Deck 8: Business Cycles

Question 1

Christina Romer's estimates of the business cycles prior to World War II showed that

A) the business cycles had greater fluctuations before World War II than previous estimates had shown.
B) the business cycles had smaller fluctuations before World War II than previously estimated, but still larger fluctuations than after World War I.
C) the business cycles had smaller fluctuations before World War II.
D) there was no difference in the size of business fluctuations prior to and after World War II.

Answer 1

B

Question 2

When aggregate economic activity is declining, the economy is said to be in

A) a contraction.
B) an expansion.
C) a trough.
D) a turning point.

Answer 2

A

Question 3

Research on the effects of recessions on the real level of GDP shows that

A) recessions cause only temporary reductions in real GDP, which are offset by growth during the expansion phase.
B) recessions cause large, permanent reductions in the real level of GDP.
C) recessions cause both temporary and permanent declines in real GDP, but most of the decline is temporary.
D) recessions cause both temporary and permanent declines in real GDP, but most of the decline is permanent.

Answer 3

C

Question 4

The low point in the business cycle is referred to as the

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

Question 5

Turning points in business cycles occur when

A) a new business cycle is initiated at the trough.
B) the economy hits the peak or trough in the business cycle.
C) the business cycle begins to follow a new pattern that differs from previous business cycles.
D) a new business cycle is initiated at the peak.

Question 6

The longest economic expansion in Canada occurred during the

A) 1920s.
B) 1940s.
C) 1960s.
D) 1980s.

Question 7

The worst recessions after World War II occurred

A) during 1945-1946 and 1973-1975.
B) during 1957-1958 and 1973-1975.
C) during 1953-1954 and 1981-1982.
D) during 1945-1946 and 1981-1982.

Question 8

The tendency of many different economic variables to have regular and predictable patterns across industries over the business cycle is called

A) persistence.
B) comovement.
C) periodicity.
D) recurrence.

Question 9

Business cycles all display the following characteristics except

A) a period of expansion followed by one of contraction.
B) co-movement of many economic variables.
C) rising prices during an expansion and falling prices during the contraction.
D) they last a period of one to twelve years.

Question 10

The high point in the business cycle is referred to as the

A) expansion.
B) boom.
C) peak.
D) turning point.

Question 11

One of the first organizations to investigate the business cycle was

A) the Federal Reserve System.
B) the National Bureau of Economic Research.
C) the Council of Economic Advisors.
D) the Brookings Institution.

Question 12

Christina Romer's criticism of the belief that business cycles had moderated since World War II depended on the fact that

A) estimates of the timing of business cycles since World War II had been inaccurate.
B) misuse of historical data had caused economists to understate the size of cyclical fluctuations in the post-World War II era.
C) economists had ignored the roles of the government and international trade in mitigating economic fluctuations prior to World War II.
D) economists had left out important components of GDP, such as wholesale and retail distribution, transportation, and services, in their pre-World War II estimates.

Question 13

The deepest contraction in Canadian history occurred

A) during the 1870s.
B) in the years right before World War I began.
C) during the 1930s.
D) during the 1970s.

Question 14

By 1937, when a new recession began in the midst of the Great Depression,

A) GDP had almost recovered to its 1929 level, but unemployment was still above the 1929 level.
B) unemployment had almost fallen back to its 1929 level but GDP had yet to recover to its 1929 level.
C) neither GDP nor unemployment had returned to near their 1929 levels.
D) both GDP and unemployment had returned to near their 1929 levels.

Question 15

In Canada, who officially determines whether the economy is in a recession or expansion?

A) the Prime Minister
B) Parliament
C) the Bank of Canada
D) Statistics Canada

Question 16

Which of the following is not included in the index of leading indicators calculated by Statistic Canada?

A) New orders of durable goods
B) Toronto Stock Exchange 300 composite stock price index
C) Money supply
D) CPI

Question 17

The tendency for declines in economic activity to be followed by further declines, and for growth in economic activity to be followed by more growth is called

A) persistence.
B) comovement.
C) periodicity.
D) recurrence.

Question 18

The longest contraction in Canadian history occurred

A) during the 1870s.
B) in the years right before World War I began.
C) during the 1930s.
D) during the 1970s.

Question 19

The fact that business cycles are periodic but not recurrent means that

A) business cycles occur at predictable intervals, but do not last a predetermined length of time.
B) the business cycle's standard contraction-trough-expansion-peak pattern has been observed to recur over and over again, but not at predictable intervals.
C) business cycles occur at predictable intervals, but do not all follow a standard contraction-trough-expansion-peak pattern.
D) business cycles last a predetermined length of time, but do not all follow a standard contraction-trough-expansion-peak pattern.

Question 20

When aggregate economic activity is increasing, the economy is said to be in

A) an expansion.
B) a contraction.
C) a peak.
D) a turning point.

Question 21

A variable that tends to move in advance of aggregate economic activity is called

A) a leading variable.
B) a coincident variable.
C) a lagging variable.
D) an acyclical variable.

Question 22

Industries that are extremely sensitive to the business cycle are the

A) durable goods and service sectors.
B) nondurable goods and service sectors.
C) capital goods and nondurable goods sectors.
D) capital goods and durable goods sectors.

Question 23

Which of the following macroeconomic variables is procyclical and coincident with the business cycle?

A) residential investment
B) nominal interest rates
C) industrial production
D) unemployment

Question 24

Which of the following is included in the index of leading indicators calculated by Statistic Canada?

A) Retail sales of furniture and appliances
B) Exchange rate
C) Unemployment rate
D) Nominal GDP

Question 25

A variable that tends to move at the same time as aggregate economic activity is called

A) a leading variable.
B) a coincident variable.
C) a lagging variable.
D) an acyclical variable.

Question 26

Which of the following macroeconomic variables would you include in an index of leading economic indicators?

A) employment
B) inflation
C) real interest rates
D) residential investment

Question 27

Which of the following macroeconomic variables is countercyclical?

A) real interest rates
B) unemployment
C) the money supply
D) consumption

Question 28

Which of the following is not a component of the Index of Leading Economic Indicators?

A) an index of 300 common stock prices
B) employment in business and personal services
C) an index of consumer imports from industrial countries
D) average work week in manufacturing

Question 29

Which of the following macroeconomic variables is procyclical and leads the business cycle?

A) business fixed investment
B) the money supply
C) nominal interest rates
D) unemployment

Question 30

Which of the following macroeconomic variables would you exclude from an index of leading economic indicators?

A) residential investment
B) employment
C) the money supply
D) stock prices

Question 31

Which of the following is included in the index of leading indicators calculated by Statistic Canada?

A) CPI
B) Retail sales of furniture and appliances
C) Interest rate
D) Real GDP

Question 32

A variable that tends to move later than aggregate economic activity is called

A) a leading variable.
B) a coincident variable.
C) a lagging variable.
D) an acyclical variable.

Question 33

Which of the following is not included in the index of leading indicators calculated by Statistic Canada?

A) US composite leading index
B) GDP
C) Money supply
D) Employment in business and personal services

Question 34

Which of the following is not a commonly cited problem with the Index of Leading Economic Indicators?

A) On several occasions the index has given false signals, predicting a recession when none occurred.
B) By relying too heavily on financial variables, the index becomes overly sensitive to sudden changes in financial markets.
C) The index provides little information on the severity of the upcoming recession.
D) As the economy changes over time, the ability of macroeconomic variables to predict changes in the economy will improve for some, grow worse for others.

Question 35

An economic variable that doesn't move in a consistent pattern with aggregate economic activity is called

A) procyclical.
B) countercyclical
C) acyclical.
D) a leading variable.

Question 36

Which of the following macroeconomic variables is procyclical and lags the business cycle?

A) business fixed investment
B) employment
C) stock prices
D) nominal interest rates

Question 37

Which of the following is not a component of the Index of Leading Economic Indicators?

A) housing outlays index
B) money supply
C) new orders for durable goods
D) Treasury bill rates

Question 38

An economic variable that moves in the same direction as aggregate economic activity (up in expansions, down in contractions) is called

A) procyclical.
B) countercyclical.
C) acyclical.
D) a leading variable.

Question 39

An economic variable that moves in the opposite direction as aggregate economic activity (down in expansions, up in contractions) is called

A) procyclical.
B) countercyclical.
C) acyclical.
D) a leading variable.

Question 40

Which of the following variables is procyclical?

A) unemployment
B) nominal interest rate
C) real interest rate
D) real wage

Question 41

The AD, SRAS, and LRAS curves each show a relationship between what two economic variables?

A) the aggregate price level and output
B) the aggregate price level and the interest rate
C) output and unemployment
D) output and the interest rate

Question 42

What are the two main components of business cycle theories?

A) a description of shocks and a model of how the economy responds to them
B) a model of how people decide to spend and a description of the government's role in the economy
C) a model of how equilibrium is reached and a description of the government's role
D) a description of shocks and a description of the government's role in the economy

Question 43

When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, the short-run aggregate supply curve (in the absence of misperceptions)

A) slopes upward.
B) slopes downward.
C) is vertical.
D) is horizontal.

Question 44

Some economists contend that the economywide average real wage may not be a good indicator of the real wage because

A) when previously unemployed workers enter the work force, the average real wage could decline even if all workers' wages have increased.
B) it fails to reflect productivity changes.
C) it fails to reflect qualitative changes in goods.
D) data used to calculate the average real wage is not collected from all sectors of the economy.

Question 45

A decline in the stock market, which makes consumers poorer, would cause

A) the aggregate demand curve to shift to the right.
B) the aggregate demand curve to shift to the left.
C) a movement down and to the right along the aggregate demand curve.
D) a movement up and to the left along the aggregate demand curve.

Question 46

Inventory investment displays business cycle patterns that differ from other forms of expenditure because

A) inventory investment is countercyclical, but expenditures are generally procyclical.
B) inventory investment is procyclical, but expenditures are generally coincident with the business cycle.
C) inventory investment displays large fluctuations that are not associated with business cycle peaks and troughs.
D) inventory investment lags the business cycle, but expenditures generally lead the business cycle.

Question 47

Which of the following macroeconomic variables is not seasonally procyclical?

A) the nominal money stock
B) average labour productivity
C) the unemployment rate
D) government spending

Question 48

Using the seasonal business cycle as your guide, during which quarter would you be most likely to expect a drop in your corporation's sales?

A) the first quarter of the year (January-March)
B) the second quarter of the year (April-June)
C) the third quarter of the year (July-September)
D) the fourth quarter of the year (October-December)

Question 49

Which of the following statements is true?

A) Both nominal and real interest rates are procyclical and leading.
B) Both nominal and real interest rates are procyclical and lagging.
C) Nominal interest rates are procyclical and real interest rates are countercyclical.
D) Nominal interest rates are procyclical and real interest rates are acyclical.

Question 50

The three main components of the aggregate demand-aggregate supply model include

A) AD, SRAS, and LM.
B) SRAS, LIRAS, and IS.
C) AD, IS, and LM.
D) AD, SRAS, and LRAS.

Question 51

When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, the aggregate demand curve

A) slopes upward.
B) slopes downward.
C) is vertical.
D) is horizontal.

Question 52

During the Iraq war, the Iraqis' infrastructure and capital were destroyed. This means that

A) the Iraqis' long-run aggregate supply has shifted rightward.
B) the Iraqis' long-run aggregate supply has shifted leftward.
C) the Iraqis' aggregate demand has shifted leftward.
D) the Iraqis' aggregate demand has shifted rightward.

Question 53

Which of the following is true?

A) Employment and unemployment are both coincident with the business cycle.
B) Employment and unemployment are both procyclical.
C) Employment is procyclical and unemployment is coincident with the business cycle.
D) Employment is procyclical and unemployment is countercyclical.

Question 54

You want to invest in a firm whose profits show small fluctuations throughout the business cycle. Which of the following would you invest in?

A) a corporation that depended heavily on business fixed investment
B) a corporation that depended heavily on residential investment
C) a corporation that depended heavily on consumer nondurables
D) a corporation that depended heavily on consumer durables

Question 55

Which of the following macroeconomic variables doesn't vary much over the seasons?

A) the nominal money stock
B) the unemployment rate
C) the real wage
D) average labour productivity

Question 56

When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, the long-run aggregate supply curve

A) slopes upward.
B) slopes downward.
C) is vertical.
D) is horizontal.

Question 57

A higher level of consumer confidence will lead

A) output to increase and price to decrease in the short run.
B) output to increase and price to increase in the short run.
C) output to increase and price to remain the same in the short run.
D) output to remain the same and price to increase in the short run.

Question 58

In the AD-AS model, when the short-run aggregate supply (SAS) curve is horizontal, it means that

A) in the short run, aggregate supply is equal to the aggregate demand.
B) in the short run, producers produce whatever quantity is demanded.
C) in the short run, output is fixed.
D) in the short run, price will rise as output increases.

Question 59

Wars, new inventions, harvest failures, and changes in government policy are examples of

A) the business cycle.
B) economic models.
C) shocks.
D) opportunity costs.

Question 60

Economists use the term shocks to mean

A) unexpected government actions that affect the economy.
B) typically unpredictable forces that have major impacts on the economy.
C) sudden rises in oil prices.
D) the business cycle.

Question 61

Keynesian economists believe that

A) the aggregate demand shocks have only short-lived effects on real output.
B) the aggregate demand shocks have long-lived effects on real output.
C) the aggregate supply shocks are the source of business cycles.
D) government policies are not useful in responding to the shocks.

Question 62

Describe the major features of the business cycle. Be sure to discuss what variables are affected by the cycle, a description of the key features that are apparent in the data, how variables are related to one another, how regular the cycle is, and how predictable the cycle is.

Question 63

Describe briefly what are the major differences between the classical economists and the Keynesian economists with regard to causes of business cycles, long-run adjustments to shock, and the government policies in restoring the full employment.

Question 64

According to classical economists

A) the aggregate demand shocks are the source of business cycles.
B) the aggregate supply shocks are the source of business cycles.
C) the aggregate demand shocks have long-run effects on output.
D) the aggregate supply curve is horizontal.

Question 65

When a recession occurs, do economists expect it to be a temporary phenomenon? Or is there some degree of permanence? What is the empirical evidence?

Question 66

The technological improvement will lead to a

A) rightward shift in the long-run aggregate supply, lowering price and increasing output.
B) leftward shift in the long-run aggregate supply, lowering price and lowering output.
C) rightward shift in the long-run aggregate supply, increasing price and lowering output.
D) leftward shift in the long-run aggregate supply, increasing price and increasing output.

Question 67

In the long run, an increase in productivity would cause output to ________ and the aggregate price level to ________.

A) fall; rise
B) fall; fall
C) rise; fall
D) rise; rise

Question 68

According to Keynesian macroeconomists, prices adjust ________ to shocks, so the government should ________.

A) slowly; do little
B) rapidly; do little
C) rapidly; fight recessions
D) slowly; fight recessions

Question 69

The classical view that the economy reaches its long-run equilibrium quickly implies that

A) the aggregate demand shocks have only short-lived effects on output.
B) the aggregate supply shocks have only short-lived effects on output.
C) the aggregate demand shocks have only long-lived effects on output.
D) the aggregate demand shocks are the source of business cycles.

Question 70

How has the severity and duration of business cycles changed over time in Canada?

Question 71

According to classical macroeconomists, prices adjust ________ to shocks, so the government should ________.

A) slowly; do little
B) rapidly; do little
C) rapidly; fight recessions
D) slowly; fight recessions

Question 72

Which of the following is correct?

A) An adverse aggregate demand shock reduces output and price in both the short run and the long run.
B) An adverse aggregate demand shock reduces output but increases price in the short run and will have no effect on output and price in the long run.
C) An adverse aggregate demand shock reduces output in the short run, but will have no effect on output in the long run.
D) An adverse aggregate demand shock reduces output and price in the short run and increases both in the long run.

Question 73

In the long run, an increase in consumer spending would cause output to ________ and the price level to ________.

A) rise; rise
B) rise; stay constant
C) stay constant; stay constant
D) stay constant; rise

Question 74

For each outcome below, tell what type of shift must have taken place in either the aggregate demand curve or the long-run aggregate supply curve.
a. In the short run, the price level is unchanged and output rises.
b. In the long run, the price level declines and output is unchanged.
c. In the long run, the price level rises and output declines.

Question 75

What are some of the problems with using the leading indicators to forecast recessions? If you were a policymaker, would you rely on them?

Question 76

In the long run, a reduction in labor supply would cause output to ________ and the aggregate price level to ________.

A) fall; rise
B) fall; fall
C) rise; fall
D) rise; rise