Chp. 12 HW Questions

Which of the following key factors can help explain the Great Recession of 2007dash-​2009? ​(Check all that apply​.) A. A fall in housing prices. B. An increase in mortgage​ defaults, negatively impacting banks. C. A fall in the value of the stock market. D. Increased trade​ protectionism, decreasing net exports. E. A reduction in consumer​ wealth, curtailing spending. F. A reduction in new home​ construction, leading to a decrease in labor demand. G. An increase in inflation.

A. a fall in housing prices B. an increase in mortgage defaults, negatively impacting banks. E. a reduction in consumer wealth, curtailing spending. F. an increase in inflation

Contractionary monetary policy can lead to an​ economy-wide recession through​ ____________. ​(Check all that apply​.) A. a reduction in the price​ level, leading to a reduction in employment because of downward wage rigidity. B. an increase in the real interest​ rate, leading to an increase in production costs and therefore lower demand for labor. C. an increase in the price​ level, leading to a reduction in employment because of downward wage rigidity. D. a reduction in the real interest​ rate, leading to a decrease in production costs and therefore lower demand for labor.

A. a reduction in the price level, leading to a reduction in employment because of downward wage rigidity. B. an increase in the real interest rate, leading to an increase in production costs and therefore lower demand for labor.

According to​ Keynes's view on animal​ spirits, ____________. A. the economy could fluctuate beyond the level that could be explained by the underlying economic fundamentals. B. technological breakthroughs could cause rapid increases in output. C. the economy will fluctuate in line with the underlying economic fundamentals. D. downward wage rigidity could lead to pessimism in the​ economy, resulting in the​ self-fulfilling prophecy of a decline in economic output.

A. the economy could fluctuate beyond the level that could be explained by the underlying economic fundamentals

Which of the following characteristics of economic fluctuations does the Great Depression​ illustrate? ​(Check all that apply​.) A. Stock market volatility. B. Limited predictability. C. ​Co-movement in economic aggregates. D. Bank volatility. E. Persistence.

B. Limited predictability C. Co movement in economic aggregates E. Persistence

When workers are laid​ off, what happens to physical​ capital? A. Capacity utilization does not change. B. Physical capital becomes less​ productive, leading firms to reduce capacity utilization. C. Physical capital becomes more​ productive, leading firms to increase capacity utilization. D. Laborers become more​ productive, leading firms to increase capacity utilization.

B. Physical capital becomes less productive, leading firms to reduce capacity utilization.

The concept of multipliers was one of the key elements of John Maynard​ Keynes's theory of fluctuations. A multiplier is​ ____________. A. a factor that causes a change in the money supply to generate activity larger than the change in the money supply. B. an economic mechanism that causes an initial shock to be amplified by​ follow-on effects. C. a change in productivity that leads to increases in aggregate economic activity. D. a change in expectations about future economic activity.

B. an economic mechanism that causes an initial shock to be amplified by follow-on effects.

An example of a multiplier is when​ ____________. ​(Check all that apply​.) A. a decrease in labor demand with rigid wages causes a larger increase in unemployment than the same decrease with flexible wages. B. an increase in business confidence causes firms to increase production and hire​ employees, leading to an increase in household​ spending, causing firms to further increase production and employment. C. a reduction in business investment is offset by increases in consumption and net exports. D. a drop in consumer confidence reduces household​ spending, causing firms to cut production and lay off​ employees, leading to a greater reduction in household spending.

B. an increase in business confidence causes firms to increase production and hire employees, leading to an increase in household spending, causing firms to further increase production and employment. D. a drop in consumer confidence reduces household spending, causing firms to cut production and lay off employees, leading to a greater reduction in household spending.

How does real business cycle theory best explain the economic​ boom? A. Technological innovation leads to decreases in productivity​ (because of distractions such as​ Facebook), which means that firms must hire more workers to produce their​ output, which in turn increases labour demand. B. The internet allowed the creation of new​ businesses, which increased labour demand. C. Technological innovation leads to increases in​ productivity, which in turn increases the marginal product of labor and therefore labour demand. D. Consumer and business demand for new technology products drove businesses to increase their​ output, which in turn increased labour demand.

C. Technological innovation leads to increases in productivity, which in turn increases the marginal product of labor and therefore labour demand.

​Keynes's theory of multipliers involved an element of the​ self-fulfilling prophecy. Which of the following illustrates the concept of a​ self-fulfilling prophecy? A. The government expects a war to occur and so increases spending on military​ equipment, which leads to increased labor demand. B. Labor demand decreases due to a recession in Europe and a reduction in exports from the United​ States, which causes U.S. consumption to drop and thus leads to additional decreases in labor demand. C. Firms expect an increase in demand in the future and so hire additional workers​ now, which leads to an increase in consumption demand. D. The Federal Reserve increases interest​ rates, which leads to lower business investment and hiring.

Firms expect an increase in demand in the future and so hire additional workers now, which leads to an increase in consumption demand (C)

___________ used the concepts of animal spirits and sentiment to explain economic fluctuations. A. Arthur Cecil Pigou. B. Irving Fisher. C. John Maynard Keynes. D. Milton Friedman.

John Maynard Keynes

In​ 1973, the major​ oil-producing nations of the world declared an oil embargo. The price of​ oil, a key source of​ energy, increased. This led to widespread inflation as costs of production increased steeply. The resulting fall in GDP and employment led the United States into a recession. Which of the business cycle theories explained in the chapter would best fit this explanation of the 1970s​ recession?

Real business cycle theory

What does it mean to say that an economic fluctuation involves the​ co-movement of many aggregate macroeconomic​ variables? A. Real variables move in the same direction as the economic​ fluctuation, whereas nominal variables move opposite. B. These variables grow or contract together during booms and recessions. C. These variables grow during booms and contract during recessions. D. Economic fluctuations in one period lead to movement of these variables in the next period.

These variables grow or contract together during booms and recessions.

If​ oil, which is a major input to most production​ processes, abruptly falls in​ price, the impact on the economy would be similar to​ ____________. A. a productivity decrease​, with a resultant decrease in real GDP. B. an economic multiplier increase​, with a resultant increase in real GDP. C. an economic multiplier decrease, with a resultant decrease in real GDP. D. a productivity increase, with a resultant increase in real GDP.

a productivity increase, with a resultant increase in real GDP (D)

An economic expansion begins​ ____________. A. after the peak of GDP growth. B. at the midpoint between the trough and peak of GDP growth. C. in the middle of a recession. D. at the end of a recession.

at the end of a recession

According to his theory of animal spirits and​ sentiment, changes in sentiment cause economic fluctuations through​ ____________. A. changes in productivity. B. changes in household consumption and firm investment. C. changes in government expenditure. D. decreases in offsetting movements in exports and imports.

changes in household consumption and firm investment.

Recessions are periods in which the economy_________ ​while economic expansions are defined as the periods ____________.

contracts, periods between recessions

Real business cycle theory​ ____________. A. emphasizes the role of changing productivity and technology in causing economic fluctuations. B. explains how monetary factors drive business cycles. C. emphasizes the role of sentiments that create the​ self-fulfilling prophecies that drive economic fluctuations. D. explains how initial economic shocks are amplified through the multiplier process.

emphasizes the role of changing productivity and technology in causing economic fluctations

The duration of an economic fluctuation​ ____________. A. is completely unpredictable. B. is predictable but only in developed economies with good data. C. is completely predictable. D. has limited predictability.

has limited predictability

An economic expansion begins​ ____________. A. when real GDP growth first breaks above the​ long-run trend for the economy. B. just after the trough of a recession. C. when the unemployment rate bottoms out. D. in the month after the second consecutive quarter of positive real GDP growth.

just after the trough of a recession

According to the concept of persistence in the rate of​ growth, if the economy grows this​ quarter, it will​ ____________. A. likely grow next quarter. B. definitely grow next quarter. C. likely contract next quarter. D. definitely contract next quarter.

likely grow next quarter

How do wage flexibility and downward wage rigidity affect the extent of unemployment in the economy when the demand for labor​ falls? When the demand for labor​ falls, the fall in employment is __________ when real wages are flexible and ____________ when wages are downwardly rigid.

limited, amplified

The Internet boom of the​ 1990's has changed all of our lives and transformed the way business is conducted. During the late​ 1990's, the economy was described as the​ "best of all possible​ worlds" with quite high employment​ (and low​ unemployment). Which of the business cycle theories explained in the chapter would best explain how the Internet boom had such a positive​ effect? The business cycle theory that would best explain how the Internet boom had such a positive effect is A. ​Okun's theory. B. real business cycle theory. C. Keynesian theory. D. monetary theory.

real business cycle theory

If an economic shock increases labor​ demand, equilibrium employment ________ and real GDP _________.

rises, rises.

Economic fluctuations are​ ____________. A. economic shocks characterized by downward wage rigidity and multipliers. B. ​long-run changes in the growth of GDP. C. changes to the trend line of GDP growth. D. ​short-run changes in the growth of GDP.

short-run changes in the growth of GDP

If wages are​ flexible, the increase in employment and real GDP will be ____________ the increase if wages are rigid.

smaller than

According to real business cycle​ theory, the economic impact of changing input prices is similar to the economic impact from​ ____________. A. technology changes. B. changes in monetary factors. C. sentiment changes. D. multipliers.

technology changes

Using sophisticated statistical​ techniques, economists can usually predict​ ____________. A. the end of an expansion. B. the​ co-movement of macroeconomic variables. C. the beginning of a recession. D. the end of a recession.

the end of a recession

An economic expansion is defined as​ ___________. A. the period between two economic recessions. B. a period of positive real GDP growth that is above the​ long-run average for the economy. C. positive real GDP growth lasting at least two quarters. D. a period of positive real GDP growth and unemployment below the rate dictated by​ Okun's Law.

the period between two economic recessions

In the United​ States, recessions are usually defined as​ ____________. A. two consecutive quarters of negative growth in nominal GDP. B. any period of negative growth in real GDP. C. two consecutive months of negative growth in real GDP. D. two consecutive quarters of negative growth in real GDP.

two consecutive quarters of negative growth in real GDP.