Question 1

As firms raise output in response to rising aggregate demand,

Accepted Answer

A)   resources become scarce, wages eventually rise, and a point is reached beyond which output cannot expand
B)   they become increasingly efficient and are thus able to pass the cost savings on to consumers in the form of lower prices
C)   real wages fall, interest rates rise, and consumers buy less
D)   they hire fewer workers and substitute capital for labor
E)   the level of nominal GDP falls, though real GDP risesF) A) and E)
G) B) and C)

Question 2

Increases in aggregate demand are likely to create

Accepted Answer

A)   deflation during recessions
B)   inflation when the output gap is quite negative
C)   higher output when the output gap is negative, and inflation when output is at capacity
D)   reductions in output if the output gap is already positive
E)   both inflation and recessionF) A) and B)
G) A) and C)

Question 3

Which of the following is characteristic of business cycles?

Accepted Answer

A)   consumption displays greater volatility than GDP
B)   investment remains relatively stable throughout the business cycle
C)   the inflation rate is a leading indicator of recessions and expansions in GDP
D)   the unemployment rate is a leading indicator of recessions and expansions in GDP
E)   the growth rate of wages fluctuates less than the growth rate of GDPF) C) and D)
G) A) and B)

Question 4

Okun's law refers to

Accepted Answer

A)   The tendency for recessions in the USA to spread throughout the world
B)   The generally stable negative relationship between the output gap and deviations of unemployment from the natural rate
C)   The generally stable positive relationship between the output gap and deviations of unemployment from the natural rate
D)   The tendency for business cycle volatility to fall over time
E)   The negative relationship between unemployment and job vacanciesF) A) and B)
G) A) and C)

Question 5

According to Real Business Cycle theory,

Accepted Answer

A)   lack of consumer confidence causes most business cycles
B)   price fluctuations are unimportant because they affect nominal, not real GDP
C)   recessions are an optimal response to negative technology shocks
D)   fiscal policy is the most appropriate way to smooth out economic fluctuations
E)   labor supply curves are extremely steepF) C) and D)
G) A) and B)

Question 6

Which of the following is not assumed in Real Business Cycle theory?

Accepted Answer

A)   labor supply curves are relatively flat
B)   markets allocate resources efficiently
C)   economic expansions are caused by technological improvements
D)   recessions are caused by reductions in aggregate demand
E)   the marginal product of labor changes over the course of the business cycleF) D) and E)
G) B) and D)

Question 7

The Great Moderation refers to

Accepted Answer

A)   Dramatic fall in business cycle volatility that occurred from the mid-1980s to the mid-2000s
B)   The general fall in business cycle volatility after the second world war
C)   The fall in global output that occurred after 2007
D)   Improved monetary policy since the mid-1980s
E)   Improved fiscal policy since the mid-1980sF) A) and B)
G) C) and E)

Question 8

One of Keynes' most profound insights was that

Accepted Answer

A)   markets allocate resources efficiently, as if by an invisible hand
B)   comparative advantage allows all nations to gain from trade
C)   capitalists exploit workers by paying them less than the total value of what they produce
D)   the same factor that drives long run growth-technological change-also causes business cycles
E)   the economy can achieve an equilibrium below its capacityF) B) and D)
G) A) and B)

Question 9

One of the reasons why higher prices affect the quantity of real output demanded is

Accepted Answer

A)   at higher prices, business people become richer, so demand rises
B)   at higher prices, real household wealth is reduced, so the quantity of output demanded falls
C)   when prices are high, consumers fear that a recession is approaching
D)   when pricing are rising, the central bank tends to reduce interest rates, thereby reducing demand
E)   at higher prices, time becomes more valuable, so people buy now instead of laterF) None of the above
G) C) and D)

Question 10

The most controversial element of the Frisch-Slutsky paradigm concerns

Accepted Answer

A)   the direction in which employment moves during business cycles
B)   the duration of business cycles
C)   which types of events can cause business cycles
D)   the manner in which exogenous shocks are translated into business cycles
E)   whether the business cycle creates impulses or propagation mechanismsF) A) and D)
G) A) and E)

Question 11

Which of the following correctly describes a theory of wage behavior during the business cycle?

Accepted Answer

A)   Real Business Cycle theory holds that workers are relatively unresponsive to wage changes
B)   Classical theory holds that nominal wages are inflexible
C)   Keynesian theory holds that real wages may rise during recessions, preventing labor markets from clearing
D)   Rational expectations theory holds that workers continue to anticipate wage increases during recessions
E)   Marxist theory holds that unions cause recessions by keeping wages too highF) C) and E)
G) A) and D)

Question 12

In contrast to the long run,in the short run

Accepted Answer

A)   changes in wages may lag behind changes in employment
B)   the economy produces at full capacity
C)   GDP follows a steady trend without fluctuations
D)   the aggregate supply curve is vertical
E)   the quantity of money has no effect on outputF) A) and B)
G) None of the above

Question 13

Comparing State economies to that of the US as a whole shows that

Accepted Answer

A)   about half the States are in recession at any point in time
B)   when the US enters a recession, about 20% of the States experience economic expansion, and vice versa
C)   there is very little correlation between the national and regional economies
D)   there is a highly positive correlation between the national economy and most State economies
E)   the 12 Federal Reserve districts experience business cycles independently of each otherF) None of the above
G) D) and E)

Question 14

A growth recession occurs when

Accepted Answer

A)   there are two successive quarters of negative GDP growth
B)   economic growth is so rapid that it creates inflation
C)   real GDP is growing but nominal GDP is not
D)   potential GDP declines
E)   GDP grows at a slower rate than its long run trendF) D) and E)
G) B) and C)

Question 15

The long run can be distinguished from the short run because in the long run

Accepted Answer

A)   an equilibrium is reached between aggregate supply and aggregate demand
B)   resources are no longer scarce
C)   firms produce at capacity
D)   the inflation rate is zero
E)   technological advances come to an endF) A) and E)
G) D) and E)

Question 16

A large negative output gap

Accepted Answer

A)   represents a shortage of goods due to excessive demand for output
B)   is the result of overtime work by the labor force
C)   creates inflation
D)   means the business cycle is at a peak
E)   implies excessive unemploymentF) A) and E)
G) C) and D)

Question 17

The shape of the short run aggregate supply curve is generally believed to be

Accepted Answer

A)   a decreasing function of the price level
B)   an increasing function of the interest rate
C)   an increasing function of the price level
D)   vertical
E)   backward-bendingF) B) and C)
G) C) and E)

Question 18

Which of the following plays a central role in Real Business Cycle theory?

Accepted Answer

A)   monopoly pricing
B)   the marginal product of labor
C)   the marginal propensity to consume
D)   expectations
E)   monetary policyF) A) and D)
G) A) and E)

Question 19

Business cycles are

Accepted Answer

A)   seasonal changes in output
B)   quarterly profit and loss fluctuations around a company's fiscal-year average
C)   long run trends upward or downward in employment
D)   medium-term fluctuations of aggregate output around its long term trend
E)   gyrations of share prices on the stock marketF) C) and E)
G) A) and B)

Question 20

All other things being equal,in the absence of public policy,an economy producing more than its sustainable capacity will eventually

Accepted Answer

A)   reduce its long run capacity by wearing out its capital and depleting its natural resources
B)   increase its long run capacity to meet the demand
C)   experience wage and price increases and cutbacks in supply until output is at capacity
D)   export the excess output to other countries
E)   exhibit improved technologyF) None of the above
G) C) and D)

Exam 11: Business Cycles

One of the reasons why higher prices affect the quantity of real output demanded is

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Which of the following is characteristic of business cycles?

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Which of the following correctly describes a theory of wage behavior during the business cycle?

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Okun's law refers to

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In contrast to the long run,in the short run

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One of Keynes' most profound insights was that

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A large negative output gap

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All other things being equal,in the absence of public policy,an economy producing more than its sustainable capacity will eventually

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As firms raise output in response to rising aggregate demand,

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The long run can be distinguished from the short run because in the long run

Correct AnswerverifiedShow Answer

The shape of the short run aggregate supply curve is generally believed to be

Correct AnswerverifiedShow Answer

A growth recession occurs when

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According to Real Business Cycle theory,

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Which of the following plays a central role in Real Business Cycle theory?

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Comparing State economies to that of the US as a whole shows that

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Which of the following is not assumed in Real Business Cycle theory?

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Increases in aggregate demand are likely to create

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The most controversial element of the Frisch-Slutsky paradigm concerns

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The Great Moderation refers to

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Business cycles are

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