Question 1

Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to see most of these pairs. Which pair of GDP growth rates and unemployment rates is most realistic?
A) -3 percent, 2 percent
B) -1 percent, 20 percent
C) 1 percent, 7 percent
D) 6 percent, 0 percent

Accepted Answer

A GDP growth rate of 1 percent and an unemployment rate of 7 percent is a realistic pair because a small amount of economic growth can still lead to job creation and a slightly higher unemployment rate is normal as people move in and out of employment. Options A and B are unlikely as high unemployment rates are typically associated with negative GDP growth. Option D is also unlikely as a 0 percent unemployment rate is unrealistic in any economy.

Question 2

According to the classical view in economics, which variable or policy can influence economic growth in the long run?
A) an increase in capital stock
B) an increase in money supply
C) an increase in unemployment benefits
D) an increase in nominal interest rates

Accepted Answer

According to the classical view in economics, an increase in capital stock (such as investments in machinery, equipment, and infrastructure) can influence economic growth in the long run by increasing the economy's production capacity and potential output. The other options listed are unlikely to have a significant impact on long-run economic growth.

Question 3

How does the size of investment as a fraction of GDP compare to its importance in creating economic fluctuations?
A) Investment is a small part of real GDP, and it accounts for a small share of the fluctuation in real GDP.
B) Investment is a small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.
C) Investment is a large part of real GDP, and it accounts for a large share of the fluctuation in real GDP.
D) Investment is a large part of real GDP, yet it accounts for a small share of the fluctuation in real GDP.

Accepted Answer

Investment spending is only a small portion of real GDP (typically around 15-20%) yet it has a significant impact on the economy's fluctuations. This is because investment spending is very volatile and can change quickly due to changes in business confidence, interest rates, or other factors. When investment spending falls, it can lead to a decrease in overall economic activity and output, creating a recession or economic downturn. Thus, even though investment spending is a small part of GDP, it can have a large impact on the economy's fluctuations.

Question 4

Which of the following happens during recessions?
A) Firms produce less but invest more.
B) Firms have to increase production because of falling prices.
C) Incomes increase because workers have to work overtime.
D) Unemployment rates increase.

Accepted Answer

Recessions are periods of economic contraction, which often results in firms laying off workers and cutting back on production, leading to an increase in unemployment rates. Option A is incorrect because during recessions, firms often reduce investments to conserve cash. Option B is incorrect because falling prices typically result in decreased demand, which leads to a reduction in production. Option C is incorrect because recessions often lead to reduced working hours or layoffs, resulting in a decrease in income.

Question 5

During Canada's three last recessions, investment spending accounted for what percentage of the decline in GDP?
A) 20 percent
B) 40 percent
C) 60 percent
D) 80 percent

Accepted Answer

During Canada's three last recessions, investment spending accounted for approximately 80 percent of the decline in GDP. This highlights the significant impact that changes in investment spending can have on the overall economy during downturns.

Question 6

What does the economy experience during a recession?
A) rising employment and income
B) rising employment and falling income
C) rising income and falling employment
D) falling employment and income

Accepted Answer

During a recession, there is a significant decline in economic activity which leads to fewer job opportunities and subsequently higher unemployment rates. This results in lower overall income levels as people are earning less or losing their jobs altogether. Therefore, the economy experiences both falling employment and income.

Question 7

Which statement characterizes business cycles?
A) They are predictable fluctuations in consumption.
B) They are no longer very important due to government policy.
C) They are fluctuations in real GDP and related variables over time.
D) They are easily predicted by competent economists.

Accepted Answer

Business cycles are fluctuations in real GDP and related variables over time. They are characterized by periods of expansion (increasing economic output and low unemployment) followed by periods of contraction (decreasing economic output and high unemployment). While there are patterns to business cycles, they are not completely predictable and can often be influenced by unexpected events or shocks to the economy.

Question 8

What happens to sales and profit during recessions?
A) sales and profits fall
B) sales and profits rise
C) sales rise and profits fall
D) profits fall and sales rise

Accepted Answer

During recessions, consumers tend to have less disposable income and are more cautious with their spending. This leads to a decrease in demand for goods and services, resulting in lower sales for businesses. Additionally, companies may have to lower their prices to remain competitive, which further cuts into their profit margins. Therefore, sales and profits typically fall during recessions.

Question 9

On average, over the past 130 years, at about what rate has the Canadian economy grown?
A) 1 percent per year
B) 2 percent per year
C) 4 percent per year
D) 8 percent per year

Accepted Answer

Over the past 130 years, the Canadian economy has grown at an average rate of around 2 percent per year. This is a relatively steady and consistent rate of growth. While there have been periods of faster or slower growth, this long-term average gives a good sense of the country's economic progress over time. Option A (1 percent per year) is too low, while Option C (4 percent per year) and Option D (8 percent per year) are too high.

Question 10

Which of the following best defines business cycles?
A) long-term trends in economic activity
B) regular, predictable fluctuations in GDP
C) the rise and fall of multinational companies
D) fluctuations in the economy

Accepted Answer

Business cycles refer to the fluctuations in the economy, including changes in GDP, employment rates, and other economic indicators, over a period of time. These cycles are characterized by their irregularity and unpredictability, rather than being regular and predictable (option B), and do not necessarily reflect the rise and fall of multinational companies (option C). Furthermore, business cycles are not necessarily long-term trends, as they can occur over shorter time frames as well.

Question 11

Which term refers to a short period of falling incomes and rising unemployment?
A) depression
B) recession
C) expansion
D) business cycle

Accepted Answer

A recession refers to a short period of declining economic activity, which is characterized by falling incomes and rising unemployment. It is a part of the overall business cycle, which includes expansions, contractions, peaks, and troughs. A depression, on the other hand, is a more severe and prolonged period of economic decline, with high unemployment rates and significant downward pressure on prices and wages.

Question 12

What typically rises during a recession?
A) the price level
B) unemployment
C) corporate profits
D) automobile sales

Accepted Answer

Unemployment typically rises during a recession as businesses may lay off workers and consumers may reduce their spending, leading to a decrease in demand for goods and services. A, C, and D are not typically associated with a recession.

Question 13

Which part of real GDP fluctuate most over the course of the business cycle?
A) consumption
B) government expenditures
C) investment
D) net exports

Accepted Answer

Investment spending is typically the most volatile component of GDP over the course of the business cycle. This is because businesses are more likely to cut back on investments during a recession or economic slowdown, and invest more during periods of economic expansion. The other components (consumption, government expenditures, net exports) tend to be relatively stable or less affected by the business cycle.

Question 14

What does real GDP measure?
A) the dollar value of all goods
B) economic activity and income
C) primarily long-run trends
D) profitability of all companies in the economy

Accepted Answer

Real GDP measures economic activity and income, specifically the value of all goods and services produced in an economy over a certain period of time adjusted for inflation.

Question 15

In 1982, Canada was in a recession. What would you expect NOT to have happened?
A) layoffs and firings
B) a higher rate of foreclosures
C) increased claims for unemployment insurance
D) increased investment spending

Accepted Answer

During a recession, it is unlikely that there would be increased investment spending, as businesses tend to cut back on expenses and be more cautious with their funds.

Question 16

How does real GDP change over time?
A) It moves in the same direction as unemployment.
B) It moves in the same direction as inflation.
C) It has a long-term upward trend.
D) It is approximately constant because it is measured in constant dollars.

Accepted Answer

Real GDP has a long-term upward trend as economies generally grow over time due to factors such as population growth, technological progress, and increases in productivity. While there may be fluctuations in the short run due to business cycles, the overall trend is typically upward.

Question 17

Which statement best describes the beginning of a recession?
A) Production and unemployment both rise.
B) Production rises and unemployment falls.
C) Production falls and unemployment rises.
D) Production and unemployment both fall.

Accepted Answer

The beginning of a recession is marked by a decline in production, also known as a contraction in the economy, and a subsequent increase in unemployment as businesses lay off workers due to decreased demand for goods and services. Therefore, production falls and unemployment rises.

Question 18

Which expenditure item is responsible for the decrease in real GDP during a recession?
A) mostly investment spending
B) mostly consumption spending
C) mostly government spending
D) mostly exports

Accepted Answer

Investment spending typically decreases during a recession because businesses cut back on spending due to lower consumer demand and uncertainty about the future. This reduction in investment spending directly impacts real GDP.

Question 19

Most economists use the aggregate demand and aggregate supply model primarily to analyze which of the following?
A) short-run fluctuations in the economy
B) the effects of macroeconomic policy on the prices of individual goods
C) the long-run effects of international trade policies
D) productivity and economic growth

Accepted Answer

The aggregate demand and aggregate supply model is primarily used to analyze short-run fluctuations in the economy, such as recessions and booms. It is not typically used to analyze the effects of macroeconomic policy on individual goods or the long-run effects of international trade policies. While productivity and economic growth can be affected by short-run fluctuations, they are not the primary focus of the model.

Question 20

Which of the following explains why production rises in most years?
A) increases in prices of goods and services
B) increases in stock prices
C) aging population
D) technological innovation

Accepted Answer

Technological innovation leads to improved efficiency and productivity, which results in increased production.

Quiz 14: Aggregate Demand and Aggregate Supply

Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to see most of these pairs. Which pair of GDP growth rates and unemployment rates is most realistic?

According to the classical view in economics, which variable or policy can influence economic growth in the long run?

How does the size of investment as a fraction of GDP compare to its importance in creating economic fluctuations?

Which of the following happens during recessions?

During Canada's three last recessions, investment spending accounted for what percentage of the decline in GDP?

What does the economy experience during a recession?

Which statement characterizes business cycles?

What happens to sales and profit during recessions?

On average, over the past 130 years, at about what rate has the Canadian economy grown?

Which of the following best defines business cycles?

Which term refers to a short period of falling incomes and rising unemployment?

What typically rises during a recession?

Which part of real GDP fluctuate most over the course of the business cycle?

What does real GDP measure?

In 1982, Canada was in a recession. What would you expect NOT to have happened?

How does real GDP change over time?

Which statement best describes the beginning of a recession?

Which expenditure item is responsible for the decrease in real GDP during a recession?

Most economists use the aggregate demand and aggregate supply model primarily to analyze which of the following?

Which of the following explains why production rises in most years?