Deck 22: Understanding Business Cycle Fluctuations

Question 1

Permanent declines in inflation such as those seen in Chile and Sweden must have been a result of:

A)an increase in the central bank's inflation target.
B)a decrease in the central bank's inflation target.
C)less independence for their central banks.
D)a change to targeting interest rates instead of inflation rates.

Answer 1

B

Question 2

Negative supply shocks cause shifts in:

A)only the short-run aggregate supply curve.
B)the dynamic aggregate demand curve.
C)the monetary policy reaction curve but only if policymakers do not change their inflation target.
D)the short-run aggregate supply curve and, possibly, the long-run aggregate supply curve.

Answer 2

D

Question 3

A reduction in the central bank's inflation target shifts the dynamic aggregate demand curve to the left resulting in:

A)lower current output and higher inflation.
B)higher current output and higher inflation.
C)lower current output and lower inflation.
D)higher current output and lower inflation.

Answer 3

C

Question 4

Which of the following would be classified as a negative supply shock?

A)An increase in the legal minimum wage
B)A decrease in the price of oil
C)An increase in government purchases
D)An increase in demand for exports

Question 5

Stagflation is a term that usually describes an economy experiencing:

A)low inflation.
B)low inflation coupled with low growth.
C)high inflation with a recessionary gap.
D)low unemployment rates and low inflation rates.

Question 6

A "shock" is something that creates a shift in:

A)the demand curve only.
B)the supply curve only.
C)either the demand curve or the supply curve.
D)both the demand curve and the supply curve at the same time.

Question 7

Which of the following would be classified as a negative supply shock?

A)An increase in the price of oil
B)An increase in government purchases
C)An increase in export demand
D)A decline of investor optimism

Question 8

Without a change in target inflation, anything that shifts the aggregate demand curve to the right will cause:

A)a temporary increase in output.
B)a permanent reduction in inflation.
C)a temporary decrease in inflation.
D)an increase in output in the long run.

Question 9

An increase in aggregate demand will have the following effect on potential output:

A)potential output will increase.
B)potential output will decrease.
C)potential output will increase at first and then decrease.
D)there won't be a change in potential output from an increase in aggregate demand.

Question 10

If monetary policymakers do not want an increase in government purchases, which increases aggregate demand, to cause an increase in inflation, they would:

A)shift the monetary policy reaction curve to the right, raising inflation at every real interest rate.
B)do nothing and let the economy's self-correcting mechanism work.
C)shift the monetary policy reaction function left, increasing the real interest rate at every rate of inflation.
D)increase the growth rate of money.

Question 11

If inflation increases, this could be illustrated as a:

A)rightward shift of the long-run aggregate supply curve.
B)leftward shift of the long-run aggregate supply curve.
C)rightward shift of the short-run aggregate supply curve.
D)movement down along the short-run aggregate supply curve.

Question 12

A reduction in the central bank's inflation target will result in:

A)an increase in potential output.
B)no change in potential output.
C)a decrease in potential output.
D)the long-run aggregate supply curve having an upward slope.

Question 13

An increase in the price of oil should cause the short-run aggregate supply curve to:

A)shift to the right.
B)become vertical.
C)become horizontal.
D)shift to the left.

Question 14

An increase in aggregate demand with no adjustment in monetary policy will result in:

A)an increase in potential output and higher inflation.
B)a decrease in potential output and higher inflation.
C)no change in potential output but higher inflation.
D)no change in inflation.

Question 15

If monetary policymakers do not change their inflation target and aggregate demand shifts left:

A)there will be a temporary decrease in output.
B)potential output will decrease.
C)there will be an increase in inflation in the long run.
D)it will result in a permanent reduction in inflation.

Question 16

During the Vietnam War, monetary policy officials reacted to the increases in aggregate demand resulting from military expenditures by:

A)not shifting the monetary policy reaction function.
B)dramatically slowing money growth.
C)shifting the monetary policy reaction curve to the left.
D)keeping the same inflation target and raising the real interest rates.

Question 17

Which of the following statements is incorrect?

A)A fall in the central bank's target inflation rate shifts the monetary policy reaction curve to the left.
B)A decrease in the central bank's inflation target raises the real interest rate policymakers set at each level of inflation.
C)Shifts in the monetary policy reaction curve shift the dynamic aggregate demand curve in the same direction.
D)A fall in the central bank's target inflation rate causes the monetary policy reaction curve to flatten.

Question 18

If an economy is initially at a state of long-run equilibrium, the short-run effect(s) from a decrease in aggregate demand will include:

A)an expansionary gap.
B)a higher rate of inflation.
C)a higher level of potential output.
D)a recessionary gap.

Question 19

The period 1974-1975 is somewhat unique in U.S.economic history due to the fact that:

A)the output was growing rapidly and the inflation rate was falling.
B)both the output and the inflation rate were falling.
C)output was falling yet the inflation rate rose dramatically.
D)output and the inflation rate were both rising.

Question 20

The 2008 and 2009 tax cuts and the increase in government spending that occurred at the same time did not have the same inflationary impact as the similar policy in the 1960s because:

A)the fiscal stimulus came at a time when the economy was weakening due to other factors.
B)monetary policymakers, having perceived the inflation risk, responded appropriately.
C)aggregate demand was far below potential output.
D)all of the answers provided are correct.

Question 21

Which of the following would shift the short-run aggregate supply curve to the right?

A)An increase in oil prices
B)A reduction in the minimum wage
C)A change in the law requiring overtime pay for anyone working more than 30 hours a week
D)An increase in payroll taxes

Question 22

Business cycles vary in:

A)the length of recessions only.
B)the time between recessions only.
C)both the length of recessions and the time between recessions.
D)none of the answers given is correct; business cycles are by definition recurring waves that rise and fall in a periodic pattern.

Question 23

Almost all recessions identified by the NBER are characterized by:

A)declining real GDP.
B)higher interest rates.
C)durations exceeding two years.
D)higher rates of inflation.

Question 24

A review of economic data suggests that:

A)expansions are shorter than recessions.
B)business cycles are recurrent and periodic.
C)over the last fifty years, recessions are becoming more common.
D)recessions are shorter in duration than expansions.

Question 25

An increase in the rate of inflation:

A)can only result from increases in aggregate demand.
B)can only result from upward shifts in the short-run aggregate supply curve.
C)will result only if the long-run aggregate supply curve is vertical.
D)can result from shifts in either the dynamic aggregate demand curve or the short-run aggregate supply curve.

Question 26

"Official" recessions in the United States are declared by:

A)the Federal Reserve.
B)the U.S.department of the Treasury.
C)the National Bureau of Economic Research.
D)Congress.

Question 27

Policymakers can stabilize the economy by shifting:

A)the short-run aggregate supply curve.
B)the dynamic aggregate demand curve.
C)the long-run aggregate supply curve.
D)neither the short-run aggregate supply curve nor the dynamic aggregate supply curve.

Question 28

Stagflation occurs when:

A)the inflation rate decreases and current output decreases.
B)the inflation rate increases and current output decreases.
C)the inflation rate decreases and current output increases.
D)the inflation rate increases and current output increases.

Question 29

An inflation shock that shifts the short-run aggregate supply curve leftward and leaves the long-run supply curve unchanged means the economy's potential level of output will:

A)increase.
B)not change.
C)decrease.
D)decrease only if monetary policymakers do not respond.

Question 30

In practice, it is difficult to keep inflation and output from fluctuating when aggregate expenditures change because:

A)it takes time for policymakers to recognize that shifts have occurred.
B)changes in interest rates do not have an immediate impact on the economy.
C)changes in consumer or business confidence can be very difficult to recognize as they are occurring.
D)all of the answers given are correct.

Question 31

The longest recession since the 1940's began in:

A)1952.
B)1973.
C)1981.
D)2007.

Question 32

Which of the following statements is most correct?

A)Policymakers can eliminate the effects of negative supply shock.
B)Policymakers can neutralize movements in aggregate demand.
C)Policymakers can shift the short-run aggregate supply curve.
D)Shifts in the monetary policy reaction function used to stabilize the economy shift the short-run aggregate supply curve.

Question 33

Which of the following is not correct with regard to the definition of a recession as used by the NBER?

A)A recession occurs whenever there is a dip in the growth rate.
B)The exact length of time needed for a downturn to be declared a recession is not specified.
C)Many key economic indicators are used, some of which may move in opposite directions.
D)A recession is characterized by lower levels of economic activity.

Question 34

Unemployment insurance and the proportional nature of the tax system are examples of:

A)discretionary fiscal policy.
B)automatic fiscal policy.
C)both discretionary and automatic fiscal policy.
D)expansionary fiscal policy.

Question 35

If consumer and business sentiment were to increase dramatically, causing an expansionary gap:

A)monetary policymakers could stabilize the economy by shifting their monetary policy reaction curve to the right.
B)fiscal policymakers could stabilize aggregate demand by cutting income and business taxes.
C)monetary policymakers would likely shift the monetary policy reaction curve to the left to shift the dynamic aggregate demand left.
D)fiscal policymakers could stabilize aggregate demand by increasing government purchases.

Question 36

Which of the following statements is most correct?

A)A recession is officially defined as two consecutive quarters where the real growth rate is negative.
B)A recession officially begins when unemployment exceeds 5.0 percent.
C)There is no hard and fast definition of a recession.
D)The official date of a recession is determined by the Federal Reserve Board, but usually with at least a three-month delay.

Question 37

What tool is available to monetary policymakers to shift the short-run aggregate supply curve to the left following a positive inflation shock?

A)A rightward shift of the monetary policy reaction curve
B)A leftward shift of the monetary policy reaction curve
C)Open market purchases of government securities
D)None of the answers given is correct; the actions of monetary policymakers affect the dynamic aggregate demand curve

Question 38

According to the NBER, a severe decline in economic activity that lasted less than two quarters:

A)could not be considered a recession.
B)could still be considered a recession.
C)would not be called a recession until more than two years had passed.
D)would immediately be called a recession.

Question 39

Stabilization policy refers to the use of:

A)only fiscal policy.
B)only monetary policy.
C)either fiscal or monetary policy.
D)policy to shift the long-run aggregate supply curve.

Question 40

Suppose that consumer and business confidence fall.What is the ultimate outcome for the economy if monetary policymakers respond to keep inflation on an unchanged target?

A)If monetary policymakers respond, output would remain close to potential output.
B)If monetary policymakers respond, output would fall below potential output.
C)If monetary policymakers respond, output would rise above potential output.
D)If monetary policymakers respond, output would remain close to potential output but inflation would still rise despite their actions.

Question 41

Fiscal policy suffers from the problem of:

A)being formulated and implemented by politicians subject to short-run incentives.
B)being slow to implement.
C)being influenced by special interest groups.
D)all of the answers given are correct.

Question 42

Possible explanations that have been offered for the Great Moderation experienced in the United States include all of the following except:

A)good fortune.
B)economies that have become more flexible in absorbing shocks.
C)calm financial markets.
D)better understanding and use of monetary policy.

Question 43

Tax cuts would have the same directional effect on the dynamic aggregate demand curve as:

A)decreases in government purchases.
B)the Federal Reserve selling U.S.treasury securities.
C)the Federal Reserve buying U.S.treasury securities.
D)temporary tax increases.

Question 44

Real business cycle theory seeks to explain business cycle fluctuations by focusing on:

A)shifts in potential output.
B)the inflexibility of prices and wages.
C)aggregate demand.
D)changes in monetary policy.

Question 45

If a positive inflation shock occurs and monetary policymakers do not change the inflation target:

A)output will eventually return to potential output and inflation will equal the inflation target.
B)output will eventually rise above potential output while inflation will equal the inflation target.
C)output will eventually fall below potential output while inflation will equal the inflation target.
D)output will eventually return to potential output but inflation will exceed the inflation target.

Question 46

Consider the period from 1995 to 1999.The U.S.economy:

A)experienced the great productivity slowdown.
B)experienced increases in productivity that allowed the Fed the opportunity to raise the inflation rate.
C)experienced increases in productivity that allowed the Fed the opportunity to let the inflation rate fall.
D)saw its potential level of output decrease.

Question 47

Increases in potential output shift:

A)the long-run aggregate supply curve.
B)the short-run aggregate supply curve.
C)both the long-run aggregate supply curve and the short-run aggregate supply curve.
D)the long-run aggregate supply curve, the short-run aggregate supply curve, and the dynamic aggregate demand curve.

Question 48

Monetary policy has the following advantage(s) over fiscal policy:

A)it is less influenced by politics.
B)it can be implemented faster.
C)it can usually be fine-tuned.
D)all of the answers given are correct.

Question 49

An increase in potential output will result in:

A)a temporary expansionary gap.
B)a higher rate of inflation eventually.
C)a temporary recessionary gap.
D)an immediate shift upward in the short-run aggregate supply curve.

Question 50

Higher potential output levels:

A)put upward pressure on real interest rates.
B)put downward pressure on real interest rates and upward pressure on inflation rates.
C)put upward pressure on real interest rates and downward pressure on inflation rates.
D)none of the answers given is correct.

Question 51

Which of the following statements best describes the level of potential output in the U.S.?

A)It never changes year to year
B)It is very erratic year to year
C)It usually increases year to year
D)It has been decreasing since 1999

Question 52

Comparing monetary and fiscal policy:

A)fiscal policy has an advantage because it is faster to implement than monetary policy.
B)fiscal policy is easier to implement.
C)monetary policy is easier to implement.
D)history has shown fiscal policy to be more effective at stabilization.

Question 53

The dynamic aggregate demand curve shifts as a result of:

A)discretionary fiscal policy.
B)automatic fiscal policy.
C)either discretionary or automatic fiscal policy.
D)fiscal policy but only when it's used in conjunction with monetary policy.

Question 54

During the Great Moderation experienced in the United States during the 1990s the volatility of inflation and growth:

A)moved in opposite directions.
B)both dropped significantly.
C)both increased but only slightly.
D)disappeared.

Question 55

Monetary policymakers can respond to the impact that positive inflation shocks have on output by shifting the:

A)monetary policy reaction curve left.
B)monetary policy reaction curve right.
C)short-run aggregate supply curve to the left.
D)short-run aggregate supply curve to the right.

Question 56

Disinflation occurs when:

A)the inflation rate is negative.
B)the inflation rate is 2 percent or less.
C)the inflation rate goes above ten percent.
D)the rate of inflation declines.

Question 57

Opportunistic disinflation occurs when policymakers:

A)change the target inflation rate.
B)take advantage of positive supply shocks.
C)are able to permanently lower inflation.
D)all of the answers given are correct.

Question 58

Most economists attribute the Great Moderation experienced in the United States during the 1990s mainly to:

A)good fortune.
B)slowing productivity growth.
C)aggressive fiscal policy.
D)better understanding and use of monetary policy.

Question 59

The key part of the real business cycle theory model is:

A)the importance of monetary policy.
B)the short-run aggregate supply curve.
C)changes in aggregate demand.
D)changes in potential output.

Question 60

Since 1950, the U.S.economy has likely experienced:

A)more periods of deflation than disinflation.
B)more periods of disinflation than deflation.
C)an equal number of periods of deflation and disinflation since they are synonymous.
D)none of the answers provided is correct.

Question 61

Policymakers can neutralize:

A)supply shocks, but only in the short run.
B)supply shocks, but only in the long run.
C)supply shocks in both the short run and the long run.
D)only demand shocks.

Question 62

In which situation would policymakers be unable to neutralize the effect on the economy?

A)The federal government runs a deficit
B)An increase in the price of oil
C)Imports exceed exports
D)Consumer confidence declines

Question 63

Globalization and trade:

A)reduce inflation in the short run but not in the long run.
B)reduce inflation in the short run and in the long run.
C)increase inflation in the short run but not in the long run.
D)reduce inflation in the short run but increase inflation in the long run.

Question 64

If the economy's output response to changes in current inflation is small, the slope of the dynamic aggregate demand curve will be:

A)flat.
B)steep.
C)positive.
D)zero.

Question 65

Policymakers could neutralize all of the following except:

A)an increase in federal government spending on defense.
B)an increase in the price of oil.
C)a trade deficit.
D)a decrease in business confidence.

Question 66

If a negative supply shock is associated with a decline in potential output, keeping inflation at its target requires:

A)a leftward shift in the monetary policy reaction curve because there is an expansionary gap.
B)a rightward shift in the monetary policy reaction curve because there is an expansionary gap.
C)a leftward shift in the monetary policy reaction curve because there is a recessionary gap.
D)a rightward shift in the monetary policy reaction curve because there is a recessionary gap.

Question 67

If the monetary policy reaction curve has a relatively flat slope, the dynamic aggregate demand curve is likely to have a:

A)relatively steep slope.
B)relatively flat slope.
C)positive slope.
D)zero slope.

Question 68

If prices were to adjust quickly:

A)output gaps would be persistent.
B)output gaps would disappear quickly.
C)inflation would adjust slowly.
D)the short-run aggregate supply curve would not shift.

Question 69

If prices and wages are slow to adjust ("sticky," rather than flexible):

A)inflation would adjust rapidly.
B)output gaps would disappear quickly.
C)inflation would adjust to output gaps sluggishly.
D)the short-run aggregate supply curve would not shift.

Question 70

If the monetary policy reaction curve has a relatively steep slope, the dynamic aggregate demand curve is likely to have a:

A)relatively steep slope.
B)relatively flat slope.
C)positive slope.
D)zero slope.

Question 71

In an economy like the United States, the impact of a decrease in import prices on overall inflation can be best described as:

A)nonexistent.
B)a modest increase.
C)a modest decrease.
D)a significant decrease, particularly as globalization and trade increase.

Question 72

If monetary policymakers respond aggressively to current inflation above the target inflation rate, the:

A)monetary policy reaction curve would be flat.
B)dynamic aggregate demand curve would have a steep slope.
C)monetary policy reaction curve would have a positive and steep slope.
D)dynamic aggregate demand curve would shift rightward.

Question 73

The assumption that prices and wages are flexible implies that the:

A)short-run aggregate supply curve is irrelevant.
B)short-run aggregate supply curve shifts slowly in response to deviations of current output from potential output.
C)long-run aggregate supply curve is irrelevant.
D)long-run aggregate supply curve could not shift.

Question 74

Globalization and trade:

A)expands economic potential in a similar fashion to productivity enhancing technological progress.
B)shifts both the short-run and long-run aggregate supply curves to the right.
C)provide an opportunity to reduce inflation permanently.
D)all of the answers provided are correct.

Question 75

Increases in productivity result in:

A)higher inflation as output increases.
B)lower inflation as output decreases.
C)opportunities for policymakers to reduce their inflation target without inducing a recession.
D)none of the answers provided is correct.

Question 76

Central bankers with a relatively steep monetary policy reaction curve will:

A)move interest rates more aggressively when inflation rises, leading to more volatility in output.
B)move interest rates more aggressively when inflation rises, leading to less volatility in output.
C)move interest rates less aggressively when inflation rises, leading to more volatility in output.
D)move interest rates less aggressively when inflation rises, leading to less volatility in output.

Question 77

If a recession results from higher oil prices:

A)inflation should increase as output decreases.
B)inflation should fall as output falls.
C)output should not change but inflation should increase.
D)an expansionary gap should occur.

Question 78

Estimates of gross domestic product (GDP) are revised:

A)quickly and often.
B)for many years after the fact.
C)only in the following quarter.
D)each month.

Question 79

Real business cycle theory explains fluctuations in output through:

A)changes in aggregate demand.
B)changes in productivity.
C)shifts of the short-run aggregate supply curve.
D)changes in monetary policy.

Question 80

If a negative supply shock is associated with a decline in potential output, policymakers need to:

A)raise the real interest rate by even less than they would in the case of a recessionary gap.
B)raise the real interest rate by even more than they would in the case of a recessionary gap.
C)raise the real interest rate by the same amount as they would in the case of a recessionary gap.
D)not shift the monetary policy reaction curve.