Chapter 8
Which of the following macroeconomic variables is countercyclical? A) Real interest rates B) Unemployment C) Money growth D) Consumption
B) Unemployment
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) a coincident variable.
Suppose the economy is initially in long-run equilibrium. For each of the shocks listed below, explain the short-run effects on output and the price level. (a) A stock market crash reduces consumers' wealth. (b) Businesses decide to hold larger inventories. (c) The government cuts defense spending. (d) Foreign countries buy more U.S. goods.
(a) Output declines and the price level is unchanged. (b) Output rises and the price level is unchanged. (c) Output declines and the price level is unchanged. (d) Output rises and the price level is unchanged.
Suppose the economy is initially in long-run equilibrium. For each of the shocks listed below, explain the long-run effects on output and the price level. (a) Labor supply decreases. (b) The government shuts down the Bureau of Economic Analysis. (c) Productivity increases.
(a) Output declines and the price level rises. (b) Output is unchanged and the price level falls. (c) Output rises and the price level falls.
25) For each outcome below, tell what type of shift must have taken place in either the aggregate demand curve or the long-run aggregate supply curve. (a) In the short run, the price level is unchanged and output rises. (b) In the long run, the price level declines and output is unchanged. (c) In the long run, the price level rises and output declines
(a) The aggregate demand curve shifts to the right. (b) The aggregate demand curve shifts to the left. (c) The long-run aggregate supply curve shifts to the left.
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 corporation that depends heavily on business fixed investment
What are the two main components of business cycle theories? A) A description of shocks and a model of how the economy responds to them B) A model of how people decide to spend and a description of the government's role in the economy C) A model of how equilibrium is reached and a description of the government's role in the economy D) A description of shocks and a description of the government's role in the economy
A) A description of shocks and a model of how the economy responds to them
11) The Great Recession began in ________ and ended in ________. A) December 2007; June 2009 B) December 2007; December 2011 C) October 2008; June 2009 D) October 2008; December 2011
A) December 2007; June 2009
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) During the 1870s
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) GDP had almost recovered to its 1929 level, but unemployment was still above the 1929 level.
The widespread decline in the volatility of many macroeconomic variables after 1984 led economists to term this period the A) Great Moderation. B) Low Volatility Era. C) Steady State. D) Long Boom.
A) Great Moderation.
Which of the following is not a leading variable? A) Inflation B) Stock prices C) Average labor productivity D) Residential investment
A) Inflation
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) Leading Variable
The recession of 2001 began in ________ and ended in ________. A) March; November B) February; December C) April; October D) February; October
A) March; November
Which of the following macroeconomic variables is acyclical? A) Real interest rates B) Unemployment C) Money supply D) Consumption
A) Real Interest Rates
The AD, SRAS, and LRAS curves each show a relationship between which two economic variables? A) The aggregate price level and output B) The aggregate price level and the interest rate C) Output and unemployment D) Output and the interest rate
A) The aggregate price level and output
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) 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
In the long run, a reduction in labor supply would cause output to ________ and the aggregate price level to ________. A) fall; rise B) fall; fall C) rise; fall D) rise; rise
A) fall; rise
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) measured properly, GNP before 1929 varied substantially less over time than the official statistics showed.
After a shift in the aggregate demand curve, which variable adjusts to restore general equilibrium? A) price level B) real interest rate C) consumption spending D) investment spending
A) price level
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) procyclical.
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) sudden drop that occurred around 1984.
An increase in consumer spending caused by an increase in consumer confidence would cause A) the aggregate demand curve to shift up and to the right. B) the aggregate demand curve to shift down and to the left. C) a movement down and to the right along the aggregate demand curve. D) a movement up and to the left along the aggregate demand curve.
A) the aggregate demand curve to shift up and to the right.
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: Contraction
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: Expansion
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: Persistence
The Great Depression consisted of how many business cycles? A) 1 B) 2 C) 3 D) 4
B) 2
The long boom ended in A) 1999. B) 2001. C) 2008. D) 2012.
B) 2001
When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, which of the following curves slopes downward? A) SRAS B) AD C) LRAS D) None of the above
B) AD
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) Acyclial, when the nominal interest rates are procyclical
Which of the following macroeconomic variables could not be used as a leading economic indicator? A) Residential investment B) Employment C) The money supply D) Stock prices
B) Employment
Which of the following macroeconomic variables would you exclude from an index of leading economic indicators?
B) Industrial Production
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) Industrial production
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) Residential investment
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) The Business Cycle Dating Committee
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) 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 A) leading indicators. B) coincident indicators. C) lagging indicators. D) recession indicators.
B) coincident indicators.
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) comovement.
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) countercyclical.
Christina Romer's estimates of the business cycles prior to World War II showed that the business cycle A) had greater fluctuations before World War II than previous estimates had shown. B) had smaller fluctuations before World War II than previously estimated. C) had smaller fluctuations before World War II than after World War II. D) had larger fluctuations after World War II than had been previously measured.
B) had smaller fluctuations before World War II than previously estimated
According to classical macroeconomists, prices adjust ________ to shocks, so the government should ________. A) slowly; do little B) rapidly; do little C) rapidly; fight recessions D) slowly; fight recessions
B) rapidly; do little
Lagging variables are aggregate economic variables that A) reach a peak after leading variables but before coincident variables reach a peak. B) reach a peak after coincident variables reach a peak. C) reach a peak two or more years after aggregate economic activity reaches a peak. D) are insensitive to business cycles.
B) reach a peak after coincident variables reach a peak.
In the short run, an increase in export sales would cause output to ________ and the price level to ________. A) rise; rise B) rise; stay constant C) fall; stay constant D) fall; rise
B) rise; stay constant
When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, the aggregate demand curve A) slopes upward. B) slopes downward. C) is vertical. D) is horizontal.
B) slopes downward.
A decline in the stock market, which makes consumers poorer, would cause A) the aggregate demand curve to shift to the right. B) the aggregate demand curve to shift to the left. C) a movement down and to the right along the aggregate demand curve. D) a movement up and to the left along the aggregate demand curve.
B) the aggregate demand curve to shift to the left.
A decrease in government spending on the park system would cause A) the aggregate demand curve to shift to the right. B) the aggregate demand curve to shift to the left. C) a movement down and to the right along the aggregate demand curve. D) a movement up and to the left along the aggregate demand curve.
B) the aggregate demand curve to shift to the left.
The key difference between classical and Keynesian macroeconomists is their differing beliefs about A) the slope of the aggregate demand curve. B) the speed at which prices adjust. C) the natural rate of unemployment. D) the full-employment level of output.
B) the speed at which prices adjust.
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 standard pattern of contraction—trough—expansion—peak occurs again and again in industrial economies.
Economists use the term shocks to mean A) unexpected government actions that affect the economy. B) typically unpredictable forces that have major impacts on the economy. C) sudden rises in oil prices. D) the business cycle.
B) typically unpredictable forces that have major impacts on the economy.
The high point in the business cycle is referred to as the A) turning point. B) peak. C) boom. D) trough.
B: Peak
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: The National Bureau of Economic Research
The fact that business cycles are recurrent but not periodic means that A) business cycles occur at predictable intervals, but do not last a predetermined length of time. B) the business cycle's standard contraction—trough—expansion—peak pattern has been observed to occur over and over again, but not at predictable intervals. C) business cycles occur at predictable intervals, but do not all follow a standard contraction—trough—expansion—peak pattern. D) business cycles last a predetermined length of time, but do not all follow a standard contraction—trough—expansion—peak pattern.
B: The business cycle's standard contraction—trough—expansion—peak pattern has been observed to occur over and over again, but not at predictable intervals.
Turning points in business cycles occur when A) a new business cycle is initiated at the trough. B) the economy hits the peak or trough in the business cycle. C) the business cycle begins to follow a new pattern that differs from previous business cycles. D) a new business cycle is initiated at the peak.
B: The economy hits the peak or trough in the business cycle.
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: Turning Points
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) 20 to 30
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) A corporation that depends heavily on business fixed investment B) A corporation that depends heavily on residential investment C) A corporation that depends heavily on consumer nondurables D) A corporation that depends heavily on consumer durables
C) A corporation that depends heavily on consumer nondurables
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) Acyclical
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) Expenditures on Durable goods
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) Industrial production
When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, which of the following curves is vertical? A) SRAS B) AD C) LRAS D) None of the above
C) LRAS
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) Rises in recessions
Which of the following macroeconomic variables does not vary much over the seasons? A) The nominal money stock B) The unemployment rate C) The real wage D) Average labor productivity
C) The real wage
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) a lagging variable.
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) better monetary policy
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) during 1973-1975 and 1981-1982.
When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, the long-run aggregate supply curve A) slopes upward. B) slopes downward. C) is vertical. D) is horizontal.
C) is vertical.
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) recessions cause both temporary and permanent declines in real GDP, but most of the decline is temporary.
In the long run, an increase in productivity would cause output to ________ and the aggregate price level to ________. A) fall; rise B) fall; fall C) rise; fall D) rise; rise
C) rise; fall
Wars, new inventions, harvest failures, and changes in government policy are examples of A) the business cycle. B) economic models. C) shocks. D) opportunity costs.
C) shocks
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) the tendency of many economic variables to move together in a predictable way over the business cycle.
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: Aggregate Economic Activity
The entire sequence of a decline in aggregate economic activity followed by recovery, measured from peak to peak or trough to trough is a A) long-run trend. B) potential output path. C) business cycle. D) recurrent comovement.
C: Business Cycle
Business cycles all display the following characteristics except A) a period of expansion followed by one of contraction. B) comovement of many economic variables. C) rising prices during an expansion and falling prices during the contraction. D) they last a period of one to twelve years.
C: Rising Prices during expansion and falling prices during the contraction
The low point in the business cycle is referred to as the A) expansion. B) boom. C) trough. D) peak.
C: Trough
The long boom occurred in the A) 1920s and 1930s. B) 1940s and 1950s. C) 1960s and 1970s. D) 1980s and 1990s.
D) 1980s-1990s
The longest economic expansion in the United States occurred during the A) 1940s. B) 1960s. C) 1980s. D) 1990s.
D) 1990s
The three main components of the aggregate demand—aggregate supply model include A) AD, SRAS, LM. B) SRAS, LRAS, IS. C) AD, IS, LM. D) AD, SRAS, LRAS.
D) AD, SRAS, LRAS.
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) Capital Goods and Durable Good Sectors
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) Employment is procyclical and unemployment is countercyclical
In the Great Depression, the financial sector collapsed, as A) banks engaged in ruinous competition. B) the stock market boomed, so people withdrew most of their funds from banks and invested heavily in stocks. C) the bond market boomed, so people withdrew most of their funds from banks and invested heavily in bonds. D) many banks closed.
D) Many Banks closed
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) Nominal interest rates
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) Nominal interest rates are procyclical and real interest rates are acyclical
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) Residential investment
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 Job loss rate
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) The National Bureau of Economic Research
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) The fourth quarter of the year (October-December)
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) coincident index based on 85 monthly variables.
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) data on the components of the index are revised.
The deep recession of 1973-1975 was mainly caused by A) flawed technology that caused a drop in TFP. B) an unexplained drop in business optimism. C) slower money growth. D) higher oil prices.
D) higher oil prices
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) rises in expansion
According to Keynesian macroeconomists, prices adjust ________ to shocks, so the government should ________. A) slowly; do little B) rapidly; do little C) rapidly; fight recessions D) slowly; fight recessions
D) slowly; fight recessions
In the long run, an increase in consumer spending would cause output to ________ and the price level to ________. A) rise; rise B) rise; stay constant C) stay constant; stay constant D) stay constant; rise
D) stay constant; rise
\ In the long run, an increase in government purchases of military equipment would cause output to ________ and the aggregate price level to ________. A) stay constant; fall B) fall; fall C) fall; stay constant D) stay constant; rise
D) stay constant; rise
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 quadrupling of oil prices by OPEC.
A detailed history of business cycles is known as a A) historical decomposition. B) trend analysis. C) Hodrick—Prescott filter. D) business cycle chronology.
D: Business Cycle Chronology
The dates of turning points are determined by a committee from the A) FBI. B) BLS. C) BEA. D) NBER.
D: NBER
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.
Economists had left out important components of GDP, such as wholesale and retail distribution, transportation, and services, in their pre-World War II estimates.
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.
The probability that someone who is unemployed will find a job in the next month.
