Chapter 8: Business Cycles

the three main components of the aggregate demand - aggregate supply model include

AD, SRAS, LRAS

when plotted with the aggregate price level on the vertical axis and output on the horizontal axis, which of the following curves slopes downward?

AD

Christina Romer argued that

measured properly, GNP before 1929 varied substantially less over time than the official statistics showed.

which of the following macroeconomic variables is procyclical and lags the business cycle?

nominal interest rates

when plotted with the aggregate price level on the vertical axis and output on the horizontal axis, the long-run aggregate supply curve

is vertical

in the great depression, the financial sector collapsed, as

many banks closed

the great depression consisted of how many business cycles?

2

stock and watson found that monetary policy was responsible for about ______ % of the reduction in output volatility that occurred in the mid-1980s

20 to 30

the long boom ended in

2001

the long boom occurred in the

80s and 90s

the longest economic expansion in the US occurred during the

90s

the Great Recession began in ________ and ended in __________.

Dec 2007; June 2009

by 1973, when a new recession began in the midst of the Great Depression,

GDP had almost recovered to its 1929 level, but unemployment was still above the 1929 level

When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, which of the following curves is vertical?

LRAS

the recession of 2001 began in ______ and ended in _______

March; November

the National Bureau of Economic Research

One of the first organizations to investigate the business cycle

When a recession occurs, do economists expect it to be a temporary phenomenon? Or is there some degree of permanence? What is the empirical evidence?

Recent research suggests that recessions may contain permanent components. Some economists argue that only the 1973-1975 recession led to a permanent change in the U.S. economy, because it changed the economy's use of oil permanently. Other studies suggest that perhaps 30% of changes in real output are permanent and 70% are temporary for the postwar United States.

which group within the National Bureau of Economic Research officially determines whether the economy is in a recession or expansion?

The Business Cycle Dating Committee

who officially determines whether the economy is in a recession or expansion?

The National Bureau of Economic Research

Suppose labor supply declined. Would this affect the aggregate demand curve or the aggregate supply curve? What would be the effect on output and the price level?

The decline in the labor supply shifts the long-run aggregate supply curve to the left, causing the price level to increase and output to decline.

business cycle

The entire sequence of a decline in aggregate economic activity followed by recovery, measured from peak to peak or trough to trough is a

you want to invest in a firm whose profits show large fluctuations throughout the business cycle. Which of the following would you invest in?

a corporation that depends heavily on business fixed investment

you want to invest in a firm whose profits show small fluctuations throughout the business cycle. which of the following would you invest in?

a corporation that depends heavily on consumer nondurables

what are the two main components of business cycle theories?

a description of shocks and a model of how the economy responds to them

business cycle chronology

a detailed history of business cycles

a coincident variable

a variable that tends to move at the same time as aggregate economic activity

a leading variable

a variable that tends to move in advance of aggregate economic activity

a lagging variable

a variable that tends to move later than aggregate economic activity

real interest rates

acyclical, while nominal interest rates are pro cyclical.

the trough of business cycle occurs when ______ hits its lowest point

aggregate economic activity

acyclical

an economic variable that doesn't move in a consistent pattern with aggregate economic activity

counter cyclical

an economic variable that moves in the opposite direction as aggregate economic activity (down in expansions, up in contractions)

pro cyclical

an economic variable that moves in the same direction as aggregate economic activity (up in expansions, down in contractions)

lagging variables

are aggregate economic variables that reach a peak after coincident variables reach a peak

stock and watson found that ________ was responsible for about 20 - 30% of the reduction in output volatility that occurred in the mid-1980s

better monetary policy

industries that are extremely sensitive to the business cycle are the

capital goods and durable goods sectors

CFNAI

coincident index based on 85 monthly variables

ADS Business Conditions Index

coincident index based on variables released with different frequencies

The NBER's Business Cycle Dating Committee picks recession dates by looking at many variables, the four most important of which are industrial production, manufacturing and trade sales, nonfarm employment, and real personal income. These variables are known as

coincident indicators.

Diebold and Rudebusch showed that the composite index of leading indicators did not improve forecasts of industrial production because

data on the components of the index revised

the worst recessions after WW II occurred

during 1973-1975 and 1981-1982

the longest contraction in American history occurred

during the 1870s

recurrence

each complete cycle is followed by another complete cycle

Christina Romer's criticism of the belief that business cycles had moderated since WWII depended on the fact that

economists had left out important components of GDP, such as wholesale and retail distribution, transportation, and services in their pre-WWII estimates.

which of the following macroeconomic variables could not be used as a leading economic indicator?

employment

Which of the following macro variables is the most seasonally procyclical?

expenditure on durable goods

in the long run, a reduction in labor supply would cause output to ________ and the aggregate price level to __________.

fall; rise

Christina Romer's estimates of the business cycles prior to World War II showed that the business cycle

had smaller fluctuations before World War II than previously estimated.

the deep recession of 1973-1975 was mainly caused by

higher oil prices

Which of the following macroeconomic variables is pro cyclical and coincident with the business cycle?

industrial production

which of the following macroeconomic variables would you exclude from an index of leading economic indicators?

industrial production

which of the following is not a leading variable?

inflation

turning points

peaks and troughs of the business cycle

after a shift in the aggregate demand curve, which variable adjusts to restore general equilibrium?

price level

nominal interest rates are ___________; and real interest rates are ___________.

pro cyclical; acyclical

Employment is ____________ and unemployment is ______________.

pro cyclical; counter cyclical

according to classical macro, prices adjust _________ to shocks, so the government should ___________.

rapidly; do little

Which of the following macroeconomic variables is acyclical?

real interest rates

research on the effects of recessions on the real level of GDP show that

recession cause both temp and permanent declines in real GDP, but most of the decline is temp.

Which of the following macroeconomic variables is pro cyclical and leads the business cycle?

residential investment

which of the following macroeconomic variables would you include in an index of leading economic indicators?

residential investment

in the long run, an increase in productivity would cause output to _________ and the aggregate price level to __________.

rise; fall

in the short run, an increase in export sales would cause output to _________ and the price level to ___________.

rise; stay constant

When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, the aggregate demand curve

slopes downward

according to Keynesian macroeconomists, prices adjust _____________ to shocks, so the government should _____________.

slowly; fight recessions

in the long run, an increase in consumer spending would cause output to ________ and the price level to __________.

stay constant; rise

in the long run, an increase in gov purchases of military equipment would cause output to __________ and the aggregate price level to ___________.

stay constant; rise.

according to research by Stock and Watson, the recent decline in volatility in many macroeconomic variables

sudden drop that occurred around 1984.

a decline in the stock market, which makes consumers poorer, would cause

the aggregate demand curve to shift to the left

a decrease in gov spending on the park system would cause

the aggregate demand curve to shift to the left

an increase in consumer spending caused by an increase in consumer confidence would cause

the aggregate demand curve to shift up and to the right

the AD, SRAS and LRAS curves each show a relationship between which two economic variables?

the aggregate price level and output

the fact that business cycles are recurrent but not periodic means that

the business cycle's standard contraction - trough - expansion - peak pattern has been observed to occur over and over again, but not at predictable intervals.

NBER

the dates of turning points are determined by a committee from the

using the seasonal business cycle, which quarter would you be most likely to expect an increase in your corporation's sales?

the fourth quarter of the year (October - December)

peak

the high point in the business cycle

trough

the low point in the business cycle

the job loss rate

the probability that an employed worker will lose his or her job in the next month (rises in recessions)

the job finding rate

the probability that someone who is unemployed will find a job in the next month (It rises in expansions)

the 1973-1975 recession was caused by

the quadrupling of oil prices by OPEC

which of the following macro variables does not vary that much over seasons?

the real wage

the key difference between classical and keynesian macroeconomists is their differing beliefs about

the speed at which prices adjust

the idea that the business cycle is recurrent means that

the standard pattern of contraction - trough - expansion - peak occurs again and again in industrial economies

persistance

the tendency for declines in economic activity to be followed by further declines and for growth in economic activity to be followed by more growth

Comovement

the tendency of many different economic variables to have regular and predictable patterns over the business cycle

Great Moderation

the widespread decline in the volatility of many macroeconomic variables after 1984

business cycles all display the following characteristics

they last a period of one to twelve years, comovement of many economic variables, a period of expansion followed by one of contraction.

shocks

typically unpredictable forces that have major impacts on the economy (wars, new inventions, harvest failures, and changes in the gov policy)

which of the following macroeconomic variables is countercyclical?

unemployment

contraction

when aggregate economic activity is declining

expansion

when aggregate economic activity is increasing