Chapter 8: The Business Cycle
Chapter 8: The Business Cycle
Multiple Choice Questions
1.The study of aggregate economic activity for the economy as a whole is:
A)Opportunity cost. B) Scarcity. C) Macroeconomics. D) Microeconomics.
Answer: C Type: Definition Page: 151
2.Macroeconomics is the study of:
A)Aggregate economic behavior of the economy as a whole.
B)Individual segments of the economy.
C)How individual households make decisions.
D)How individual businesses make decisions.
Answer: A Type: Definition Page: 151
3.Alternating periods of economic growth and contraction in real GDP define:
A)Capitalism. B) The business cycle. C) Macro equilibrium. D) Say's Law.
Answer: B Type: Definition Page: 151
4.The business cycle is defined as:
A)Changing wages and prices.
B)An effort to reach full employment.
C)The growth of real GDP.
D)Alternating periods of economic growth and contraction.
Answer: D Type: Definition Page: 151
STABLE OR UNSTABLE?
5.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 to shifts in aggregate demand.
D)Business cycles are not relevant and do not occur.
Answer: C Type: Basic Understanding Page: 151
6.A cornerstone of the Classical view was:
A)The law of demand adjusted the economy to shifts in aggregate demand.
B)A laissez-faire economy.
C)Flexible wages and prices.
D)All of the above.
Answer: D Type: Basic Understanding Page: 151
7.Which theory of the economy led to the assertion that markets "self-adjust" to deviations from their long-term growth trend?
A)Classical theory. B) Monetarist theory. C) Keynesian theory. D) Supply-side theory.
Answer: A Type: Basic Understanding Page: 152
8.Which of the following theories assumes that markets self-adjust?
A)Classical economic theory. C)Supply-side economic theory.
B)Keynesian theory. D)The eclectic viewpoint.
Answer: A Type: Basic Understanding Page: 152
9.If wages and prices are flexible, then a recession is best eliminated when prices:
A)And wages both rise. C)Rise and wages drop.
B)And wages both fall. D)Drop and wages rise.
Answer: B Type: Complex Understanding Page: 152
10.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 a market equilibrium.
D)Increased prices lead to increased supply.
Answer: A Type: Definition Page: 152
11.The statement "Supply creates its own demand" is known as:
A)Keynes' Law. B) Say's Law. C) Okun's Law. D) A supply-side belief.
Answer: B Type: Definition Page: 152
12.Unlike the Classical economists, Keynes asserted that:
A)The private economy was inherently unstable. C)Prices and wages were flexible.
B)Laissez faire would lead to macro equilibrium. D)Markets would naturally self-adjust.
Answer: A Type: Basic Understanding Page: 153
13.Which of the following describes how Keynes viewed the macro economy?
A)Typically self-adjusting. C)Inherently unstable.
B)Supply creates its own demand. D)Inherently stable.
Answer: C Type: Basic Understanding Page: 153
14.According to Keynes, which of the following can be used to stimulate the economy?
A)Raising interest rates through reductions in the money supply.
B)Increasing government purchases.
C)Increasing government taxation.
D)Reducing inefficient employment of resources.
Answer: B Type: Basic Understanding Page: 153
HISTORICAL CYCLES
15.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.
Answer: B Type: Basic Understanding Page: 154
16.The peak of a business cycle is typically accompanied by:
A)The highest unemployment rate over the cycle.
B)The highest rate of increase in the price level over the cycle.
C)The lowest output of goods and services over the cycle.
D)All of the above.
Answer: B Type: Basic Understanding Page: 154
17.Which of the following is characteristic of a downturn in the business cycle?
A)Lower unemployment rates. B) Lower real output. C) Higher prices. D) Higher interest rates.
Answer: B Type: Basic Understanding Page: 154
18.Constant prices are used to correct distortions in nominal GDP because of:
A)Inflation. B) Unemployment. C) Business cycles. D) All of the above.
Answer: A Type: Basic Understanding Page: 154
19.Changes in real GDP provide a way to measure:
A)Inflation. B) Unemployment. C) Business cycles. D) All of the above.
Answer: C Type: Basic Understanding Page: 154
20.A decline in total output for two or more consecutive quarters is known as:
A)Inflation. B) A recession. C) A growth recession. D) All of the above.
Answer: B Type: Definition Page: 154
21.A recession can be represented by a point:
A)Outside the production-possibilities curve.
B)Inside the production-possibilities curve.
C)On the production-possibilities curve.
D)At either end of the production-possibilities curve.
Answer: B Type: Complex Understanding Page: 154
22.A decline in real GDP characterizes a:
A)Recession. B) Depression. C) Downswing in the business cycle. D) All of the above.
Answer: D Type: Basic Understanding Page: 154
23.An extremely deep and long recession is called a:
A)Growth recession. C)Normal period of contraction.
B)Depression. D)Temporary deviation from full employment.
Answer: B Type: Definition Page: 154
24.In which of the following situations is the percentage change in real GDP positive?
A)Depression. B) Growth recession. C) Recession. D) All of the above.
Answer: B Type: Definition Page: 154
25.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.
Answer: B Type: Definition Page: 154
26.Which of the following would be a "growth recession"?
A)Real GDP contracts for two consecutive quarters.
B)Real GDP grows for a period at a rate less than 3 percent.
C)The unemployment rate stays constant at the long-run rate of 6 percent.
D)Prices rise steadily but at a rate less than the long-run trend of 4 percent.
Answer: B Type: Definition Page: 154
27.The Great Depression:
A)Followed a period of apparent prosperity.
B)Led to an unemployment rate that reached 25 percent.
C)Caused President Roosevelt to declare a "bank holiday" in 1933.
D)Did all of the above.
Answer: D Type: Basic Understanding Page: 155
28.The Great Depression in the United States:
A)Provided the basis for the Neoclassical economic theory.
B)Ended with a higher real GDP per capita than when it began.
C)Caused negative growth in real GDP and a high level of unemployment.
D)Was ended by World War I.
Answer: C Type: Basic Understanding Page: 155
29.The Great Depression in the United States:
A)Provided the basis for the Neoclassical economic theory.
B)Caused real GDP to fall by nearly 30 percent between 1919 and 1929.
C)Ended with a higher real GDP per capita than when it began.
D)Was ended by massive government spending during World War II.
Answer: D Type: Basic Understanding Page: 155
30.During the period 1992 to 2000, for the United States:
A)Economic expansion set a record for longevity. C)Millions of new jobs were created.
B)The unemployment rate fell to 3.9 percent. D)All of the above.
Answer: D Type: Basic Understanding Page: 156
A MODEL OF THE MACRO ECONOMY
31.Macro outcomes include:
A)Output. B) Growth. C) Jobs. D) All of the above.
Answer: D Type: Basic Understanding Page: 157
32.Which of the following are considered macro outcomes?
A)The levels of employment and unemployment.
B)The year-to-tear expansion in production capacity.
C)The average price of goods and services.
D)All of the above.
Answer: D Type: Basic Understanding Page: 157
33.Which of the following is generally considered a desirable outcome of government intervention?
A)More jobs. B) More profitable prices. C) Higher unemployment rates. D) Greater deficits.
Answer: A Type: Basic Understanding Page: 157
34.Which of the following can be used to measure macroeconomic performance?
A)The total value of goods and services produced. C)The international value of the dollar.
B)The average price level of goods and services. D)All of the above.
Answer: D Type: Basic Understanding Page: 157
35.The determinants of macro performance include:
A)Internal market forces. B) Policy levers. C) External shocks. D) All of the above.
Answer: D Type: Basic Understanding Page: 158
36.External shocks include:
A)Wars, natural disasters, trade disruptions.
B)Tax policy, government spending, availability of money, and regulation.
C)Population growth, spending behavior, invention, and innovation.
D)Internal market forces, policy levers.
Answer: A Type: Basic Understanding Page: 158
37.External shocks include:
A)Tax policy. C)Trade disruptions.
B)Changes in the availability of money. D)All of the above.
Answer: C Type: Basic Understanding Page: 158
38.Internal market forces include:
A)Wars, natural disasters, trade disruptions.
B)Tax policy, government spending, availability of money.
C)Population growth, spending behavior, invention.
D)External shocks, policy levers.
Answer: C Type: Basic Understanding Page: 158
39.Policy levers include:
A)Tax policy, government spending, availability of money.
B)Wars, natural disasters, trade disruptions.
C)Population growth, spending behavior, invention.
D)External shocks, internal market forces.
Answer: A Type: Basic Understanding Page: 158
40.Policy levers include:
A)Spending behavior. B) Trade disruptions. C) Availability of money. D) All of the above.
Answer: C Type: Basic Understanding Page: 158
41.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)Still experience business cycle fluctuations because of factors such as wars and tax policy.
Answer: A Type: Complex Understanding Page: 158
AGGREGATE DEMAND AND SUPPLY
42.Determinants of macro performance work on macro outcomes through:
A)Aggregate supply and demand. C)External shocks and internal market forces.
B)International balances. D)All of the above.
Answer: A Type: Basic Understanding Page: 159
43.Aggregate demand:
A)Is the total quantity of a good demanded at alternative prices.
B)Is the total quantity of output demanded at alternative price levels.
C)Refers to the demand in a particular market.
D)Refers to the level of demand where equilibrium occurs.
Answer: B Type: Definition Page: 159
44.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.
Answer: B Type: Basic Understanding Page: 159
45.Which of the following explains the downward slope of the aggregate demand curve?
A)The real-balances effect. C)The interest-rate effect.
B)The foreign-trade effect. D)All of the above.
Answer: D Type: Basic Understanding Page: 159
46.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.
Answer: B Type: Basic Understanding Page: 160
47.If average prices in the U.S. economy fall, then, ceteris paribus:
A)The real-balances effect will lead to a higher quantity of output demanded.
B)The foreign-trade effect will lead to a lower quantity of output demanded.
C)The interest-rate effect will lead to a lower quantity of output demanded.
D)The cost effect will lead to a higher quantity of output demanded.
Answer: A Type: Basic Understanding Page: 160
48.If average prices in the U.S. economy fall, then, ceteris paribus:
A)The real-balances effect will lead to a lower quantity of output demanded.
B)The foreign-trade effect will lead to a higher quantity of output demanded.
C)The interest-rate effect will lead to a lower quantity of output demanded.
D)The profit effect will lead to a higher quantity of output demanded.
Answer: B Type: Basic Understanding Page: 160
49.If average prices in the U.S. economy fall, then, ceteris paribus:
A)The real-balances effect will lead to a lower quantity of output demanded.
B)The foreign-trade effect will lead to a lower quantity of output demanded.
C)The interest-rate effect will lead to a higher quantity of output demanded.
D)All of the above.
Answer: C Type: Basic Understanding Page: 160
50.The foreign-trade effect states that:
A)The quantity of domestic goods demanded rises when the domestic price level rises.
B)The quantity of domestic goods demanded rises when the prices of imported goods fall.
C)Foreign consumers have less incentive to buy American-made products when U.S. prices fall.
D)Relatively lower prices for imports give Americans an incentive to buy foreign-made products.
Answer: D Type: Definition Page: 160
51.Which of the following effects suggests that lower average prices stimulate more borrowing?
A)The cost effect. B) The interest-rate effect. C) The real-balances effect. D) The profit effect.
Answer: B Type: Complex Understanding Page: 160
52.Which of the following refers to the total quantity of output producers are willing and able to supply at alternative price levels?
A)Quantity supplied. B) Market supply. C) Aggregate supply. D) A supply-side alternative.
Answer: C Type: Definition Page: 161
53.Which of the following is associated with the aggregate supply curve?
A)Factors of production. B) The cost effect. C) The profit effect. D) All of the above.
Answer: D Type: Basic Understanding Page: 161
54.The profit effect implies:
A)That some costs do not rise with average prices. C)A negative-sloping aggregate supply curve.
B)A curved aggregate supply curve. D)All of the above.
Answer: A Type: Complex Understanding Page: 161
55.The shape of the aggregate supply curve can be explained by the:
A)Foreign-trade effect. B) Interest rate effect. C) Real-balances effect. D) Profit effect.
Answer: D Type: Basic Understanding Page: 161
56.Which of the following suggests that lower average prices make it more difficult to cover interest payments and other costs of doing business, causing firms to reduce production?
A)The cost effect. B) The interest-rate effect. C) The profit effect. D) The real-balances effect.
Answer: C Type: Complex Understanding Page: 161
57.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 which do not rise when prices rise.
Answer: D Type: Basic Understanding Page: 161
58.A positively sloped aggregate supply curve reflects:
A)The idea that greater production lowers profit margins, which raises quantity demanded.
B)That costs rise simultaneously with rising prices.
C)Rising costs of increased capacity utilization.
D)All of the above.
Answer: C Type: Basic Understanding Page: 161
59.The cost effect implies:
A)That higher average prices are reflected in higher costs.
B)A linear aggregate supply curve.
C)That lower average prices result in greater quantity supplied.
D)All of the above.
Answer: A Type: Complex Understanding Page: 161
60.The aggregate supply curve is upward-sloping because of the:
A)The real-balances effect. C)The interest-rate effect.
B)The foreign-trade effect. D)The cost effect.
Answer: D Type: Basic Understanding Page: 161
61.As output rises, the cost effect results from:
A)Lower opportunity costs.
B)Tight supplies of factors of production.
C)The law of demand.
D)Constant costs which fail to fall when prices fall.
Answer: B Type: Basic Understanding Page: 161
62.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 the average price level of the economy.
D)The level of output is expanding.
Answer: C Type: Basic Understanding Page: 162
63.The unique situation in which the behavior of buyers and sellers is compatible is referred to as:
A)Full-employment GDP. C)Micro equilibrium.
B)Macro equilibrium. D)Labor market equilibrium.
Answer: B Type: Definition Page: 162
64.Macro equilibrium:
A)Occurs at the full-employment output level.
B)Occurs at the optimal price level.
C)May be distributed by shifts in aggregate demand or aggregate supply.
D)Can result in the shortage of goods if consumer demand is too great.
Answer: C Type: Complex Understanding Page: 162
65.If aggregate demand decreases and aggregate supply decreases, the level of real output will:
A)Decrease and the price level will decrease.
B)Decrease and the price level will increase.
C)Either increase or decrease, but the price level will stay the same.
D)Decrease, but the price level may either increase, decrease, or stay the same.
Answer: D Type: Complex Understanding Page: 162
66.Which of the following might be a problem at macro equilibrium?
A)The equilibrium is inconsistent with macroeconomic goals.
B)A surplus of goods.
C)A shortage of goods.
D)All of the above.
Answer: A Type: Basic Understanding Page: 163
67.Beginning at a full employment equilibrium, a decrease in aggregate demand will tend to cause a:
A)Lower price level and a higher employment level.
B)Lower price level and a lower employment level.
C)Higher price level and a higher employment level.
D)Higher price level and a lower employment level.
Answer: B Type: Complex Understanding Page: 164
68.Which of the following results if the aggregate quantity supplied exceeds the aggregate quantity demanded?
A)Aggregate demand shifts to the right. C)A surplus causes the price level to rise.
B)Aggregate supply shifts to the left. D)A surplus causes the price level to fall.
Answer: D Type: Basic Understanding Page: 164
69.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.