Module 8: Short term economic fluctuations

In Macroland, a country that operates according to Okun's law, potential GDP equals $10 trillion, the actual rate of unemployment is 8 percent, and the natural unemployment rate is 6 percent. What is real GDP in Macroland? A $9.6 trillion B $9.8 trillion C $10 trillion D $10.2 trillion

A $9.6 trillion

Refer to the accompanying figure. In the figure, which interval represents a business cycle expansion? A A to B B B to C C A to C D B to D

A A to B

The following data give the dates of successive turning points in U.S. economic activity and the corresponding levels of real GDP at the time. Which of the turning points are troughs? A (A), (B), and (C) B (C), (D), and (E) C (A), (C), and (E) D (B) and (D)

D (B) and (D)

In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 3 percent, then the output gap equals: A −1 percent. B −2 percent. C 1 percent. D 2 percent.

D 2 percent.

Using Okun's Law, fill in the missing data in the table below. All data re hypothetical.

For each year apply the formula for Okun's Law: [(Y - Y-star)/Y-star] x 100 = -2 (U - U-star) Calculating (a): [(7,840 - 8,000)/8000] × 100 = -2(6 - a). Therefore, a = 5% Similarly, you can calculate that b = $8,100 billion c = $8,282 billion, and, d = 4%

How is each of the following likely to be affected by a recession: the natural rate of unemployment, the cyclical unemployment rate, the inflation rate, and, the poll ratings of the President?

The natural unemployment rate is the sum of structural and frictional unemployment and excludes cyclical unemployment. Hence, the natural unemployment rate by definition should not be affected by a recession. Also, by definition, the cyclical unemployment rate rises in a recession. Inflation tends to decline in the period following a recession. Finally, poll ratings of presidents tend to be strongly correlated with the state of the economy, so a recession will probably reduce a president's popularity.

According to Okun's Law, when cyclical unemployment increases from 1 to 2 percent, the output gap increases from ___ percent. A -2 to -4 B -1 to -2 C 3 to 4 D 1 to 2

A -2 to -4

Which of the following does not describe a characteristic of short-term economic fluctuations? A Expansions and recessions are felt in only a few sectors of the economy. B Expansions and recessions are irregular in length and severity. C The unemployment rate rises during recessions. D Durable-goods industries are more sensitive to short-term fluctuations than service and non-durable industries.

A Expansions and recessions are felt in only a few sectors of the economy.

Which of the following is most likely to occur in the labor market during a recession? A The growth rate of real wages declines. B Bonuses and promotions become more frequent. C New entrants to the labor market have an easier time finding jobs. D The supply of labor increases dramatically.

A The growth rate of real wages declines.

A depression is: A a particularly severe and protracted recession. B the high point of economic activity prior to a downturn. C the low point of economic activity prior to a recovery. D a particularly strong and protracted expansion.

A a particularly severe and protracted recession.

If actual output equals potential output, unusually slow potential output growth would tend to result in: A a recession. B an expansion. C an output gap. D a recessionary gap.

A a recession.

Industrial production, total sales, nonfarm employment, and after-tax household income are examples of _ indicators of economic activity. A coincident B preceding C lagged D real

A coincident

Industrial production, total sales, nonfarm employment, and after-tax household income are examples of ____ indicators of economic activity. A coincident B preceding C lagged D real

A coincident

Varying the quantity of output produced and sold at preset prices is called: A meeting demand. B self-correcting economics. C Okun's law. D spurring inflation.

A meeting demand.

If all prices adjusted immediately to balance the quantities supplied and demanded for all goods and services: A output gaps would not exist. B output gaps would be positive more often than they would be negative. C cyclical unemployment would be positive. D potential GDP would rise much more quickly.

A output gaps would not exist.

An expansion occurs when ____, when ____, or when both of these occur. A potential output grows rapidly; actual output rises above potential output. B potential output grows slowly; actual output rises above potential output C potential output grows rapidly; actual output equals potential output D potential output grows slowly; actual output equals potential output

A potential output grows rapidly; actual output rises above potential output.

The decline in the natural rate of unemployment between the 1979 and the 2000s might be the result of: A the changing age structure of the population and more efficient labor markets. B advances in computer technology and globalization. C increasing wage inequality and skill-biased technological change. D greater quantities of human capital and increased average labor productivity.

A the changing age structure of the population and more efficient labor markets.

Two possible explanations for the decline in the natural rate of unemployment in the United States over the past twenty years are: A the changing age structure of the population and more efficient labor markets. B advances in computer technology and globalization. C increasing wage inequality and skill-biased technological change. D greater quantities of human capital and increased average labor productivity.

A the changing age structure of the population and more efficient labor markets.

The end of a recession is called the: A trough. B expansion. C peak. D boom.

A trough.

An informal definition of a recession is at least ____ consecutive quarters of declining real GDP. A two B four C six D eight

A two

In Okunland, a country whose economy operates according to Okun's law, real GDP equals $7,520 billion, potential GDP equals $8,000 billion, and the actual unemployment rate is 8 percent. What is the natural rate of unemployment in Okunland? A 2 percent B 5 percent C 6 percent D 11 percent

B 5 percent

The economy of Omega operates according to Okun's law. In Omega, potential GDP and real GDP both equal $7 trillion, and the natural rate of unemployment equals 6 percent. What is the actual rate of unemployment in Omega? A 4.2 percent B 6.0 percent C 7.0 percent D 13.0 percent

B 6.0 percent

A period in which the economy is growing at a rate significantly above normal is called a(n): A depression. B expansion. C peak. D recession.

B expansion.

Compared to older workers, younger workers change jobs more frequently, so they are more prone to _ unemployment and have fewer skills, so they are more prone to ____ unemployment. A cyclical; frictional B frictional; structural C structural; frictional D frictional; cyclical

B frictional; structural

Workers in durable-goods industries are ____ workers in non-durable goods industries to lose their jobs during a recession. A much less likely than B more likely than C less likely than D equally likely as

B more likely than

Economic activity moves from a period of expansion to a ___ and then moves into a period of ___ until it reaches a _. A peak; expansion; trough B peak, recession; trough C trough; expansion; peak D trough; recession; peak

B peak, recession; trough

If the actual rate of unemployment equals the natural rate of unemployment, then: A potential output is greater than real GDP. B potential output equals real GDP. C potential output is less than real GDP. D there is a recessionary gap.

B potential output equals real GDP.

Changes in the growth rate of potential output and deviations of actual output from potential output are two logical explanations for: A the decline in the natural rate of unemployment. B short-term economic fluctuations. C increasing wage inequality. D skill-biased technological change.

B short-term economic fluctuations.

If the output gap equals -$200 million, then A cyclical unemployment equals the sum of structural and frictional unemployment. B there is a recessionary gap. C there is no cyclical unemployment. D potential GDP is less than actual GDP.

B there is a recessionary gap.

The duration of an expansion is measured from: A peak to trough. B trough to peak. C peak to peak. D trough to trough.

B trough to peak.

If potential output equals $8 billion and actual output equals $10 billion, then this economy's output gap should be expressed as: A $2 billion. B 20 percent. C 25 percent. D −25 percent.

C 25 percent.

If the natural rate of unemployment is 4 percent, what is the actual rate of unemployment if output is 2 percent below potential? A 2% B 4% C 5% D 6%

C 5%

Cyclical unemployment is equal to zero when: A there is no recessionary gap. B there is no expansionary gap. C actual GDP and potential GDP are equal. D frictional unemployment equals structural unemployment.

C actual GDP and potential GDP are equal.

According to Okun's Law, each extra percentage point of _ unemployment is associated with a __ percentage point increase in the output gap, measured in relation to potential output A frictional; 2 B frictional; 4 C cyclical; 2 D cyclical; 4

C cyclical; 2

In an expansion, the cyclical rate of unemployment is often: A positive. B zero. C negative. D equal to the natural rate of unemployment.

C negative.

The beginning of a recession is called the: A depression. B expansion. C peak. D trough.

C peak.

In the long run, output gaps are eliminated by: A reducing potential output. B increasing potential output. C price changes. D increased efficiency in labor markets.

C price changes.

In the long run, total spending affects ____, and output is determined by ____. A inputs and productivity; prices B inputs and productivity; total spending C prices; inputs and productivity D prices; meeting demand at preset prices

C prices; inputs and productivity

When recessions are the result of slowing growth in potential output, the government's best response is a policy to: A increase aggregate demand. B decrease aggregate demand. C promote saving and investment. D reduce government spending.

C promote saving and investment.

Among the most important indicators used by the NBER Business Cycle Dating Committee to determine the beginning of the 2007-2009 recession were all of the following except: A industrial production. B total sales in manufacturing, wholesale trade, and retail trade. C the consumer price index. D nonfarm employment.

C the consumer price index.

When actual output is less than potential output there is a(n): A budget deficit. B budget surplus. C trade deficit. D recessionary gap.

D recessionary gap.

If the cyclical rate of employment equals 1% and the actual rate of unemployment equals 8%, then the natural rate of unemployment must equal: A -10%. B 9%. C 1%. D 7%.

D 7%.

If firms maintain preset prices in the short run, then the primary cause of outputs gaps is changes in: A potential output. B prices. C capital and technology. D economywide spending.

D economywide spending.

In Macroland potential GDP equals $20 billion and real GDP equals $19.2 billion. Macroland has a(n) ____ gap equal to ____ percent of potential GDP. A expansionary; 8 B expansionary; 4 C recessionary; −8 D recessionary; −4

D recessionary; −4

Potential output is: A equal to actual output. B also known as the output gap. C the same as the natural rate of unemployment. D the maximum sustainable amount of output.

D the maximum sustainable amount of output.

Which firm is likely to see its profits reduced the most in a recession: an automobile producer, a manufacturer of boots and shoes, or a janitorial service? Which is likely to see its profits reduced the least? Explain.

In general, producers of durable goods are affected most by recessions while producers of non-durables (like food) and services are affected least. Automobiles are durable goods, so the automobile producer would probably see its profits reduced the most, while the janitorial service will see the smallest decline in profit. Boots and shoes are "semi-durable" since a pair of shoes may last for several years and people can put off purchases of these for a while if necessary. Thus the boot manufacturer's losses are likely to fall in between those of the other two firms.