Section 1

A temporary adverse productivity shock would A) shift the labor supply curve upward. B) decrease the level of employment. C) decrease future income. D) decrease the expected future marginal product of capital.

B

A household-production model more closely matches the U.S. data than a standard RBC model because it has a A) higher standard deviation of market output. B) lower standard deviation of market output. C) higher rate of job destruction. D) lower standard deviation of consumption.

A

A variable that tends to move in advance of aggregate economic activity is called A) a leading variable. B) a coincident variable. C) a lagging variable. D) an acyclical variable.

A

According to classical economists, the government should increase government purchases when A) the benefits of the spending exceed the costs. B) the economy is in a recession. C) the economy is likely to go into a recession in the next six months to a year. D) inflation is lower than its targeted level.

A

According to research by Stock and Watson, the recent decline in volatility in many macroeconomic variables was a A) sudden drop that occurred around 1984. B) gradual decline throughout the 1980s. C) sudden drop that occurred around 1990. D) gradual decline throughout the 1990s.

A

An economic variable that moves in the same direction as aggregate economic activity (up in expansions, down in contractions) is called A) procyclical. B) countercyclical. C) acyclical. D) a leading variable.

A

Braun and Evans found that A) the measured Solow residual varied sharply over the seasons. B) electricity use by producers rises sharply in economic upturns. C) professional forecasters have rational expectations of inflation. D) shocks to fiscal policy are the main source of business cycle fluctuations.

A

By 1937, when a new recession began in the midst of the Great Depression, A) GDP had almost recovered to its 1929 level, but unemployment was still above the 1929 level. B) unemployment had almost fallen back to its 1929 level, but GDP had yet to recover to its 1929 level. C) neither GDP nor unemployment had returned to near their 1929 levels. D) both GDP and unemployment had returned to near their 1929 levels.

A

Christina Romer argued that A) measured properly, GNP before 1929 varied substantially less over time than the official statistics showed. B) measured properly, GNP after 1929 varied substantially more over time than the official statistics showed. C) measured properly, economic expansions after 1929 were shorter than the official statistics showed. D) measured properly, economic expansions before 1929 were shorter than the official statistics showed.

A

Classical economists would cite all of the following as reasons why the government cannot smooth out the business cycle EXCEPT that A) only productivity shocks can cause real fluctuations in the business cycle. B) the government has imperfect knowledge of the economy. C) political constraints on policy actions prevent the government from carrying out effective policies. D) time lags between the onset of a recession and the implementation of effective countermeasures make anti-recessionary macroeconomic policies impractical.

A

DSGE models are A) similar to RBC models but allow for shocks other than productivity shocks. B) similar to RBC models, but government spending shocks play a major role. C) similar to Keynesian models except in the long run. D) similar to Keynesian models except in the short run.

A

Measures of the Solow residual show it to be A) strongly procyclical. B) mildly procyclical. C) mildly countercyclical. D) strongly countercyclical.

A

Models that are similar to RBC models but allow for shocks other than productivity shocks are known as A) DSGE models. B) Keynesian models. C) Solow models. D) Friedman models.

A

Persistence is A) 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. B) the idea that the standard pattern of contraction-trough- expansion-peak occurs again and again in industrial economies. C) the tendency of many economic variables to move together in a predictable way over the business cycle. D) the idea that peaks and troughs of the business cycle occur at regular intervals.

A

Real business cycle theorists think that most business cycle fluctuations are caused by shocks to A) the production function. B) the size of the labor force. C) the real quantity of government purchases. D) the spending and saving decisions of consumers.

A

The longest contraction in American history occurred A) during the 1870s. B) in the years right before World War I began. C) during the 1930s. D) during the 1970s.

A

The most common measure of productivity shocks is known as A) the Solow residual. B) the Lucas supply curve. C) the Prescott productivity parameter. D) the Kydland factor.

A

The recession of 2001 began in ________ and ended in ________. A) March; November B) February; December C) April; October D) February; October

A

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 is called A) persistence. B) comovement. C) periodicity. D) recurrence.

A

When aggregate economic activity is declining, the economy is said to be in A) a contraction. B) an expansion. C) a trough. D) a turning point.

A

When aggregate economic activity is increasing, the economy is said to be in A) an expansion. B) a contraction. C) a peak. D) a turning point.

A

Which of the following is an example of a productivity shock? A) The introduction of new management techniques B) A change in taxes on corporate profits C) A change in the level of government transfer programs D) An increase in the money supply

A

Which of the following is not a leading variable? A) Inflation B) Stock prices C) Average labor productivity D) Residential investment

A

Which of the following macroeconomic variables is acyclical? A) Real interest rates B) Unemployment C) Money supply D) Consumption

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) A corporation that depends heavily on business fixed investment B) A corporation that depends heavily on consumer services C) A corporation that depends heavily on consumer nondurables D) A corporation that depends heavily on government purchases

A

A variable that tends to move at the same time as aggregate economic activity is called A) a leading variable. B) a coincident variable. C) a lagging variable. D) an acyclical variable.

B

An economic variable that moves in the opposite direction as aggregate economic activity (down in expansions, up in contractions) is called A) procyclical. B) countercyclical. C) acyclical. D) a leading variable.

B

In recession years, ________ jobs are lost than created, and vacancies and job openings ________. A) more; increase B) more; decline C) fewer; decline D) fewer; increase

B

In the classical IS-LM/AD-AS model, a beneficial productivity shock would ________ output, ________ the real interest rate, and ________ the price level. A) increase; decrease; increase B) increase; decrease; decrease C) increase; increase; decrease D) decrease; decrease; increase

B

One important reason why the Solow residual may be strongly procyclical even if the actual technology used in production doesn't change is that A) employment is procyclical. B) resource utilization is procyclical. C) demand shocks are the dominant force determining the business cycle. D) the coefficients (a and 1 - a) on capital and labor in the production function are procyclical.

B

One of the first organizations to investigate the business cycle was A) the Federal Reserve System. B) the National Bureau of Economic Research. C) the Council of Economic Advisors. D) the Brookings Institution.

B

Peaks and troughs of the business cycle are known collectively as A) volatility. B) turning points. C) equilibrium points. D) real business cycle events.

B

Real interest rates are A) procyclical, just like nominal interest rates. B) acyclical, while nominal interest rates are procyclical. C) acyclical, just like nominal interest rates. D) countercyclical, while nominal interest rates are procyclical.

B

The ADS Business Conditions Index is a A) leading index based on variables released with different frequencies. B) coincident index based on variables released with different frequencies. C) leading index based on 85 monthly variables. D) coincident index based on 85 monthly variables.

B

The Great Depression consisted of how many business cycles? A) 1 B) 2 C) 3 D) 4

B

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 A) leading indicators. B) coincident indicators. C) lagging indicators. D) recession indicators.

B

The Solow residual is A) the waste from the production process. B) the most common measure of productivity shocks. C) a measure of the efficiency of the production process. D) a measure of the proportion of involuntarily unemployed workers.

B

The idea that the business cycle is recurrent means that A) declines in economic activity tend to be followed by further declines, and growth in economic activity tends to be followed by more growth. B) the standard pattern of contraction-trough- expansion-peak occurs again and again in industrial economies. C) many economic variables to move together in a predictable way over the business cycle. D) peaks and troughs of the business cycle occur at regular intervals.

B

The tendency of many different economic variables to have regular and predictable patterns over the business cycle is called A) persistence. B) comovement. C) periodicity. D) recurrence.

B

Which group within the National Bureau of Economic Research officially determines whether the economy is in a recession or expansion? A) The G-4 B) The Business Cycle Dating Committee C) The Business Cycle Governors D) The Turning Point Group

B

Which of the following macroeconomic variables is procyclical and leads the business cycle? A) Business fixed investment B) Residential investment C) Nominal interest rates D) Unemployment

B

Which of the following macroeconomic variables would you exclude from an index of leading economic indicators? A) Money supply B) Industrial production C) Inventory investment D) Residential investment

B

A variable that tends to move later than aggregate economic activity is called A) a leading variable. B) a coincident variable. C) a lagging variable. D) an acyclical variable.

C

An adverse supply shock would directly ________ labor productivity by changing the amount of output that can be produced with any given amount of capital and labor. It would also indirectly ________ average labor productivity through changes in the level of employment. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

C

An economic variable that doesn't move in a consistent pattern with aggregate economic activity is called A) procyclical. B) countercyclical. C) acyclical. D) a leading variable.

C

Comovement is A) 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. B) the idea that the standard pattern of contraction-trough- expansion-peak occurs again and again in industrial economies. C) the tendency of many economic variables to move together in a predictable way over the business cycle. D) the idea that peaks and troughs of the business cycle occur at regular intervals.

C

Critics of the RBC approach argue that it's hard to find productivity shocks large enough to cause business cycles. What is the RBC counterargument to this criticism? A) Business cycles are always and everywhere a monetary phenomenon. B) Wars and military buildups could be considered productivity shocks. C) Business cycles could be caused by the cumulation of small productivity shocks. D) Business cycles are often caused by unobservable productivity shocks, which aren't apparent at the time they occur.

C

Davis and Haltiwanger showed that ________ churning of jobs occurs and that this churning reflects closing of old plants and opening of new ones ________. A) little; in different industries B) little; within the same industry C) much; within the same industry D) much; in different industries

C

Given data on capital (K), labor (N), and output (Y), and estimates of capital's share of output (a), the Solow residual is measured as A) Y K^a * N^(1-a) B) (Y*Ka)/N^(1-a) C) Y/(K^a * N^(1-a)) D) 1/(Y * K^a * N^(1-a))

C

If the utilization rates of capital (uK) and labor (uN) are procyclical, then the Solow residual, as conventionally measured, is A) Y[(uK K)a)(uN N)1-a] B) Y/[( uK K)a)(uN N)1-a] C) A * uk ^ a * uN^(1-a) D) 1/{Y[(uK K)a)(uN N)1-a]}

C

In the classical model, a temporary decrease in government spending would cause a decrease in A) output, the real interest rate, real wages, and the price level. B) employment, the real interest rate, real wages, and the price level. C) output, employment, the real interest rate, and the price level. D) output, employment, real wages, and the price level.

C

Research on the effects of recessions on the real level of GDP shows that A) recessions cause only temporary reductions in real GDP, which are offset by growth during the expansion phase. B) recessions cause large, permanent reductions in the real level of GDP. C) recessions cause both temporary and permanent declines in real GDP, but most of the decline is temporary. D) recessions cause both temporary and permanent declines in real GDP, but most of the decline is permanent.

C

Stock and Watson found that ________ was responsible for about 20-30 % of the reduction in output volatility that occurred in the mid-1980s. A) reduced shocks to productivity B) reduced shocks to food and commodity prices C) better monetary policy D) better inventory control

C

Stock and Watson found that monetary policy was responsible for about ________ % of the reduction in output volatility that occurred in the mid-1980s. A) 0 to 10 B) 10 to 20 C) 20 to 30 D) 30 to 40

C

The distinction between real and nominal shocks is that A) real shocks directly affect only the IS curve, but not the FE line or LM curve. B) real shocks directly affect only the FE line, but not the LM curve. C) real shocks directly affect only the IS curve or the FE line, but not the LM curve. D) real shocks have a large direct effect on the IS curve and the FE line, but only a small direct effect on the LM curve.

C

The job loss rate A) equals 1 minus the job finding rate. B) remains constant over the business cycle. C) rises in recessions. D) rises in expansions.

C

The low point in the business cycle is referred to as the A) expansion. B) boom. C) trough. D) peak.

C

The theory that real shocks to the economy are the primary cause of business cycles is A) monetarism. B) Keynesian theory. C) real business cycle theory. D) Hamiltonian theory.

C

The trough of a business cycle occurs when ________ hits its lowest point. A) inflation. B) the money supply. C) aggregate economic activity. D) the unemployment rate.

C

The worst recessions after World War II occurred A) during 1945-1946 and 1973-1975. B) during 1957-1958 and 1973-1975. C) during 1973-1975 and 1981-1982. D) during 1945-1946 and 1981-1982.

C

When RBC economists compare the volatility in their models to the data, what are they looking at? A) The degree to which variables lead output over the business cycle B) The strength of procyclicality of different variables C) The amount of random variation in economic variables D) The degree to which different economic variables move together

C

When RBC economists work out a detailed numerical example of a more general theory, they are performing A) econometrics. B) number theory. C) calibration. D) topology.

C

Which of the following is not a primary cause of business cycle fluctuations, according to real business cycle theory? A) A change in the production function B) A change in the size of the labor force C) A change in the money supply D) A change in the real quantity of government purchases

C

Which of the following macroeconomic variables doesn't vary much over the seasons? A) The nominal money stock B) The unemployment rate C) The real wage D) Average labor productivity

C

Which of the following macroeconomic variables is procyclical and coincident with the business cycle? A) Residential investment B) Nominal interest rates C) Industrial production D) Unemployment

C

Which of the following macroeconomic variables is the most seasonally procyclical? A) Expenditure on services B) The unemployment rate C) Expenditure on durable goods D) The real wage

C

A temporary increase in government purchases in the classical model would A) shift the production function to the right. B) shift the marginal product of labor curve to the left. C) shift the labor demand curve to the right. D) shift the labor supply curve to the right.

D

According to classical economists, the increase in unemployment in recessions is caused by A) slack aggregate demand. B) the failure of wages to adjust to restore equilibrium in the labor market. C) the power of labor unions, which prevent firms from cutting wages. D) a mismatch of workers and jobs.

D

According to classical economists, unemployment rises in recessions due to an increase in ________ unemployment, not ________ unemployment. A) cyclical; frictional and structural B) frictional and cyclical; structural C) structural; frictional and cyclical D) frictional and structural; cyclical

D

Christina Romer's criticism of the belief that business cycles had moderated since World War II depended on the fact that A) estimates of the timing of business cycles since World War II had been inaccurate. B) misuse of historical data had caused economists to understate the size of cyclical fluctuations in the post-World War II era. C) economists had ignored the roles of the government and international trade in mitigating economic fluctuations prior to World War II. D) economists had left out important components of GDP, such as wholesale and retail distribution, transportation, and services, in their pre-World War II estimates.

D

Diebold and Rudebusch showed that the composite index of leading indicators did not improve forecasts of industrial production because A) the index is not produced in a timely manner. B) the government manipulates the index so it never predicts a recession. C) the index is not designed for forecasting. D) data on the components of the index are revised.

D

In the classical model, a temporary increase in government purchases causes A) a decrease in output and the real interest rate. B) a decrease in output and an increase in the real interest rate. C) an increase in output and a decrease in the real interest rate. D) an increase in output and the real interest rate.

D

Industries that are extremely sensitive to the business cycle are the A) durable goods and service sectors. B) nondurable goods and service sectors. C) capital goods and nondurable goods sectors. D) capital goods and durable goods sectors.

D

Labor hoarding occurs when A) firms keep good workers so other firms can't hire them. B) the unemployment rate exceeds the natural rate of unemployment. C) involuntary unemployment exceeds voluntary unemployment. D) because of hiring and firing costs, firms retain workers in a recession that they would otherwise lay off.

D

The 1973-1975 recession was caused by A) the Fed';s easy monetary policy. B) the Fed';s tight monetary policy. C) business pessimism about investment caused by high tax rates on capital. D) the quadrupling of oil prices by OPEC.

D

The CFNAI is a A) leading index based on variables released with different frequencies. B) coincident index based on variables released with different frequencies. C) leading index based on 85 monthly variables. D) coincident index based on 85 monthly variables.

D

The formula Y/(KaN1-a) provides a calculation of A) x-efficiency. B) dynamic efficiency. C) economy-wide monopoly power. D) the Solow residual.

D

The job finding rate A) equals 1 minus the job loss rate. B) remains constant over the business cycle. C) rises in recessions. D) rises in expansions.

D

The job finding rate is defined as A) the probability that someone who has been unemployed for over a year will find a job in the next month. B) the probability that someone who is not in the labor force will enter the labor force in the next month. C) the probability that someone who is employed will change jobs in the next month. D) the probability that someone who is unemployed will find a job in the next month

D

The long boom occurred in the A) 1920s and 1930s. B) 1940s and 1950s. C) 1960s and 1970s. D) 1980s and 1990s.

D

The longest economic expansion in the United States occurred during the A) 1940s. B) 1960s. C) 1980s. D) 1990s.

D

The probability that an employed worker will lose his or her job in the next month is known as A) the unemployment rate. B) the job finding rate. C) the underemployment rate. D) the job loss rate.

D

The term household production refers to A) output produced by forcing children to work. B) output produced by workers who are telecommuting. C) services provided directly to households, such as lawn mowing by landscape companies. D) output produced at home.

D

Using the seasonal business cycle as your guide, during which quarter would you be most likely to expect an increase in your corporation's sales? A) The first quarter of the year (January-March) B) The second quarter of the year (April-June) C) The third quarter of the year (July-September) D) The fourth quarter of the year (October-December)

D

When RBC economists compare the correlations in their models to the data, what are they looking at? A) The degree to which variables lead output over the business cycle B) The strength of procyclicality of different variables C) The amount of random variation in economic variables D) The degree to which different economic variables move together

D

Which of the following is true? A) Employment and unemployment are both coincident with the business cycle. B) Employment and unemployment are both procyclical. C) Employment is procyclical and unemployment is coincident with the business cycle. D) Employment is procyclical and unemployment is countercyclical.

D

Which of the following macroeconomic variables is procyclical and lags the business cycle? A) Business fixed investment B) Employment C) Stock prices D) Nominal interest rates

D

Which of the following macroeconomic variables would you include in an index of leading economic indicators? A) Employment B) Inflation C) Real interest rates D) Residential investment

D

Which of the following statements is true? A) Both nominal and real interest rates are procyclical and leading. B) Both nominal and real interest rates are procyclical and lagging. C) Nominal interest rates are procyclical and real interest rates are countercyclical. D) Nominal interest rates are procyclical and real interest rates are acyclical.

D

Who officially determines whether the economy is in a recession or expansion? A) The president of the United States B) The U.S. Congress C) The Federal Reserve Board of Governors D) The National Bureau of Economic Research

D