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As a new expansion in the business cycle starts, we can expect the aggregate labor demand curve to shift to the ______. This will be met with __________ in real GDP and a movement _____ the aggregate production function.
right an increase up
If an economic shock increases labor demand, equilibrium employment _________ and real GDP ________. If wages are flexible, the increase in employment and real GDP will be __________ the increase if wages are rigid.
rises, rises. smaller than
Economic fluctuations are ____________.
short-run changes in the growth of GDP.
According to Keynes's view on animal spirits, ____________.
the economy could fluctuate beyond the level that could be explained by the underlying economic fundamentals.
gdp deflator formula
Nominal GDP/Real GDP x 100
Using your answer above, how does a pendulum-like structure contradict this property in economic fluctuations?
Pendulums swing in an easily-measured rhythm that would make predicting fluctuations simple.
When workers are laid off, what happens to physical capital?
Physical capital becomes less productive, leading firms to reduce capacity utilization.
On the graph to the right, potential real GDP is the _______ curve, nominal GDP is the _____ curve, and real GDP is the _____ curve.
grey, blue, red
The duration of an economic fluctuation ____________.
has limited predictability.
If wages were flexible, employment would have been _________ employment with rigid wages.
higher than
While economic booms are generally positive, they also have a dark side. This is because ____________.
if the economy is close to full employment and full capacity utilization before the beginning of the boom, the economy might eventually experience a leftward shift in labor demand, causing a recession rather than a gentle fall to pre-boom levels.
Partial recovery occurs while downward wage rigidity _______ in effect. Full recovery (full employment) occurs when labor demand shifts to an equilibrium wage that is _________ the rigid wage.
is still greater than
While the inverse relationship between unemployment and real GDP growth is unquestionable over time, it is not always proportional because ____________.
labor hoarding slows down the hiring process.
Examine each variable and explain whether it is likely to be positively correlated, negatively correlated, or uncorrelated with real GDP. The average weekly hours worked by manufacturing workers is likely to be _________ with real GDP. The average number of initial applications for unemployment insurance is likely to be _________ with real GDP. The amount of new orders for capital goods unrelated to defense is likely to be __________ with real GDP. The amount of new building permits for residential buildings is likely to be ___________ with real GDP. The S&P 500 stock index is likely to be _________ with real GDP. Consumer sentiment is likely to be __________ with real GDP.
positively correlated negatively correlated positively correlated positively correlated positively correlated positively correlated
To calculate the percent that real GDP is above real potential GDP, use the following formula:
real GDP - real potential GDP/ real potential GDP (x100)
Which of the following key factors can help explain the Great Recession of 2007dash2009? (Check all that apply.)
An increase in mortgage defaults, negatively impacting banks. A reduction in new home construction, leading to a decrease in labor demand. A reduction in consumer wealth, curtailing spending. A fall in housing prices.
Which of the following shows the correct sequence of events from an initial shock to consumption and the resulting multiplier effects?
Consumption declines, firms' revenue falls, labor demand shifts left, unemployment rises, and the multiplier effects continue their cycle.
Which of the following statements correctly describe economic fluctuations? (Check all that apply.)
Economic fluctuations tend to be difficult to predict. Short-run changes in the growth of GDP are referred to as economic fluctuations.
Keynes's theory of multipliers involved an element of the self-fulfilling prophecy. Which of the following illustrates the concept of a self-fulfilling prophecy?
Firms expect an increase in demand in the future and so hire additional workers now, which leads to an increase in consumption demand.
Which of the following statements is true about economic fluctuations?
Investment and business expansion would show co-movement.
Which of the following statements correctly describes features / implications of real business cycle (RBC) theory?
It suggests that technological progress is an important determinant of long-term fluctuations in growth.
Which of the following statements correctly describes the events that took place during the Great Depression?
Its start coincided with a crash in the U.S. stock market.
What are the important mechanisms that reverse the effects of a recession in a modern economy? (Check all that apply.)
Labor demand increases due to expansionary government policies. Labor demand increases due to market forces.
Early theories of business cycles assumed that economic fluctuations had a pendulum-like structure with systematic swings in economic growth. Which property of economic fluctuations do these early theories contradict?
Limited predictability.
A toy company's excess inventories get sold off. Interest rates are lowered by 1.5 percentage points to attract investment. The employees -of firms which had to shut down - find other jobs. Corporate taxes in the country are decreased by 5 percentage points. A rise in overall inflation due to an expansionary monetary policy raises the price of firm Z's cars. Researchers develop a cheaper method of manufacturing steel.
Market forces Government Policies Market forces Government Policies Government Policies Market forces
Which of the following best relays the events of the 2007dash2009 recession after the bust in housing prices?
Mortgage foreclosures, a credit contraction, a leftward shift in the demand for labor, and a strong drop in consumption
In 1973, the major oil-producing nations of the world declared an oil embargo. The price of oil, a key source of energy, increased. This led to widespread inflation as costs of production increased steeply. The resulting fall in GDP and employment led the United States into a recession. Which of the business cycle theories explained in the chapter would best fit this explanation of the 1970s recession?
Real business cycle theory.
What market forces might cause the labor demand curve to shift back to the right? (Check all that apply.)
The banking system recuperates and businesses are again able to use credit to finance their activities. Technological advances encourage firms to expand their activities. Excess inventory has been sold off.
Which of the following statements explains why the new technology is likely to lead to higher unemployment than estimated using Okun's Law?
The effect of the new technology on the unemployment rate would be moderated by substituting capital for labor.
Some economists stress the role of monetary policy in the period leading up to the recession of 2007-2009. Between 2001 and 2003, the Federal Reserve lowered the target federal funds rate from 6.5% to 1%, and kept it there through much of 2004. This resulted in a substantial decline in real interest rates throughout the economy, including mortgage rates. Based on the chapter's discussion of monetary and financial factors, how could the Federal Reserve's policies have contributed to the economic "bubble" of the pre-recession years of 2000-2006?
The low federal funds rate also lowered mortgage rates, driving an increase in demand for housing, which in turn drove up real estate prices.
An example of a multiplier is when ____________. (Check all that apply.)
a drop in consumer confidence reduces household spending, causing firms to cut production and lay off employees, leading to a greater reduction in household spending. an increase in business confidence causes firms to increase production and hire employees, leading to an increase in household spending, causing firms to further increase production and employment.
The post-recession wage is _________ the pre-recession wage. Which of the following statements correctly describes the consequences of considering real wages instead of nominal wages in analyzing recessions?
above We would find that firms base their hiring decisions on the ratio of nominal wages to their output prices.
Using Okun's Law, we can infer that the change in the growth rate of GDP will ___________. Using the real business cycle approach, it can be concluded that the new technology will _________.
accelerate the decrease in the unemployment rate stimulate both employment and GDP
The concept of multipliers was one of the key elements of John Maynard Keynes's theory of fluctuations. A multiplier is ____________.
an economic mechanism that causes an initial shock to be amplified by follow-on effects.
A variable identified as real is one that is measured in _________ dollars.
base-year
An economic expansion that occurs close to full employment ____________.
can cause inflation with very little employment and output growth.
Recessions are periods in which the economy __________,while economic expansions are defined as the periods __________. An economic expansion begins ____________.
contracts, between recessions at the end of a recession.
During recessions, firms typically prefer to achieve a reduction in employment by ____________. But, if this is not sufficient for reducing employment quickly, they would have to _________.
cutting back new hiring engage in mass layoffs
Real business cycle theory ____________.
emphasizes the role of changing productivity and technology in causing economic fluctuations.
Using sophisticated statistical techniques, economists can usually predict ____________.
the end of a recession.
One major difference between modeling economic busts and booms is that ____________.
there is no issue of rigid nominal wages when modeling booms.
In the United States, recessions are usually defined as ____________.
two consecutive quarters of negative growth in real GDP.
Using Okun's law:
we can calculate the change in rate of unemployment by using the formula -0.5(g - 2), where g is the rate of real GDP growth.
