Deck 8: The Business Cycle

Question 1

Based on the classical view,

A)Unemployment never occurs.
B)Cyclical unemployment might occur temporarily.
C)All goods produced are always purchased at an unchanging price.
D)Persistent unemployment might be a problem.

Answer 1

B

Question 2

According to Keynes,which of the following should the government do when the economy overheats?

A)Employ more people.
B)Increase spending.
C)Raise taxes.
D)Practice laissez faire policies.

Answer 2

C

Question 3

According to the classical view,if consumer demand slowed down,

A)Prices would decrease,and the economy would return to its long-term growth trend.
B)Prices would increase,and the economy would return to its long-term growth trend.
C)Wages would increase,and the economy would return to its long-term growth trend.
D)Investment and government demand would increase,and the economy would return to its long-term growth trenD.Through the adjustment of prices,the economy quickly rebounds to its potential.

Answer 3

A

Question 4

Which of the following is true about business cycles in the United States?

A)They are remarkably similar in length but vary greatly in intensity.
B)They vary greatly in length,frequency,and intensity.
C)They are similar in frequency and intensity but not in length.
D)They are similar in length,frequency,and intensity.

Question 5

Say's Law states that

A)Supply creates its own demand.
B)Shifts of either supply or demand can achieve a given market equilibrium.
C)Wages and prices are inflexible,which prevents the achievement of market equilibrium.
D)Increased prices lead to increased supply.

Question 6

Real GDP is better than nominal GDP for measuring growth because real GDP has been adjusted for changes in

A)The price level.
B)Unemployment.
C)The business cycle.
D)Productivity.

Question 7

The study of aggregate economic activity for the economy as a whole is

A)Opportunity cost.
B)Scarcity.
C)Macroeconomics.
D)Microeconomics.

Question 8

The inflation-adjusted value of all goods and services produced is

A)The GDP deflator.
B)Nominal GDP.
C)GDP per capita.
D)Real GDP.

Question 9

According to classical economists,market-driven economies

A)Are typically self-adjusting.
B)Are inherently unstable.
C)Require government intervention.
D)Are always in long-run equilibrium.

Question 10

According to Keynes,when the economy falters,the government should do any of the following except

A)Practice a laissez faire policy approach.
B)Provide more dollars for unemployment benefits.
C)Make more money available.
D)Buy more output.

Question 11

Unlike the classical economists,Keynes asserted that

A)The economy was inherently unstable.
B)Laissez faire policies would lead to macro equilibrium.
C)Prices and wages were flexible.
D)Markets would naturally self-adjust.

Question 12

Who believed that small disturbances in output,prices,or unemployment were likely to be magnified by the invisible hand of the marketplace?

A)President Herbert Hoover.
B)Adam Smith.
C)John Maynard Keynes.
D)Jean-Baptiste Say.

Question 13

According to classical theory,

A)Keynes had "neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand."
B)Macro equilibrium might start out badly and get worse in the absence of government intervention.
C)Flexible wages and prices allow a laissez faire economy to adjust wages and prices to shifts in aggregate demand.
D)Business cycles are not relevant and do not occur.

Question 14

The government can "prime the pump" by doing all of the following except

A)Buying more output.
B)Employing more people.
C)Making more money available.
D)Raising taxes.

Question 15

Which of the following was not characteristic of the U.S.economy during the Great Depression?

A)Families lost their farms.
B)Automobile production fell.
C)The stock market crashed.
D)Unemployment reached 50 percent.

Question 16

Which of the following is characteristic of a downturn in the business cycle?

A)Lower unemployment rates.
B)Lower real output.
C)Higher interest rates.
D)None of the choices are correct.

Question 17

According to Keynes,which of the following can be used to slow down an overheated economy?

A)Decrease government purchases.
B)Decrease taxes.
C)Make more money available.
D)Employ more people.

Question 18

If wages and prices are flexible,then a recession is best eliminated when prices

A)And wages both rise.
B)And wages both fall.
C)Rise and wages drop.
D)Drop and wages rise.

Question 19

Alternating periods of economic growth and contraction in real GDP define

A)Capitalism.
B)The business cycle.
C)Macro equilibrium.
D)Say's Law.

Question 20

In the early 1900s,which of the following was not true?

A)Falling price levels appeared to limit an increase in unemployment.
B)Periods of high unemployment tended to be brief.
C)Say's Law seemed to work.
D)Government intervention was commonly used to stimulate the economy.

Question 21

The real balances effect says that an increase in the price level

A)Increases the price of U.S.produced goods,causing Americans to buy more imported goods.
B)Increases the price of U.S.produced goods,causing foreign consumers to buy fewer U.S.goods.
C)Increases the need to borrow,which drives up interest rates and reduces loan-financed purchases.
D)Reduces the real value of a fixed amount of savings,which reduces the purchase of goods and services.

Question 22

Assume you have $2,000 in a savings account at the beginning of the year and the price level is equal to 100.If the price level is equal to 120 at the end of the year,the real value of your savings is closest to

A)$1,667.
B)$1,880.
C)$2,120.
D)$2,400.

Question 23

The Great Depression did not

A)Follow a period of apparent prosperity.
B)Lead to an unemployment rate that reached 25 percent.
C)Cause President Roosevelt to declare a "bank holiday" in 1933.
D)Lead to a high rate of inflation.

Question 24

Which of the following was not true for the U.S.economy during the period from the late 1990s to 2000?

A)Economic expansion set a record for longevity.
B)The unemployment rate was low.
C)Millions of new jobs were created.
D)Real GDP declineD.Real GDP expanded for a record number of months during the 1990s to 2000.

Question 25

Which of the following caused a recession in the years immediately following World War II?

A)A surge in investment spending.
B)Pent-up demand for consumer goods.
C)Cutbacks in defense production.
D)Technological advances.

Question 26

Internal market forces include

A)Wars,natural disasters,and trade disruptions.
B)Tax policy,government spending,and availability of money.
C)Population growth,spending behavior,and invention.
D)External shocks and policy levers.

Question 27

External shocks include all of the following except

A)Population growth.
B)Natural disasters.
C)Terrorist attacks.
D)Wars.

Question 28

A decline in total real output for two or more consecutive quarters is referred to as

A)Laissez faire.
B)A recession.
C)A growth recession.
D)Say's Law.

Question 29

Determinants of macro performance work on macro outcomes through

A)Aggregate supply and demand.
B)International balances.
C)External shocks.
D)Internal market forces.

Question 30

Which of the following is not considered a macro outcome?

A)The level of unemployment.
B)External shocks such as weather.
C)The average price of goods and services.
D)The year-to-year expansion in overall productive capacity.

Question 31

The aggregate demand curve is downward-sloping because,other things being equal,

A)People buy fewer goods and services at lower average incomes.
B)People buy more goods and services at lower average prices.
C)A higher average price level will induce producers to offer more output than otherwise.
D)People buy more goods and services at higher average prices.

Question 32

In the absence of external shocks or government policy,an economy would

A)Still experience business cycle fluctuations because of internal market forces.
B)Not experience business cycle fluctuations.
C)Not be able to expand production and output.
D)None of the choices are correct.

Question 33

Which of the following is illustrated by the aggregate demand curve?

A)How real personal income varies with the inflation rate.
B)How total quantity of output demanded varies with the average price level.
C)How real output varies with the inflation rate.
D)How real personal income varies with the price level.

Question 34

Which of the following is generally considered a desirable outcome of government intervention?

A)More jobs.
B)A higher price level.
C)Higher unemployment rates.
D)Greater deficits.

Question 35

All of the following can be used to measure macroeconomic performance except for the

A)Total real value of goods and services produced.
B)Average price level of goods and services.
C)International value of the dollar.
D)Growth rate of the population.

Question 36

In which of the following situations is the percentage change in real GDP always positive?

A)Depression.
B)Inflation.
C)Recession.
D)Growth recession.

Question 37

Before the year 2000,the most prolonged departure from the long-term growth path for the United States occurred during

A)The 1980s.
B)The Great Depression.
C)World War II.
D)The years following World War II.

Question 38

A growth recession is said to occur when the economy grows at a

A)Rate less than that of population.
B)Rate less than the long-term average.
C)Slower rate in the current year than the preceding year.
D)Negative rate.

Question 39

A recession can be represented by a point

A)Inside the production possibilities curve.
B)Outside the production possibilities curve.
C)On the production possibilities curve.
D)At either end of the production possibilities curve.

Question 40

Changes in real GDP are used to measure

A)Inflation.
B)Price level changes.
C)Business cycles.
D)Population growth.

Question 41

Which of the following is a potential problem at macro equilibrium?

A)It is inconsistent with the macroeconomic goals.
B)A surplus of goods exists.
C)A shortage of goods exists.
D)The economy is permanently stuck there.

Question 42

Assume you have $1,000 in a savings account at the beginning of the year and the price level is equal to 100.If the price level is equal to 115 at the end of the year,the real value of your savings is closest to

A)$870.
B)$885.
C)$1,115.
D)$1,150.

Question 43

If aggregate demand decreases and aggregate supply decreases,the level of real output will

A)Decrease,and the price level will definitely decrease.
B)Decrease,and the price level will definitely increase.
C)Either increase or decrease,but the price level will stay the same.
D)Decrease,but the price level is indeterminate.

Question 44

Alternating periods of economic growth and contraction are

A)The result of government intervention according to Keynes.
B)The result of recurrent shifts of aggregate demand and aggregate supply.
C)Indicative of an unstable economy and require government intervention according to classical economists.
D)Not typical of the U.S.economy.

Question 45

The unique situation in which the behavior of buyers and sellers is compatible is referred to as

A)Full-employment GDP.
B)Macro equilibrium.
C)Micro equilibrium.
D)Labor market balance.

Question 46

As output rises,the profit effect results from

A)Lower opportunity costs.
B)Tight supplies of factors of production.
C)The law of demand.
D)Constant costs that do not rise when prices rise.

Question 47

Assume you have $5,000 in a savings account at the beginning of the year and the price level is equal to 100.If the price level is equal to 125 at the end of the year,the real value of your savings is closest to

A)$4,000.
B)$4,875.
C)$5,125.
D)$6,250.

Question 48

Ceteris paribus,the price level will decrease if the aggregate

A)Supply curve shifts to the left.
B)Demand curve shifts to the left.
C)Demand curve shifts to the right.
D)Supply and demand curves both shift to the right.

Question 49

Ceteris paribus,if average prices in the U.S.economy fall,then the

A)Real balances effect will lead to a lower quantity of U.S.output demanded.
B)Foreign trade effect will lead to a higher quantity of U.S.output demanded.
C)Interest rate effect will lead to a lower quantity of U.S.output demanded.
D)Profit effect will lead to a higher quantity of U.S.output demandeD.As the domestic price level falls,consumers (domestic and international)will buy more U.S.-made products and exports will rise.In essence,exports will rise,and imports will fall.

Question 50

Which of the following is not associated with the aggregate supply curve?

A)Factors of production.
B)The interest rate effect.
C)The profit effect.
D)The cost effect.

Question 51

According to the profit effect,

A)Some costs do not rise when average prices rise.
B)The aggregate supply curve is vertical in the short run.
C)The aggregate supply curve has a negative slope.
D)All costs rise when average prices rise.

Question 52

Assume you have $1,000 in a savings account at the beginning of the year and the price level is equal to 100.If the price level is equal to 92 at the end of the year,the real value of your savings is closest to

A)$908.
B)$920.
C)$1,087.
D)$1,092.

Question 53

The cost effect implies that

A)Higher costs are reflected in higher average prices.
B)The aggregate supply curve is linear.
C)Lower average prices result in greater quantity supplied.
D)The aggregate demand curve is downward-sloping.

Question 54

Assume you have $2,000 in a savings account at the beginning of the year and the price level is equal to 100.If the price level is equal to 95 at the end of the year,the real value of your savings is closest to

A)$1,900.
B)$1,905.
C)$2,095.
D)$2,105.

Question 55

Ceteris paribus,if average prices in the U.S.economy fall,then the

A)Real balances effect will lead to a lower quantity of U.S.output demanded.
B)Foreign trade effect will lead to a lower quantity of U.S.output demanded.
C)Interest rate effect will lead to a higher quantity of U.S.output demanded.
D)Cost effect will lead to a higher quantity of U.S.output demandeD.As the price level falls,interest rates fall,so spending on interest-sensitive items such as cars and plasma TVs increases.Even with a constant quantity of nominal money,interest rates fall because a decrease in the price level causes an increase in the supply of real money in a lending institution.

Question 56

Which of the following would result if the price level were below the equilibrium level?

A)Aggregate demand would increase.
B)Aggregate supply would decrease.
C)Consumers would bid prices up by competing for goods currently in shortage.
D)Shortages would force sellers to lower prices in order to increase aggregate quantity demandeD.Shortages would develop across the economy,which would cause prices to rise and thus encourage more production.

Question 57

Which of the following is used to explain why the AD curve slopes downward?

A)The interest rate effect.
B)The cost effect.
C)The profit effect.
D)The laissez faire effect.

Question 58

Macro equilibrium always occurs when

A)Aggregate supply is greater than aggregate demand.
B)The labor force is fully employed.
C)Aggregate demand equals aggregate supply at a given average price level.
D)The level of output is expanding.

Question 59

Which of the following results if at a particular price level,the aggregate quantity supplied exceeds the aggregate quantity demanded?

A)Aggregate demand shifts to the right.
B)Aggregate supply shifts to the left.
C)A surplus causes the price level to rise.
D)A surplus causes the price level to fall.

Question 60

A positively sloped aggregate supply curve reflects

A)The idea that greater production lowers profit margins,which raises quantity demanded.
B)The decrease in the real value of money as the price level rises.
C)The rising costs associated with increased capacity utilization.
D)None or the other choices.

Question 61

A tax cut can best be characterized as

A)Monetary policy only.
B)Fiscal policy only.
C)Supply-side policy only.
D)Either fiscal or supply-side policy.

Question 62

From the supply-side perspective,the economy may fail to reach full employment because of

A)Production incentives.
B)Declining costs.
C)Lack of government regulation.
D)Taxes that are too high.

Question 63

Which of the following is true if equilibrium exceeds full employment?

A)The economy is inside the production possibilities curve.
B)The economy is experiencing low inflation.
C)Growth rates are unacceptably low.
D)The economy is working beyond normal capacity.

Question 64

In the long run,an increase in aggregate demand will lead to

A)A higher price level and an increase in real GDP.
B)A higher price level only.
C)An increase in real GDP only.
D)A decrease in real GDP.

Question 65

Which group of economists believes that there is a natural rate of output that is relatively immune to short-run fluctuations in aggregate demand?

A)Supply-siders.
B)Keynesians.
C)Monetarists.
D)Fiscal economists.

Question 66

Which of the following is the best example of supply-side policy?

A)The government response to the Great Depression.
B)Inflation during the 1970s.
C)The Reagan tax cuts in 1981.
D)Government policy before 1930.

Question 67

The emphasis by some economists on long-term outcomes is reminiscent of

A)Keynesian theory.
B)Classical theory.
C)Supply-side theory.
D)None of the choices are correct.

Question 68

Controversies between Keynesian,monetarist,and supply-side theories focus on the

A)Shape and sensitivity of aggregate demand and aggregate supply curves.
B)Existence or nonexistence of the aggregate supply curve.
C)Importance of international balances to the economy.
D)Usefulness of aggregate demand and supply to analyze adjustment of the macro equilibrium.

Question 69

Which combination of shifts of aggregate demand and supply would definitely cause an increase in real GDP?

A)Demand shifts to the left and supply shifts to the right.
B)Demand shifts to the left and supply shifts to the left.
C)Demand shifts to the right and supply shifts to the right.
D)Demand shifts to the right and supply shifts to the left.

Question 70

For the aggregate supply curve,the profit effect

A)Provides an incentive for producers to decrease output when prices rise.
B)Dominates in the long run and causes the curve to be upward-sloping.
C)Along with the cost effect causes the curve to be downward-sloping in the long run.
D)Is temporary in the short run,while in the long run it is canceled out because the cost effect dominates.

Question 71

Keynesian levers include

A)Deregulation.
B)Fiscal policy.
C)Monetary policy.
D)Aggregate supply.

Question 72

In the long run,which of the following is true?

A)Profit effects are equal to cost effects.
B)Profit effects are larger than cost effects.
C)Cost effects are larger than profit effects.
D)None of the choices are correct.

Question 73

Which of the following economic perspectives focuses on the need for government to shift aggregate supply to correct problems of unemployment and inflation?

A)Supply-side.
B)Keynesian.
C)Classical.
D)Monetary.

Question 74

According to Keynesian theory,the correct fiscal policy to stimulate the economy would be to

A)Raise taxes to increase aggregate demand.
B)Increase the money supply to increase aggregate supply.
C)Increase government expenditures to increase aggregate demand.
D)Lower taxes to increase aggregate supply.

Question 75

Which of the following economic perspectives focuses on the need for government to use spending and taxes to shift aggregate demand and thus correct problems of unemployment and inflation?

A)Supply-side.
B)Keynesian.
C)Classical.
D)Monetarists.

Question 76

When the AS curve is vertical,increases in AD will

A)Increase the average price level but have no impact on unemployment.
B)Increase the average price level and decrease unemployment.
C)Increase both the average price level and unemployment.
D)Have no impact on either the average price level or unemployment.

Question 77

According to Keynes,unemployment results from

A)Increased business investment that reduces consumer spending.
B)Flexible wages and price.
C)Insufficient spending on the part of consumers,business,and government.
D)Increased government spending that reduces consumer spending.

Question 78

Individual employment and training programs are levers most likely to be advocated by

A)Classical economists.
B)Monetarists.
C)Keynesians.
D)Supply-side economists.

Question 79

A vertical aggregate supply curve

A)Implies that supply-side policies will have no effect on the macro equilibrium.
B)Implies that aggregate demand shifts have no impact on output.
C)Is likely in the short run.
D)Reflects the inflexibility of prices and wages.

Question 80

If full employment is associated with an output that is greater than the current macro equilibrium,which of the following best describes the impact of a rightward shift of the aggregate supply curve,ceteris paribus?

A)A higher price level and a higher level of output.
B)A higher price level and a lower level of output.
C)A recession or depression.
D)A lower price level and a higher level of output.