Unit 12

Which segment of the business cycle would one expect to find rising interest rates and higher wages? A) Expansion B) Recession C) Contraction D) Trough

A) Expansion Expansions in the business cycle are characterized by increasing consumer demand for goods and services and increasing industrial production. One would expect these increases to lead to rising interest rates as demands for loans for purchases increases and higher wages for workers as production increases.

In what order do the following economic phases typically occur? Recovery Trough Decline Prosperity A) I, IV, III, II B) III, IV, I, II C) IV, III, I, II D) II, I, III, IV

A) I, IV, III, II Expansion (recovery) is considered to be the beginning of the business cycle, followed by the peak (prosperity), contraction (decline), and trough.

Rising employment due to an increase in demand for goods and services would be associated with periods of A) inflation. B) stagflation. C) stagnation. D) deflation.

A) inflation. During inflationary periods, prices are rising due to a rising demand for goods and services. This will have the effect of creating more employment. Conversely, when the economy slows down, employment generally falls and claims for unemployment benefits will rise.

The business cycle includes all of the following classifications except A) waves. B) trough. C) expansion. D) peak.

A) waves. Throughout modern history, periods of economic expansion have been followed by periods of contraction in a pattern referred to as the business cycle or economic cycle. Business cycles go through four stages; expansion, peak, contraction, and trough.

According to the U.S. Commerce Department, the economy is in a depression when a decline in real output of goods and services lasts A) 9 months or more (3 quarters). B) 18 months or more (6 quarters). C) beyond 12 months (4 quarters). D) 6 months or more (2 quarters).

B) 18 months or more (6 quarters). The U.S. Commerce Department defines a depression as a decline in real output of goods and services lasting 18 months or more (6 quarters).

Reports of rising inventories generally occur during which period of the business cycle? A) Expansion B) Contraction C) Peak D) Recovery

B) Contraction Downturns in the business cycle (a contraction) tend to be characterized by rising inventories due to a lack of consumer demand. During expansion or recovery, demand is high and goods are less likely to remain in inventory.

Just as markets can be influenced by many factors, so can the market price of a single company's stock. While all of the following could impact a company's stock price to some extent, which would be the least likely to have a direct and immediate impact? A) Changes in the business cycle B) Political elections C) The company's earnings D) Federal Reserve Board (FRB) policies

B) Political elections The price of a company's stock will be impacted directly by the company's earnings and changes in the business cycle. Less directly impactful would be FRB policies to loosen or tighten credit, and least likely to have a direct impact would be the outcome of political elections. It should be noted, however, that the outcome of political elections can influence FRB policies over time and, therefore, where the economy stands in relation to the business cycle. Still, however, elections would have less of an immediate impact.

U.S. consumers are increasing their imports of foreign-made goods. On this data alone, one might expect gross domestic product (GDP) to A) remain the same. B) decrease. C) initially increase sharply and then decrease. D) increase.

B) decrease. GDP is the measure of good and services produced. If U.S. consumers are importing more foreign goods, it is likely that production of U.S. goods will fall off, leading to a decrease in the GDP.

Economists call mild, short-term contractions A) troughs. B) recessions. C) depressions. D) declines.

B) recessions. Economists call mild, short-term contractions recessions. Longer, more severe contractions are depressions.

According to the U.S. Commerce Department, the economy is in a recession when a decline in real output of goods and services lasts A) 18 months or more. B) 9 months or more. C) 6 months or more. D) beyond 12 months.

C) 6 months or more. The U.S. Commerce Department defines a recession as a decline in real output of goods and services for six months or more.

Which of the following groupings might indicate the economy is contracting? A) Inventories are at record lows, stock prices are at record highs, and bankruptcies are falling. B) Bond prices are falling, stock prices are rising, and GDP is rising. C) Bond defaults are rising, inventories are rising, and GDP is falling. D) Consumer borrowing is low, property values are high, and stock prices are falling.

C) Bond defaults are rising, inventories are rising, and GDP is falling. The only grouping where all factors point toward a contracting or downward economy is the one showing bond defaults rising, inventories rising, and GDP falling. Other signs of a contracting economy would be falling stock prices, rising bankruptcies and bond defaults, higher consumer debt (borrowing), and falling property values.

Which of the following are characteristics of the expansion phase of the business cycle? A) Increasing defaults B) Rising inventories C) Increase industrial production D) Higher consumer debt

C) Increase industrial production Higher consumer debt, rising inventories, and increasing defaults are characteristics of the decline phase of the business cycle.

Which of the following refers to prolonged periods of slow or little economic growth, usually accompanied by high unemployment? A) Stagflation B) Trough C) Stagnation D) Deflation

C) Stagnation Economic stagnation refers to prolonged periods of slow or little economic growth, usually accompanied by high unemployment.

Economists refer to longer, more severe contractions in the economy as A) declines. B) recessions. C) depressions. D) depletions.

C) depressions. Economists call mild, short-term contractions recessions while longer, more severe contractions are called depressions.

Which of the following are characteristics of an economic downturn? A) Decreasing inventories B) Decreasing defaults C) Increasing industrial production D) Higher consumer debt

D) Higher consumer debt In the early stages of an economic downturn it is normal to see a spike in consumer debt. Consumers, assuming the drop in income is temporary, may use debt to maintain their lifestyle. Decreasing inventories, increasing industrial production, and decreasing defaults are all characteristics of an economic expansion.