indicates a phase of economic growth.

Question 35

The trough is good news because:

A) it is the middle of the expansion phase of the business cycle.
B) production is at the highest level.
C) unemployment is low.
D) it is the starting point to improve economic conditions.

Question 36

Which of the following is true?

A) The GDP gap is the difference between nominal GDP and real GDP.
B) Economic growth is a difference between last year's CPI and this year's CPI.
C) Economic growth is measured by the annual increase in a nation's real GDP.
D) Discouraged workers are not fully accounted for in the unemployment rate.

Question 37

Which of the following is true?

A) The GDP gap is the difference between nominal GDP and real GDP.
B) Economic growth is needed because it reduces the nation's standard of living.
C) Economic growth is measured by the annual percentage increase in a nation's real GDP.
D) Economic growth is required to reduce the value of net exports.

Question 38

The business cycle is the:

A) succession of long-run fluctuations around the long-term trend.
B) succession of short-run fluctuations around the long-term trend.
C) erratic movements around the long-term trend.
D) straight line.

Question 39

If real GDP is currently $500 billion, there is 3 per cent cyclical unemployment and the potential nominal GDP is $600 billion, we can conclude with certainty that:

A) the GDP gap is $100 billion.
B) there is no GDP gap.
C) there is a GDP gap.
D) the economy is operating above full employment.

Question 40

The cost of cyclical unemployment is also called:

A) real GDP.
B) the GDP surplus.
C) the inflation gap.
D) potential output minus actual output.

Question 41

In the simple Solow growth model, with constant technology and constant returns to scale, GDP per capita can only increase if:

A) capital increases at the same rate as labour increases.
B) capital increases at a slower rate than labour.
C) capital increases at a faster rate than labour.
D) increasing marginal returns to capital exists.

Question 42

One of the long-term potential problems in getting an economy to increase its living standards in the Solow growth model is that:

A) current generations may not want to sacrifice investment for the benefit of future
Generations.
B) current generations may not want to sacrifice consumption for the benefit of future
Generations.
C) current generations may not want to sacrifice savings for the benefit of future
Generations.
D) future generations may not want to have to sacrifice consumption for the benefit of current generations.

Question 43

According to the Solow model, with a constant amount of labour and constant technology, increases in the quantity of capital will lead to output per worker:

A) increasing at an increasing rate.
B) increasing at a decreasing rate.
C) remaining constant.
D) declining at an increasing rate.

Question 44

According to the Solow model, with constant technology, an increase in capital per worker will lead to a smaller increase in GDP per capita. This is explained by:

A) constant returns to scale.
B) the law of diminishing marginal returns.
C) the law of diminishing marginal utility.
D) decreasing returns to scale.

Question 45

One of the problems in a country achieving its steady-state level in the Solow model is that:

A) short-term saving must be sacrificed in order to increase living standards in the long term.
B) short-term consumption must be sacrificed in order to increase living standards in the long term.
C) short-term investment must be sacrificed in order to increase living standards in the long term.
D) future generations will need to cut back on consumption in the long term.

Question 46

The 'golden rule', steady-state in the Solow growth model occurs when:

A) the level at which the economy will be made no better off is by additional saving.
B) the level of output per person is maximised.
C) the level of savings per person is minimised.
D) the level of consumption per person is maximised.

Question 47

The 'golden rule' of saving is:

A) the rate of saving that produces the minimum level of consumption per capita in the long-steady state.
B) the rate of saving that produces the maximum level of production per capita in the long-steady state.
C) the rate of saving that produces the maximum level of consumption per capita in the long-steady state.
D) The rate of saving that produces the minimum level of investment per capita in the long-steady state.

Question 48

The 'golden rule' level of capital per worker in the Solow model implies:

A) governments should consistently follow the same monetary policy rule regardless of the economy's stage in the business cycle.
B) consumption will be maximised when capital per worker is at its maximum.
C) there is an optimal rate of saving that will maximise investment.
D) there is an optimal rate of saving that will maximise consumption.

Question 49

The 1987 the Nobel Laureate, awarded for his contribution to growth theory, was:

A) John Maynard Keynes.
B) Milton Friedman.
C) Robert Solow.
D) Gregory Mankiw.

Question 50

An implication of the Solow growth model is that:

A) economies will automatically move from the optimal saving rate.
B) there may be a role for governments to play in moving the economy to its steady state.
C) output per worker will be maximised at the steady-state level.
D) it is impossible for a country to save 'too much'.

Question 51

The 'golden rule', steady-state level of capital per worker in the Solow model is where:

A) the savings rate equals zero.
B) the savings rate equals the consumption rate.
C) the savings rate results in the maximum level of output per worker.
D) the savings rate results in the maximum level of consumption per worker.

Question 52

Over the past century, virtually all countries have experienced long-term growth of:

A) zero per cent.
B) 2 per cent.
C) 3 per cent.
D) various rates.

Question 53

The law of diminishing returns in the Solow model implies that for sustained long-term economic growth to occur, a country needs to:

A) continually increase the quantity of capital.
B) continually increase the proportion of savings.
C) continually increase consumption.
D) have technological progress.

Question 54

In the Solow model, technological change:

A) is not included in the model.
B) is assumed to be endogenous.
C) is assumed not to exist.
D) is assumed to be exogenous.

Question 55

If an increase in labour and capital of 10 per cent leads to output increasing by 10 per cent then, ceteris paribus, the economy is operating with:

A) increasing returns to scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) economies of scale.

Question 56

The Solow growth model attempts to explain:

A) how consumption, saving, capital, labour and technology combine to determine long-term economic growth.
B) how technology is endogenous to economic growth.
C) how government spending, saving, capital, labour and technology combine to determine long-term economic growth.
D) how capital and labour combine to determine short-term economic growth.

Question 57

If an increase in labour and capital of 10 per cent leads to output increasing by 20 per cent then, ceteris paribus, the economy is operating with:

A) diseconomies of scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) increasing returns to scale.

Question 58

In the simple Solow growth model, investment depends crucially on:

A) the capital stock.
B) the supply of labour.
C) household savings.
D) diminishing returns to capital.

Question 59

In the Solow growth model, investment is only possible if:

A) consumption equals output.
B) consumption is greater than output.
C) output is greater than consumption.
D) firms borrow from overseas.

Question 60

According to the Solow growth model, technological progress:

A) was thought to occur within the economic system.
B) was thought to occur independently of the economic growth process.
C) was thought not to exist.
D) was thought to exist but only inside the economic system.

Question 61

What saving rate is optimal?

A) The rate of spending that produces the minimum level of consumption per capita in the long-run steady state.
B) The rate of saving at which the community will be made no better off by additional
Saving.
C) The rate of saving that produces the steady level of consumption per capita in the long- run steady state.
D) The rate of saving that produces the maximum level of consumption per capita during the recession.

Question 62

In the Solow model, technological progress is assumed to occur:

A) systematically as part of capital accumulation.
B) randomly outside the system.
C) systematically as part of increases in output.
D) systematically as part of increases in investment.

Question 63

For a given state of unchanging production technologies without the technological change:

A) no further growth in living standards can be achieved at some point in time.
B) further growth in living standards can be achieved if investment is higher than
Consumption.
C) further growth in living standards can be achieved at some point in time.
D) further growth in living standards can be achieved if saving is higher than investment.

Question 64

Which of the following is an example of a government policy aimed at increasing the long-term living standards of Australians?

A) Increases in government spending.
B) Decreases in taxes.
C) Decreases in interest rates.
D) Compulsory superannuation.

Question 65

The Solow growth model was the first economic model to show that long-term increases in living standards depended crucially on:

A) increases in capital.
B) increases in labour.
C) increases in saving rates.
D) technological progress.

Question 66

The Solow growth model explains:

A) how consumption, saving, capital, labour and technological change combine in the short term to determine economic growth.
B) how consumption, saving, capital, labour and technological change combine in the longer term to determine economic growth.
C) how history changes economic growth.
D) how net exports determine economic growth.

Question 67

One country can have a higher level of output per worker because of:

A) an increase in the unemployment rate.
B) a reduction in its labour force.
C) improvement in its available production technologies.
D) a reduction in population.

Question 68

In terms of the Solow growth model, the recent situation in Japan is perhaps an example of where a country has:

A) failed to increase its savings to the optimal rate.
B) been consistently able to achieve its optimal savings rate.
C) exceeded its optimal savings rate.
D) put too much emphasis on current consumption at the expense of future generations.

Question 69

Which of the following statements is correct regarding the Solow growth model?

A) Increases in living standards will be achieved automatically in the long run.
B) An increase in the saving rate will always result in a higher level of output per person.
C) An increase in the saving rate will always result in a higher level of consumption per person.
D) The optimal saving rate will be achieved as the community is no better off by additional saving.

Question 70

Without technological progress a country can never enjoy sustained increases in living standards because:

A) of diminishing marginal productivity.
B) of decreasing returns to scale.
C) an economy can never exceed its optimal rate of saving in the long run.
D) of increasing marginal productivity.

Question 71

Narrbegin Exhibit 12.2
$$\begin{array} { | c | c | c | c | c | c | c | } \hline \begin{array} { c } \text { Capital stock } \\\text { per person }\end{array} & \begin{array} { c } \text { Output per } \\\text { person }\end{array} & \begin{array} { c } \text { Capital stock } \\\text { depreciation } \\\text { (at rate of 10 } \\\text { per cent) }\end{array} & \begin{array} { c } \text { Gross in- } \\\text { vestment } \\\text { per person }\end{array} & \begin{array} { c } \text { Required } \\\text { saving } \\\text { per per- } \\\text { son }\end{array} & \begin{array} { c } \text { Required } \\\text { saving } \\\text { rate }\end{array} & \begin{array} { c } \text { Consump- } \\\text { tion per } \\\text { person }\end{array} \\\hline 100 \quad ( \langle 20 \% ) & 40 & 10 & 10 & 10 & 25 \% & 30 \\\hline 120 \quad ( \langle 20 \% ) & 46 ( < 15 \% ) & 12 & 12 & 12 & 26 \% &-?- \\ \hline 144 \quad ( \langle 20 \% ) & \begin{array} { c } 50.6 ( < \\10 \% )\end{array} & 14 & 14 & 144 & 28.5 \% & 36.2 \\\hline 172.8 ( \langle 20 \% ) & 53.1 ( \langle 5 \% ) & 17.3 & 17.3 & 17.3 & { } _ { - } { ?} _ { - } \% & 35.8 \\\hline\end{array}$$

-According to Exhibit 12.2, the 'golden rule' steady-state occurs when the level of capital per worker is:

A) 100.
B) 120.
C) between 144 and 172.8.
D) 172.8.

Question 72

A country can increase its real GDP per person by:

A) reducing the quantity of production factors.
B) increasing the number of holidays.
C) reducing its spending.
D) using more productive technology.

Question 73

In the Solow model, technological progress is assumed to be:

A) zero.
B) endogenous.
C) exogenous.
D) continually increasing.

Question 74

Which of the following can improve labour productivity?

A) Less spending on education and training.
B) More unskilled labour.
C) More spending on managers' office supplies.
D) Better educated workforce and improved management practice.

Question 75

According to the Solow growth model, the only way for a country to enjoy long-term economic growth is through:

A) increasing saving to the optimal steady-state level.
B) maximising consumption per worker.
C) technological progress.
D) increasing the quantity of capital per worker.

Question 76

If a country has no technological progress, the only way for it to have long-term increases in living standards is by:

A) continually increasing capital per worker.
B) continually increasing the saving rate.
C) continually increasing investment in research and development.
D) the government continually running budget surpluses to increase national savings.

Question 77

Which of the following statements best represents the impact of technological progress in the Solow growth model?

A) There must be increases in the quality and quantity of consumption for long-term growth to be achieved.
B) Technological progress is necessary to achieve the steady-state level of consumption per worker.
C) There must be increases in the quality and quantity of capital for long-term growth to be achieved.
D) Technological progress allows for an increase in the saving rate.

Question 78

Which of the following statements is incorrect regarding the Solow growth model?

A) Increases in living standards are not necessarily guaranteed in an economy.
B) The optimal saving rate is achieved when saving per person is maximised.
C) The optimal saving rate is achieved when consumption per capita is maximised.
D) The optimal saving rate is derived under the assumption that technology is constant.

Question 79

The rate of saving that produces the maximum level of consumption per capita in the long-run steady state is called the:

A) marvellous rate of saving.
B) golden rule of saving.
C) maximum rate of spending.
D) optimum rate of spending.

Question 80

Which of the following is not an example of technological progress?

A) Better training for workers.
B) Improvements in the quality of capital.
C) Improvements in management practices.
D) Increases in the quantity of capital.