Changes in Economic and Business Cycles
An increase in the price level and an increase in real GDP.
CPA-03218: An increase (shift right) in aggregate demand causes:
Unused productive capacity and an unwillingness to risk investments.
CPA-03221: The trough of a business cycle is generally characterized by:
Expansion./During an expansion, real GDP is rising and unemployment is falling.
CPA-03246: A period during which real GDP is rising and unemployment is falling is called a(n):
Capacity constraints and labor shortages are likely to put upward pressure on the overall price level./The peak of a business cycle marks the highest point of economic activity. At that point, firms are likely to face capacity constraints and labor shortages, which will put upward pressure on the overall price level.
CPA-03317: At the peak of a business cycle, which of the following conditions is most true?
The total monetary value of all final goods and services produced within a nation in one year./Gross domestic product (GDP) is the total dollar (monetary) value of all new final products and services produced within the economy in a given time period. The emphasis is on the final goods and services.
CPA-05254: Gross domestic product includes which of the following measures?
Potential output will exceed actual output./During a recession, potential output (real GDP) will exceed actual output (real GDP).
CPA-03227: Which of the following conditions is most true during a recession:
A decrease in aggregate demand AND A decrease in aggregate supply./can cause a recession. A recession is defined as a period of falling GDP and rising unemployment. GDP will fall if there is a decrease in aggregate demand or a decrease in aggregate supply.
CPA-03233: A recession can be caused by:
Increase government purchases, decrease in taxes./Expansionary fiscal policy involves increasing government purchases and/or decreasing taxes. Both increases in government spending and decreases in taxes cause the aggregate demand curve to shift right and thus cause real GDP (output) to increase.
CPA-03249: Which of the following might be considered the most expansionary set of fiscal policies?
Real GDP to rise and unemployment to fall./An increase in government spending causes an increase in aggregate demand (i.e., causes the aggregate demand curve to shift right). As a result, an increase in government spending causes real GDP to rise and unemployment to fall.
CPA-03256: An increase in government spending will tend to cause:
Real GDP to fall and unemployment to rise./An increase in the personal income tax will cause a decrease in aggregate demand (i.e., causes the aggregate demand curve to shift left). As a result, an increase in taxes causes real GDP to fall and unemployment to rise.
CPA-03262: An increase in the personal income tax will tend to cause:
Expansion, peak, contraction, and trough./The sequence of a typical business cycle includes an expansionary phase, a peak of economic activity, a contractionary phase, and a trough of economic activity.
CPA-03267: Which one of the following most accurately describes the normal sequence of a business cycle?
An increase in the level of real interest rates./An increase in real interest rates increases the cost of capital, which shifts the aggregate demand curve to the left.
CPA-03291: Which of the following is not likely to cause a rightward shift in the aggregate demand curve?
Real output to expand and the price level to fall./A shift right in short run aggregate supply causes output to increase and the price level to fall.
CPA-03295: Within the framework of the aggregate demand/aggregate supply model, an increase in short run aggregate supply will cause:
A decrease in employment./As aggregate demand falls, the unemployment rate rises so employment would decrease.
CPA-03298: Which one of the following is most likely to accompany a reduction in aggregate demand?
An acceleration in the inflation rate, unless government expenditures are also reduced./A tax cut shifts the aggregate demand curve to the right causing the price level and therefore the inflation rate to rise.
CPA-03300: If an economy is currently experiencing both full employment and price stability, a major tax reduction will probably cause:
Decrease as U.S. goods become less attractive overseas./If the dollar gains in value, net exports will suffer as U.S. goods become more expensive overseas; hence aggregate demand will decrease. The supply of foreign goods domestically should increase as imports become cheaper.
CPA-03303: If the U.S. dollar increases in value relative to the other major currencies, aggregate demand should:
A decrease in real GDP and an increase in the price level./An increase in nominal wages represents an increase in input costs. This would shift the aggregate supply curve to the left resulting in a decrease in real GDP and an increase in the overall price level. Note that the increase in input costs raises the price level from P0 to P1; thus, the price level increases. Graphs, such as the one above, are a great worksheet methodology to visually arrive at or verify your conclusions.
CPA-03304: A large increase in nominal wages, perhaps orchestrated by unions, would most likely result in:
Fluctuations in the level of economic activity, relative to a long-term growth trend./By the definition of business cycles.
CPA-03305: Economic fluctuations (or business cycles) are best described as:
A rightward shift in the aggregate supply curve./If the aggregate supply curve shifts to the right, real GDP would increase and the price level would fall.
CPA-03307: Suppose real GDP is rising while the overall price level is falling. This scenario results in:
A fall in interest rates and a fall in input costs./ A decline in government spending would cause real GDP to decline, not increase.
CPA-03314: Which of the following would most likely cause real GDP to increase the most:
Real GDP per capita./Real GDP per capita is real GDP divided by population. Real GDP per capita is typically used to compare standards of living across countries or across time. By dividing real GDP by population, this measure adjusts for differences in the size of countries and for differences in population over time.
CPA-03359: The measure most often used to compare standards of living across countries or across time is:
Healthcare industry./The business cycle is the rise and fall of economic activity relative to its long-term growth trend. During a contraction or a recession, most industries experience a decline in sales and profits. Similarly, during an expansion, most industries experience an increase in sales and profits. However, health care services are typically not affected by business cycles. People need medical services regardless of whether or not the economy is doing well. Thus, the health care industry is the least affected by the business cycle.
CPA-04831: Which of the following segments of the economy will be least affected by the business cycle?
To assist the auditor to accurately interpret information obtained during an audit./As part of audit planning, the auditor should obtain an understanding of the entity's business. This understanding enables the auditor to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests.
CPA-04840: An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?
Expansionary & Trough/Redwood is showing rising profits, but there is no indication of its having reached a peak. It is recruiting staff, and that is a clear indication of an expansionary phase. Greenwood has clearly hit a record low as stated in the question and is reducing staff (a clear indication of the trough phase).
CPA-04864: Greenwood Corporation has been in business for 20 years. This year its profits have hit a record low and three of its factories are working a three-day week as a result of low product demand. Redwood Corporation, however, has shown steadily rising profits over the last three years and is actively recruiting the staff being laid off by Greenwood. Select the answer that most appropriately describes the phase of business experienced by these two businesses. Redwood Greenwood
A rise in real interest rates, a rise in the value of country X's currency, a decrease in government spending, and an increase in consumer taxes./Stated activity in each of these factors would cause the national output to fall. Factors listed in the proposed answers generally relate to shifts in the demand curve. Leftward shifts in the demand curve will cause supply (national output) to fall at equilibrium. Changes in factors that cause the demand curve to shift to the left and cause output to fall are intuitive and are listed below as
CPA-04866: Which of the following would cause the national output of country X to fall?
The economy will be capable of producing more goods and services./If there is an increase in the resources available in an economy, the economy will be capable of producing more goods and services. This increase is really an increase in the long-run aggregate supply (potential GDP). On the aggregate supply and demand chart, the long-run aggregate supply line (LRAS) is the vertical line that represents the potential or equilibrium level of output. If that line shifts to the right, then the economy is capable of expanding, but it will not automatically expand just because the line shifts to the right.
CPA-05318: Which of the following statements is correct if there is an increase in the resources available within an economy?
Its exports are less expensive for the United States./The foreign country's exports will be less expensive for the United States since it will require fewer U.S. dollars to buy the foreign goods. If the conversion factor is 1.5 FCU to the USD, it takes $.666 to purchase one currency unit. When the conversion factor changes to 1.7 FCU to the USD, it takes $.588 to purchase one currency unit. Therefore, with the higher exchange rate the country's exports will be less expensive for the United States.
CPA-06643: A country's currency conversion value has recently changed from 1.5 to the U.S. dollar to 1.7 to the U.S. dollar. Which of the following statements about the country is correct?
Duration and intensity./Variations in business cycle are attributed or described in terms of how long they last (duration) and the degree of peak or trough (intensity). While a recession, for example, is defined as two consecutive quarters of negative economic growth, a depression is more qualitatively assessed after consideration of both severity (depth) and duration.
CPA-06986: Variations between business cycles most likely are attributable to which of the following factors?
Potential national income exceeds actual national income./When potential national income (potential Gross Domestic Product, also referred to as the Long Run Aggregate Supply) is greater than the achieved national income, the short run aggregate supply curve is shifting to the left indicating a contraction or recession.
CPA-07016: Which of the following indicates that the economy is in a recessionary phase?
$20 billion/ Spending/(1 − MPC)=Change in GDP Spending /(1 − 0.8)=$100,000,000,000 Spending=$100,000,000,000 × (1 − 0.8) Spending=$20,000,000,000
CPA-08312: The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment?
It will benefit U.S. exporters./A decline in the exchange rate of the U.S. dollar will result in U.S. goods being less expensive for purchasers outside of the U.S. The currency for a foreign purchaser will be worth more relative to the U.S. dollar, allowing that purchaser to afford more U.S. goods than before. As a result, this will benefit U.S. exporters, who will be able to sell more of their goods to foreign purchasers.
CPA-08344: A significant decline in the exchange rate of the U.S. dollar generally will have which of the following effects?
Businesses increase capital investment./In an expansionary phase, real GDP increases, firms' profits rise, and the demand for goods and services increases. To capitalize on this rising economic activity, businesses increase their capital investment and expand the size of their workforce.
CPA-08525: Which of the following would indicate that the economy is in an expansionary phase?
