Question 1

If expectations were rational, the multiplier would be

Accepted Answer

If expectations were rational, people would anticipate the effects of fiscal policy changes, leading to adjustments in their behavior that would offset the impact of the policy, resulting in a multiplier of zero.

Question 2

The persistence of a phenomenon, such as unemployment, even when its causes have been removed is called

Accepted Answer

Hysteresis refers to the phenomenon where the effects of a certain cause persist even after the cause has been removed, commonly discussed in the context of unemployment and economics.

Question 3

The hysteresis which caused high unemployment to persist from the 1980s into the 1990s can be explained by

Accepted Answer

Hysteresis in unemployment, where high unemployment rates persist over time, can be explained by a combination of factors including lack of capital due to low investment (A), firms increasing output without hiring new employees by pressuring existing ones (B), and the long-term unemployed becoming unemployable due to skill loss or stigma (C). Therefore, all of the provided options contribute to the explanation of hysteresis in unemployment.

Question 4

According to Keynesians, which policy is suitable to tackle the problem of hysteresis?

Accepted Answer

Keynesians believe that retraining programs can help tackle hysteresis by improving the skills of the unemployed, making them more employable and reducing long-term unemployment.

Question 5

The idea that some economic changes are difficult to reverse is called

Accepted Answer

Hysteresis in economics refers to the phenomenon where economic events or policies have effects that persist even after the initial causes are removed, making some changes difficult to reverse.

Question 6

In the UK the inflation target is set by______and the rate of interest to achieve it is set by______

Accepted Answer

The inflation target is set by the government, specifically the Treasury, which outlines the economic policies and targets for the country. The Bank of England is responsible for setting the interest rates to achieve this target through its Monetary Policy Committee.

Question 7

With a successful policy of inflation targeting and a successful supply- side policy to reduce unemployment, the path of inflation and unemployment over time would seem to suggest a Phillips curve that is

Accepted Answer

A successful policy of inflation targeting would stabilize inflation rates, while a successful supply-side policy to reduce unemployment would lower unemployment rates without necessarily causing inflation to rise, suggesting a situation where inflation and unemployment do not trade off in the traditional Phillips curve manner, thus appearing horizontal.

Question 8

A movement leftward of the Phillips curve in the long term would be due to

Accepted Answer

The answer of A movement leftward of the Phillips curve...

Question 9

If inflation targeting were abandoned and instead the government set about a concerted policy of expanding aggregate demand to reduce unemployment, the Phillips curve would become

Accepted Answer

The Phillips curve posits an inverse relationship between inflation and unemployment, suggesting that lower unemployment comes with higher inflation, and vice versa. In the short term, this relationship can be downward-sloping, indicating that policies to reduce unemployment can lead to higher inflation. However, in the long term, expectations adjust, making the Phillips curve vertical, indicating that attempts to reduce unemployment below its natural rate solely by expanding aggregate demand will not succeed and will only lead to higher inflation.

Question 10

Why did the government face a dilemma during the late 2000s?

Accepted Answer

During the late 2000s, particularly around the time of the global financial crisis, many governments faced the dilemma of high unemployment and high inflation, a situation often referred to as stagflation. This combination poses a challenge because the typical tools to combat inflation can exacerbate unemployment, and vice versa.

Question 11

The instability of investment contributes to

Accepted Answer

The instability of investment is a key factor contributing to the ups and downs of the business cycle, as changes in investment levels can lead to fluctuations in economic activity, affecting overall economic stability.

Question 12

Business cycles are highly irregular in practice since

Accepted Answer

Business cycles are highly irregular because the length and magnitude of each stage can vary significantly, making it difficult to predict the duration and impact of each phase of the cycle.

Question 13

The level of induced investment, divided by the change of national income which caused it to take place, is known as the

Accepted Answer

The accelerator coefficient is a concept in economics that measures the relationship between changes in national income and the level of induced investment that results from it. It reflects how investment increases in response to economic growth.

Question 14

Without government intervention, the interaction between the multiplier and accelerator could cause

Accepted Answer

The interaction between the multiplier and accelerator can indeed cause various economic outcomes such as rapid contraction, cyclical fluctuations, or rapid expansion of aggregate demand, depending on the magnitudes of the marginal propensity to withdraw (MPW) and the accelerator coefficient. These factors influence how investment, consumption, and other economic variables respond to changes in income, leading to different economic scenarios.

Question 15

If there is a feedback loop (injections > national income > induced investment > national income), this is called

Accepted Answer

The multiplier-accelerator interaction describes how an initial change in aggregate demand can lead to a larger change in national income through the process of injections leading to more income, which then leads to more investment, further increasing national income. This feedback loop emphasizes the interaction between the multiplier effect (where an initial increase in spending leads to further increases in income and consumption) and the accelerator effect (where an increase in demand leads to increased investment in capital goods).

Question 16

When an initial event can cause a larger effect, it is an example of

Accepted Answer

Cumulative causation is the process by which an initial event can cause a larger effect, as the effect of the initial event leads to further changes that amplify the original effect.

Question 17

Booms and recessions persist mainly because of ______and ______.

Accepted Answer

Time lags and bandwagon effects are significant factors in the persistence of booms and recessions. Time lags refer to the delays in the effects of economic policies or market reactions, which can exacerbate or prolong economic cycles. Bandwagon effects describe how individuals or businesses tend to follow popular trends or behaviors, which can amplify economic movements either upwards (booms) or downwards (recessions).

Question 18

Why do booms and recession persist for a period of time?

Accepted Answer

Booms and recessions persist due to the interaction of the multiplier and accelerator, time lags in economic adjustments, and bandwagon effects, where individuals' economic behaviors influence each other, all contributing to the duration of these economic phases.

Question 19

A ceiling of output will be reached if

Accepted Answer

A ceiling of output is reached when actual output grows more rapidly than potential output, leading to inflationary pressures and unsustainable growth, which cannot be maintained without exceeding the economy's long-term capabilities.

Question 20

In a boom, contractionary policies may be pursued, because the government may become concerned about which objectives?

Accepted Answer

In a boom, the economy is expanding rapidly, which can lead to inflation as demand outstrips supply. The government may also be concerned about the balance of trade deficits, as a booming economy can lead to increased imports. Therefore, contractionary policies may be pursued to cool down the economy, control inflation, and address trade deficits.

Quiz 29: Business Activity, Employment and Inflation