Question 1

In a recession, compared to the percentage decline in GDP, what happens to investment spending?
A)Investment spending falls by a larger percentage than GDP.
B)Investment spending falls by about the same percentage as GDP.
C)Investment spending falls by a smaller percentage than GDP.
D)Investment spending falls, but the percentage change is sometimes much larger and sometimes much smaller.

Accepted Answer

In a recession, investment spending is one of the categories that typically falls by a larger percentage than GDP. This is because businesses are less likely to invest in new projects or expand their operations during a period of economic uncertainty, and may even cut back on existing investments.

Question 2

Which of the following variables or policies 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)a decrease in nominal interest rates

Accepted Answer

An increase in capital stock can lead to higher productivity and output, which can drive long-run economic growth.

Answer: D 
 A decrease in nominal interest rates can make borrowing cheaper and encourage investment, which can support long-run economic growth. However, this depends on whether the decrease in interest rates is accompanied by other factors that support investment, such as a healthy business environment and favorable economic policies.

B and C are unlikely to have a significant impact on long-run economic growth. An increase in money supply can lead to inflation, which can harm long-term economic prospects, and an increase in unemployment benefits can provide a safety net for individuals but may not directly contribute to economic growth.

Question 3

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)6 percent per year

Accepted Answer

Over the past 130 years, the Canadian economy has grown at an average rate of approximately 2 percent per year.

Question 4

Which of the following expenditure items is responsible for the decrease in real GDP during a recession?
A)mostly investment spending
B)mostly consumption spending
C)both consumption and investment spending, equally
D)sometimes mostly consumption and sometimes mostly investment

Accepted Answer

Investment spending is typically more volatile and sensitive to economic conditions, making it a major contributor to GDP fluctuations during a recession.

Question 5

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 is typically a small part of real GDP (usually around 20-25%), but it has a large impact on economic fluctuations because changes in investment spending represent changes in firms' views about the future state of the economy. In particular, a decrease in investment spending due to pessimistic views about future economic conditions can lead to a significant decrease in aggregate demand, causing a recession or economic contraction. Likewise, an increase in investment spending due to optimistic views about future conditions can lead to an increase in aggregate demand and economic expansion. Therefore, even though investment is a small part of GDP, it can have a large impact on overall economic performance.

Question 6

Which of the following 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 within a country's borders adjusted for inflation. It does not reflect profitability or focus primarily on long-run trends.

Question 7

Which of the following 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

A recession is typically characterized by a decrease in economic activity. This is reflected in a decline in production or gross domestic product (GDP) and an increase in unemployment. Choice C is the only option where production falls and unemployment rises, indicating the beginning of a recession.

Question 8

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, including changes in output, employment, and price levels. It allows economists to understand the causes and consequences of business cycles and economic recessions.

Question 9

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 due to increases in productivity, population growth, and technological advancements. While there may be short-term fluctuations and recessions, the overall trend is upward.

Question 10

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

Accepted Answer

During a recession, businesses tend to decrease their investment spending due to decreased demand for their products or services. Therefore, it would be unlikely for there to be an increase in investment spending during a recession.

Question 11

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

Accepted Answer

A GDP growth rate of -1 percent with an unemployment rate of 6 percent is realistic because negative GDP growth can be associated with moderate unemployment, reflecting a sluggish economy.

Question 12

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 drives increases in productivity, leading to increased production in most years.

Question 13

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

Accepted Answer

A recession is a period of temporary economic decline, typically signaled by a decrease in GDP and a rise in unemployment. It is generally characterized by a decrease in consumer spending and business investment. A depression is a more severe and prolonged economic downturn, while an expansion is a period of economic growth. The business cycle refers to the regular pattern of alternating periods of growth and contraction in the economy.

Question 14

Which of the following characterizes business cycles?
A)They are mainly 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 caused by various factors like changes in consumer spending, investment, government spending, and international trade. Despite government policies to stabilize the economy, business cycles are still relevant and can have significant impacts on the overall health of the economy. Economists can predict the general trends of business cycles, but precise timing and duration of each phase can be difficult to forecast. Therefore, option D is incorrect.

Question 15

Which of the following 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, the economy experiences a decrease in economic activity, resulting in a reduction in employment opportunities and ultimately leading to a decline in income levels. Therefore, falling employment and income are characteristic of a recession.

Question 16

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 generally have less disposable income and therefore spend less. This leads to decreased sales and profits for businesses.

Question 17

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)Many workers are laid off.

Accepted Answer

Recessions are characterized by a slowdown in economic activity, which often leads to firms cutting back on production and laying off workers to reduce costs. Therefore, option D is the correct choice. The other options are not usually observed during recessions.

Question 18

Which of the following typically rises during a recession?
A)garbage collection
B)unemployment
C)corporate profits
D)automobile sales

Accepted Answer

During a recession, companies tend to lay off employees which leads to an increase in unemployment.

Question 19

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 fluctuations in the economy, including periods of expansion and contraction. These cycles are not necessarily regular or predictable, as they can be influenced by a variety of factors such as changes in consumer behavior or economic policy. A is incorrect because business cycles are not necessarily long-term trends, as they can occur in shorter periods. B is incorrect because while business cycles do involve fluctuations in GDP, they are not always regular or predictable. C is incorrect because business cycles refer to changes in the overall economy rather than specific companies.

Question 20

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

Accepted Answer

Investment spending typically fluctuates the most over the course of the business cycle. This is because businesses tend to be more optimistic and willing to invest in new projects during periods of economic expansion, while they may be more cautious and cut back on new investments during recessions. Consumption and government expenditures tend to be more stable, while net exports depend on global economic conditions outside of a country's control.

Quiz 14: Aggregate Demand and Aggregate Supply

In a recession, compared to the percentage decline in GDP, what happens to investment spending?

Which of the following variables or policies can influence economic growth in the long run?

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

Which of the following expenditure items is responsible for the decrease in real GDP during a recession?

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

Which of the following does real GDP measure?

Which of the following best describes the beginning of a recession?

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

How does real GDP change over time?

In 1982, Canada was in recession. Which of the following things would you expect NOT to have happened?

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

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

Which of the following terms refers to a short period of falling incomes and rising unemployment?

Which of the following characterizes business cycles?

Which of the following does the economy experience during a recession?

What happens to sales and profit during recessions?

Which of the following happens during recessions?

Which of the following typically rises during a recession?

Which of the following best defines business cycles?

Which of the following parts of real GDP fluctuates most over the course of the business cycle?