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Chapter 8: The Business Cycle
Chapter 8: The Business Cycle
Multiple Choice Questions
1. The study of aggregate economic activity for the economy as a whole is:
A) Opportunity cost. B) Scarcity. C) Macroeconomics. D) Microeconomics.
Answer: C Type: Definition Page: 151
2. Macroeconomics is the study of:
A) Aggregate economic behavior of the economy as a whole.
B) Individual segments of the economy.
C) How individual households make decisions.
D) How individual businesses make decisions.
Answer: A Type: Definition Page: 151
3. Alternating periods of economic growth and contraction in real GDP define:
A) Capitalism. B) The business cycle. C) Macro equilibrium. D) Say's Law.
Answer: B Type: Definition Page: 151
4. The business cycle is defined as:
A) Changing wages and prices.
B) An effort to reach full employment.
C) The growth of real GDP.
D) Alternating periods of economic growth and contraction.
Answer: D Type: Definition Page: 151
STABLE OR UNSTABLE?
5. According to Classical theory:
A) Keynes had "neglected to take account of the drag on prosperity which can be exercised by an
insufficiency of effective demand."
B) Macro equilibrium might start out badly and get worse in the absence of government intervention.
C) Flexible wages and prices allow a laissez-faire economy to adjust to shifts in aggregate demand.
D) Business cycles are not relevant and do not occur.
Answer: C Type: Basic Understanding Page: 151
6. A cornerstone of the Classical view was:
A) The law of demand adjusted the economy to shifts in aggregate demand.
B) A laissez-faire economy.
C) Flexible wages and prices.
D) All of the above.
Answer: D Type: Basic Understanding Page: 151
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Chapter 8: The Business Cycle
7. Which theory of the economy led to the assertion that markets "self-adjust" to deviations from their long-term
growth trend?
A) Classical theory. B) Monetarist theory. C) Keynesian theory. D) Supply-side theory.
Answer: A Type: Basic Understanding Page: 152
8. Which of the following theories assumes that markets self-adjust?
A) Classical economic theory.
C) Supply-side economic theory.
B) Keynesian theory.
D) The eclectic viewpoint.
Answer: A Type: Basic Understanding Page: 152
9. If wages and prices are flexible, then a recession is best eliminated when prices:
A) And wages both rise.
C) Rise and wages drop.
B) And wages both fall.
D) Drop and wages rise.
Answer: B Type: Complex Understanding Page: 152
10. Say's Law states that:
A) Supply creates its own demand.
B) Shifts of either supply or demand can achieve a given market equilibrium.
C) Wages and prices are inflexible, which prevents the achievement of a market equilibrium.
D) Increased prices lead to increased supply.
Answer: A Type: Definition Page: 152
11. The statement "Supply creates its own demand" is known as:
A) Keynes' Law. B) Say's Law. C) Okun's Law. D) A supply-side belief.
Answer: B Type: Definition Page: 152
12. Unlike the Classical economists, Keynes asserted that:
A) The private economy was inherently unstable.
C) Prices and wages were flexible.
B) Laissez faire would lead to macro equilibrium. D) Markets would naturally self-adjust.
Answer: A Type: Basic Understanding Page: 153
13. Which of the following describes how Keynes viewed the macro economy?
A) Typically self-adjusting.
C) Inherently unstable.
B) Supply creates its own demand.
D) Inherently stable.
Answer: C Type: Basic Understanding Page: 153
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Chapter 8: The Business Cycle
14. According to Keynes, which of the following can be used to stimulate the economy?
A) Raising interest rates through reductions in the money supply.
B) Increasing government purchases.
C) Increasing government taxation.
D) Reducing inefficient employment of resources.
Answer: B Type: Basic Understanding Page: 153
HISTORICAL CYCLES
15. Which of the following is true about business cycles in the United States?
A) They are remarkably similar in length but vary greatly in intensity.
B) They vary greatly in length, frequency, and intensity.
C) They are similar in frequency and intensity, but not in length.
D) They are similar in length, frequency, and intensity.
Answer: B Type: Basic Understanding Page: 154
16. The peak of a business cycle is typically accompanied by:
A) The highest unemployment rate over the cycle.
B) The highest rate of increase in the price level over the cycle.
C) The lowest output of goods and services over the cycle.
D) All of the above.
Answer: B Type: Basic Understanding Page: 154
17. Which of the following is characteristic of a downturn in the business cycle?
A) Lower unemployment rates. B) Lower real output. C) Higher prices.
D) Higher interest rates.
Answer: B Type: Basic Understanding Page: 154
18. Constant prices are used to correct distortions in nominal GDP because of:
A) Inflation. B) Unemployment. C) Business cycles. D) All of the above.
Answer: A Type: Basic Understanding Page: 154
19. Changes in real GDP provide a way to measure:
A) Inflation. B) Unemployment. C) Business cycles.
D) All of the above.
Answer: C Type: Basic Understanding Page: 154
20. A decline in total output for two or more consecutive quarters is known as:
A) Inflation. B) A recession. C) A growth recession. D) All of the above.
Answer: B Type: Definition Page: 154
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Chapter 8: The Business Cycle
21. A recession can be represented by a point:
A) Outside the production-possibilities curve.
B) Inside the production-possibilities curve.
C) On the production-possibilities curve.
D) At either end of the production-possibilities curve.
Answer: B Type: Complex Understanding Page: 154
22. A decline in real GDP characterizes a:
A) Recession. B) Depression. C) Downswing in the business cycle.
D) All of the above.
Answer: D Type: Basic Understanding Page: 154
23. An extremely deep and long recession is called a:
A) Growth recession.
B) Depression.
C) Normal period of contraction.
D) Temporary deviation from full employment.
Answer: B Type: Definition Page: 154
24. In which of the following situations is the percentage change in real GDP positive?
A) Depression. B) Growth recession. C) Recession. D) All of the above.
Answer: B Type: Definition Page: 154
25. A growth recession is said to occur when the economy grows at a:
A) Rate less than that of population.
B) Rate less than the long-term average.
C) Slower rate in the current year than the preceding year.
D) Negative rate.
Answer: B Type: Definition Page: 154
26. Which of the following would be a "growth recession"?
A) Real GDP contracts for two consecutive quarters.
B) Real GDP grows for a period at a rate less than 3 percent.
C) The unemployment rate stays constant at the long-run rate of 6 percent.
D) Prices rise steadily but at a rate less than the long-run trend of 4 percent.
Answer: B Type: Definition Page: 154
27. The Great Depression:
A) Followed a period of apparent prosperity.
B) Led to an unemployment rate that reached 25 percent.
C) Caused President Roosevelt to declare a "bank holiday" in 1933.
D) Did all of the above.
Answer: D Type: Basic Understanding Page: 155
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Chapter 8: The Business Cycle
28. The Great Depression in the United States:
A) Provided the basis for the Neoclassical economic theory.
B) Ended with a higher real GDP per capita than when it began.
C) Caused negative growth in real GDP and a high level of unemployment.
D) Was ended by World War I.
Answer: C Type: Basic Understanding Page: 155
29. The Great Depression in the United States:
A) Provided the basis for the Neoclassical economic theory.
B) Caused real GDP to fall by nearly 30 percent between 1919 and 1929.
C) Ended with a higher real GDP per capita than when it began.
D) Was ended by massive government spending during World War II.
Answer: D Type: Basic Understanding Page: 155
30. During the period 1992 to 2000, for the United States:
A) Economic expansion set a record for longevity. C) Millions of new jobs were created.
B) The unemployment rate fell to 3.9 percent.
D) All of the above.
Answer: D Type: Basic Understanding Page: 156
A MODEL OF THE MACRO ECONOMY
31. Macro outcomes include:
A) Output. B) Growth.
C) Jobs.
D) All of the above.
Answer: D Type: Basic Understanding Page: 157
32. Which of the following are considered macro outcomes?
A) The levels of employment and unemployment.
B) The year-to-tear expansion in production capacity.
C) The average price of goods and services.
D) All of the above.
Answer: D Type: Basic Understanding Page: 157
33. Which of the following is generally considered a desirable outcome of government intervention?
A) More jobs. B) More profitable prices. C) Higher unemployment rates. D) Greater deficits.
Answer: A Type: Basic Understanding Page: 157
34. Which of the following can be used to measure macroeconomic performance?
A) The total value of goods and services produced. C) The international value of the dollar.
B) The average price level of goods and services. D) All of the above.
Answer: D Type: Basic Understanding Page: 157
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Chapter 8: The Business Cycle
35. The determinants of macro performance include:
A) Internal market forces. B) Policy levers. C) External shocks.
D) All of the above.
Answer: D Type: Basic Understanding Page: 158
36. External shocks include:
A) Wars, natural disasters, trade disruptions.
B) Tax policy, government spending, availability of money, and regulation.
C) Population growth, spending behavior, invention, and innovation.
D) Internal market forces, policy levers.
Answer: A Type: Basic Understanding Page: 158
37. External shocks include:
A) Tax policy.
B) Changes in the availability of money.
C) Trade disruptions.
D) All of the above.
Answer: C Type: Basic Understanding Page: 158
38. Internal market forces include:
A) Wars, natural disasters, trade disruptions.
B) Tax policy, government spending, availability of money.
C) Population growth, spending behavior, invention.
D) External shocks, policy levers.
Answer: C Type: Basic Understanding Page: 158
39. Policy levers include:
A) Tax policy, government spending, availability of money.
B) Wars, natural disasters, trade disruptions.
C) Population growth, spending behavior, invention.
D) External shocks, internal market forces.
Answer: A Type: Basic Understanding Page: 158
40. Policy levers include:
A) Spending behavior.
B) Trade disruptions.
C) Availability of money.
Answer: C Type: Basic Understanding Page: 158
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D) All of the above.
Chapter 8: The Business Cycle
41. In the absence of external shocks or government policy an economy would:
A) Still experience business cycle fluctuations because of internal market forces.
B) Not experience business cycle fluctuations.
C) Not be able to expand production and output.
D) Still experience business cycle fluctuations because of factors such as wars and tax policy.
Answer: A Type: Complex Understanding Page: 158
AGGREGATE DEMAND AND SUPPLY
42. Determinants of macro performance work on macro outcomes through:
A) Aggregate supply and demand.
C) External shocks and internal market forces.
B) International balances.
D) All of the above.
Answer: A Type: Basic Understanding Page: 159
43. Aggregate demand:
A) Is the total quantity of a good demanded at alternative prices.
B) Is the total quantity of output demanded at alternative price levels.
C) Refers to the demand in a particular market.
D) Refers to the level of demand where equilibrium occurs.
Answer: B Type: Definition Page: 159
44. Which of the following is illustrated by the aggregate demand curve?
A) How real personal income varies with the inflation rate.
B) How total quantity of output demanded varies with the average price level.
C) How real output varies with the inflation rate.
D) How real personal income varies with the price level.
Answer: B Type: Basic Understanding Page: 159
45. Which of the following explains the downward slope of the aggregate demand curve?
A) The real-balances effect.
C) The interest-rate effect.
B) The foreign-trade effect.
D) All of the above.
Answer: D Type: Basic Understanding Page: 159
46. The aggregate demand curve is downward-sloping because, other things being equal:
A) People buy fewer goods and services at lower average incomes.
B) People buy more goods and services at lower average prices.
C) A higher average price level will induce producers to offer more output than otherwise.
D) People buy more goods and services at higher average prices.
Answer: B Type: Basic Understanding Page: 160
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Chapter 8: The Business Cycle
47. If average prices in the U.S. economy fall, then, ceteris paribus:
A) The real-balances effect will lead to a higher quantity of output demanded.
B) The foreign-trade effect will lead to a lower quantity of output demanded.
C) The interest-rate effect will lead to a lower quantity of output demanded.
D) The cost effect will lead to a higher quantity of output demanded.
Answer: A Type: Basic Understanding Page: 160
48. If average prices in the U.S. economy fall, then, ceteris paribus:
A) The real-balances effect will lead to a lower quantity of output demanded.
B) The foreign-trade effect will lead to a higher quantity of output demanded.
C) The interest-rate effect will lead to a lower quantity of output demanded.
D) The profit effect will lead to a higher quantity of output demanded.
Answer: B Type: Basic Understanding Page: 160
49. If average prices in the U.S. economy fall, then, ceteris paribus:
A) The real-balances effect will lead to a lower quantity of output demanded.
B) The foreign-trade effect will lead to a lower quantity of output demanded.
C) The interest-rate effect will lead to a higher quantity of output demanded.
D) All of the above.
Answer: C Type: Basic Understanding Page: 160
50. The foreign-trade effect states that:
A) The quantity of domestic goods demanded rises when the domestic price level rises.
B) The quantity of domestic goods demanded rises when the prices of imported goods fall.
C) Foreign consumers have less incentive to buy American-made products when U.S. prices fall.
D) Relatively lower prices for imports give Americans an incentive to buy foreign-made products.
Answer: D Type: Definition Page: 160
51. Which of the following effects suggests that lower average prices stimulate more borrowing?
A) The cost effect. B) The interest-rate effect. C) The real-balances effect. D) The profit effect.
Answer: B Type: Complex Understanding Page: 160
52. Which of the following refers to the total quantity of output producers are willing and able to supply at
alternative price levels?
A) Quantity supplied. B) Market supply. C) Aggregate supply. D) A supply-side alternative.
Answer: C Type: Definition Page: 161
53. Which of the following is associated with the aggregate supply curve?
A) Factors of production. B) The cost effect. C) The profit effect.
Answer: D Type: Basic Understanding Page: 161
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D) All of the above.
Chapter 8: The Business Cycle
54. The profit effect implies:
A) That some costs do not rise with average prices. C) A negative-sloping aggregate supply curve.
B) A curved aggregate supply curve.
D) All of the above.
Answer: A Type: Complex Understanding Page: 161
55. The shape of the aggregate supply curve can be explained by the:
A) Foreign-trade effect. B) Interest rate effect. C) Real-balances effect.
D) Profit effect.
Answer: D Type: Basic Understanding Page: 161
56. Which of the following suggests that lower average prices make it more difficult to cover interest payments
and other costs of doing business, causing firms to reduce production?
A) The cost effect. B) The interest-rate effect. C) The profit effect. D) The real-balances effect.
Answer: C Type: Complex Understanding Page: 161
57. As output rises, the profit effect results from:
A) Lower opportunity costs.
B) Tight supplies of factors of production.
C) The law of demand.
D) Constant costs which do not rise when prices rise.
Answer: D Type: Basic Understanding Page: 161
58. A positively sloped aggregate supply curve reflects:
A) The idea that greater production lowers profit margins, which raises quantity demanded.
B) That costs rise simultaneously with rising prices.
C) Rising costs of increased capacity utilization.
D) All of the above.
Answer: C Type: Basic Understanding Page: 161
59. The cost effect implies:
A) That higher average prices are reflected in higher costs.
B) A linear aggregate supply curve.
C) That lower average prices result in greater quantity supplied.
D) All of the above.
Answer: A Type: Complex Understanding Page: 161
60. The aggregate supply curve is upward-sloping because of the:
A) The real-balances effect.
C) The interest-rate effect.
B) The foreign-trade effect.
D) The cost effect.
Answer: D Type: Basic Understanding Page: 161
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Chapter 8: The Business Cycle
61. As output rises, the cost effect results from:
A) Lower opportunity costs.
B) Tight supplies of factors of production.
C) The law of demand.
D) Constant costs which fail to fall when prices fall.
Answer: B Type: Basic Understanding Page: 161
62. Macro equilibrium always occurs when:
A) Aggregate supply is greater than aggregate demand.
B) The labor force is fully employed.
C) Aggregate demand equals aggregate supply at the average price level of the economy.
D) The level of output is expanding.
Answer: C Type: Basic Understanding Page: 162
63. The unique situation in which the behavior of buyers and sellers is compatible is referred to as:
A) Full-employment GDP.
C) Micro equilibrium.
B) Macro equilibrium.
D) Labor market equilibrium.
Answer: B Type: Definition Page: 162
64. Macro equilibrium:
A) Occurs at the full-employment output level.
B) Occurs at the optimal price level.
C) May be distributed by shifts in aggregate demand or aggregate supply.
D) Can result in the shortage of goods if consumer demand is too great.
Answer: C Type: Complex Understanding Page: 162
65. If aggregate demand decreases and aggregate supply decreases, the level of real output will:
A) Decrease and the price level will decrease.
B) Decrease and the price level will increase.
C) Either increase or decrease, but the price level will stay the same.
D) Decrease, but the price level may either increase, decrease, or stay the same.
Answer: D Type: Complex Understanding Page: 162
66. Which of the following might be a problem at macro equilibrium?
A) The equilibrium is inconsistent with macroeconomic goals.
B) A surplus of goods.
C) A shortage of goods.
D) All of the above.
Answer: A Type: Basic Understanding Page: 163
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Chapter 8: The Business Cycle
67. Beginning at a full employment equilibrium, a decrease in aggregate demand will tend to cause a:
A) Lower price level and a higher employment level.
B) Lower price level and a lower employment level.
C) Higher price level and a higher employment level.
D) Higher price level and a lower employment level.
Answer: B Type: Complex Understanding Page: 164
68. Which of the following results if the aggregate quantity supplied exceeds the aggregate quantity demanded?
A) Aggregate demand shifts to the right.
C) A surplus causes the price level to rise.
B) Aggregate supply shifts to the left.
D) A surplus causes the price level to fall.
Answer: D Type: Basic Understanding Page: 164
69. Which of the following would result if the price level were below the equilibrium level?
A) Aggregate demand would increase.
B) Aggregate supply would decrease.
C) Consumers would bid prices up by competing for goods currently in shortage.
D) Shortages would force sellers to lower prices in order to increase aggregate quantity demanded.
Answer: C Type: Basic Understanding Page: 164
70. Alternating periods of economic growth and contraction are:
A) The result of government intervention according to Keynes.
B) The result of recurrent shifts of aggregate demand and aggregate supply.
C) Indicative of an unstable economy and require government intervention according to classical
economists.
D) Not typical of the U.S. economy.
Answer: B Type: Complex Understanding Page: 164
71. Ceteris paribus, the price level will decrease if the aggregate:
A) Supply curve shifts to the left.
B) Demand curve shifts to the left.
C) Demand curve shifts to the right.
D) Supply and demand curves both shift to the right.
Answer: B Type: Basic Understanding Page: 164
72. When the aggregate demand curve shifts to the left, output will remain constant if the aggregate:
A) Supply curve is vertical.
C) Demand curve is vertical.
B) Supply curve is horizontal.
D) Demand curve is downward sloping.
Answer: A Type: Basic Understanding Page: 164
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Chapter 8: The Business Cycle
73. If full employment is greater than the macro equilibrium, which of the following best describes the impact of
a rightward shift of the aggregate supply curve, ceteris paribus?
A) A higher price level and a higher level of output.
B) A higher price level and a lower level of output.
C) A recession or depression.
D) A lower price level and a higher level of output.
Answer: D Type: Complex Understanding Page: 164
74. If macro equilibrium is at a level below full employment, which of the following best describes the impact of
a rightward shift of the aggregate demand curve, ceteris paribus?
A) A higher price level and a higher level of output.
B) A higher price level and a lower level of output.
C) A recession or depression.
D) A lower price level and a higher level of output.
Answer: A Type: Complex Understanding Page: 164
75. A rightward shift in the aggregate supply curve should result in:
A) Inflation and a higher unemployment rate.
C) Deflation and a higher unemployment rate.
B) Inflation and a lower unemployment rate.
D) Deflation and a lower unemployment rate.
Answer: D Type: Complex Understanding Page: 164
76. Which combination of shifts of aggregate demand and supply would definitely cause an increase in real
GDP?
A) Demand shifts to the left and supply shifts to the right.
B) Demand shifts to the left and supply shifts to the left.
C) Demand shifts to the right and supply shifts to the right.
D) Demand shifts to the right and supply shifts to the left.
Answer: C Type: Complex Understanding Page: 164
77. Which of the following is most likely to cause the aggregate demand curve to shift to the left?
A) A decrease in taxes.
C) A decrease in government spending.
B) A decrease in savings.
D) All of the above.
Answer: C Type: Complex Understanding Page: 164
78. A leftward shift of the aggregate supply curve could be caused by:
A) An increase in consumer saving.
C) An increase in imports.
B) A decrease in the money supply.
D) An increase in production costs.
Answer: D Type: Complex Understanding Page: 164
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Chapter 8: The Business Cycle
79. Which of the following is a situation in which economic theory failed to explain a change in the economy?
A) Classical economics failed to explain a prolonged depression.
B) New Classical economics failed to explain the effects of "priming the pump."
C) Keynes failed to explain the impact of fiscal policy on the economy.
D) Supply-side economics failed to explain a prolonged inflation.
Answer: A Type: Basic Understanding Page: 164
80. Controversies between Keynesian, monetarist, supply-side, and eclectic theories focus on the:
A) Shape and sensitivity of aggregate demand and aggregate supply curves.
B) Existence or nonexistence of the aggregate supply curve.
C) Importance of international balances to the economy.
D) Usefulness of using aggregate demand and supply to analyze adjustment of the macro equilibrium.
Answer: A Type: Basic Understanding Page: 164
COMPETING THEORIES OF SHORT-RUN INSTABILITY
81. Which of the following is true if equilibrium exceeds full employment?
A) The economy is inside the production-possibilities curve.
B) The economy is experiencing low inflation.
C) Growth rates are unacceptably low.
D) The economy is working beyond normal capacity.
Answer: D Type: Definition Page: 166
82. Which of the following economic perspectives focuses on the need for government to shift aggregate demand
to correct problems of unemployment and inflation?
A) Supply-side. B) Keynesian. C) Classical. D) New Classical.
Answer: B Type: Basic Understanding Page: 166
83. According to Keynesian theory, the correct fiscal policy to stimulate the economy would be to:
A) Raise taxes to increase aggregate demand.
B) Increase the money supply to increase aggregate supply.
C) Increase government expenditures to increase aggregate demand.
D) Lower taxes to increase aggregate supply.
Answer: C Type: Basic Understanding Page: 166
84. According to Keynes, unemployment resulted from:
A) Increased business investment which reduced consumer spending.
B) Flexible wages and price.
C) Insufficient spending on the part of consumers, business, and government.
D) Increased government spending which reduced consumer spending.
Answer: C Type: Complex Understanding Page: 166
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Chapter 8: The Business Cycle
85. Keynesian levers would include:
A) Deregulation. B) Fiscal policy.
C) Monetary policy.
D) Aggregate supply.
Answer: B Type: Basic Understanding Page: 166
86. A tax cut can best be characterized as:
A) Monetary policy only.
B) Fiscal policy only.
C) Supply-side policy only.
D) Both fiscal and supply-side policy.
Answer: D Type: Complex Understanding Page: 166
87. From the supply-side perspective, the economy may fail to reach full employment because of:
A) A lack of incentives for production.
C) Excessive government taxes and regulation.
B) Rising costs.
D) All of the above.
Answer: D Type: Complex Understanding Page: 168
88. Individual employment and training programs are levers most likely to be advocated by:
A) Classical economists. B) Neoclassical economists. C) Keynesians. D) Supply-side economists.
Answer: D Type: Basic Understanding Page: 168
89. Which of the following is the best example of supply-side policy?
A) The government response to the Great Depression.
B) Inflation during the 1970s.
C) The Reagan tax cuts in 1982.
D) Government policy before 1930.
Answer: C Type: Basic Understanding Page: 168
LONG-RUN SELF-ADJUSTMENT
90. In the long run, the aggregate supply curve:
A) Is upward sloping.
B) Is the same as it is in the short run.
C) Tends to be horizontal.
D) Tends to be vertical.
Answer: D Type: Analytical Page: 169
91. A vertical aggregate supply curve:
A) Implies that supply-side policies will have no effect on the macro equilibrium.
B) Implies that aggregate demand shifts have no impact on output.
C) Is likely in the short run.
D) Reflects the inflexibility of prices and wages.
Answer: B Type: Complex Understanding Page: 169
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Chapter 8: The Business Cycle
92. The long-run AS curve is vertical because:
A) Of the profit effect of rising price levels.
B) Of the inverse relationship between inflation and unemployment.
C) Over a long period of time, rising costs will catch up with higher price levels thus providing no incentive
to increase output.
D) The real balances effect does not apply in the long run.
Answer: C Type: Basic Understanding Page: 169
93. For the aggregate supply curve, the profit effect:
A) Provides an incentive for producers to decrease output when prices rise.
B) Dominates in the long run and causes the curve to be upward sloping.
C) Along with the cost effect cause the curve to be upward sloping in the long run.
D) Is temporary and in the long run the cost effect dominates.
Answer: D Type: Complex Understanding Page: 169
94. When the AS curve is vertical, increases in AD will:
A) Increase the average price level but have no impact on unemployment.
B) Increase the average price level and decrease unemployment.
C) Increase both the average price level and but have no impact on unemployment.
D) Have no impact on either the average price level or unemployment.
Answer: A Type: Complex Understanding Page: 169
95. If the price level decreases and real output does not change, we can conclude that aggregate:
A) Demand increased in the portion of the aggregate supply curve that is practically horizontal.
B) Demand decreased in the portion of the aggregate supply curve that is vertical.
C) Demand decreased in the portion of the aggregate supply curve that is upward sloping.
D) Supply increased in the portion of the aggregate demand curve that is downward sloping.
Answer: B Type: Complex Understanding Page: 169
96. When the AS curve is vertical, fiscal policy will be:
A) Ineffective against both inflation and unemployment.
B) Effective against inflation but not unemployment.
C) Effective against unemployment but not inflation.
D) Effective against both inflation and unemployment.
Answer: B Type: Complex Understanding Page: 169
97. The belief that an increase in aggregate demand results in an increase in the price level but no change in
output is attributed to:
A) Monetarists. B) Keynesians. C) Supply-side economists. D) All of the above.
Answer: A Type: Complex Understanding Page: 169
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Chapter 8: The Business Cycle
98. The only policy lever that is effective against unemployment when the AS curve is vertical is:
A) Fiscal policy. B) Monetary policy. C) Supply-side policy. D) No policy lever is effective.
Answer: C Type: Complex Understanding Page: 169
THE ECONOMY TOMORROW
99. A laissez faire policy approach during a recession would advocate:
A) Non-interference by the government.
B) Increasing AS by funding programs which improve worker skills.
C) Increasing AD by increasing government spending.
D) Increasing both AD and AS.
Answer: A Type: Definition Page: 171
100. New Classical economists believe:
A) The market self-adjusts so that government policy is ineffective even in the short run.
B) Increased government spending is needed to stimulate the economy.
C) Government policy has its chief effect through the demand side.
D) In a horizontal supply curve.
Answer: A Type: Basic Understanding Page: 171
101. The use of tax incentives and deregulation to stimulate the ability and willingness to produce goods and
services is most closely associated with:
A) Fiscal policy. B) A laissez faire approach. C) Supply-side policy. D) Monetary policy.
Answer: C Type: Basic Understanding Page: 171
102. International trade and money flows can increase aggregate supply and aggregate demand if:
A) Trade barriers are increased.
C) Tariffs are increased.
B) Trade barriers are reduced.
D) Quotas are increased.
Answer: B Type: Basic Understanding Page: 171
103. The eclectic approach to macroeconomic policy relies on:
A) Demand-side policy.
C) Supply-side policy.
B) A laissez faire approach.
D) Any or all of the above approaches.
Answer: D Type: Definition Page: 171
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Chapter 8: The Business Cycle
Use the following to answer questions 104-107:
Figure 8.1
PRICE LEVEL
P2
•
A
•
B
•
P1
AD2
C
AD1
Q1
Q2
REAL OUTPUT
104. Using Figure 8.1, an increase in real output resulting from the real-balances effect would be depicted as a
movement from point:
A) A to point C. B) A to point B. C) B to point C. D) C to point A.
Answer: A Type: Complex Understanding Page: 159
105. Using Figure 8.1, an increase in real output resulting from the interest-rate effect would be depicted as a
movement from point:
A) A to point B. B) A to point C. C) B to point C. D) C to point A.
Answer: B Type: Complex Understanding Page: 159
106. In Figure 8.1, an increase in government spending, ceteris paribus, is best represented as a movement from
point:
A) A to point B. B) C to point A. C) B to point C. D) A to point C.
Answer: A Type: Basic Understanding Page: 159
107. In Figure 8.1, a decrease in business inventories, ceteris paribus, is best represented as a movement from
point:
A) A to point B. B) C to point A. C) C to point B. D) B to point A.
Answer: D Type: Basic Understanding Page: 159
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Chapter 8: The Business Cycle
Use the following to answer questions 108-110:
Figure 8.2
AS1
PRICE LEVEL
AS2
P2
•
P1
•
•
A
B
C
Q1
Q2
REAL OUTPUT
108. Using Figure 8.2, a decrease in real output resulting from the profit and cost effects would be depicted as a
movement from point:
A) A to point C. B) A to point B. C) B to point C. D) C to point B.
Answer: C Type: Complex Understanding Page: 161
109. In Figure 8.2, an improvement in technology is best represented as a movement from point:
A) A to point B. B) C to point A. C) C to point B. D) B to point A.
Answer: A Type: Basic Understanding Page: 161
110. In Figure 8.2, an increase in the cost of an input in the production process is best represented as a movement
from point:
A) A to point B. B) C to point A. C) C to point B. D) B to point A.
Answer: D Type: Basic Understanding Page: 161
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Chapter 8: The Business Cycle
Use the following to answer questions 111-119:
Figure 8.3
Aggregate supply and demand
111. Assume the economy is initially in equilibrium on AD1 and AS1. Which curve would have shifted and in
what direction would it have shifted, if a new equilibrium were to occur at an output level of $300 billion and
a price level of P3 in Figure 8.3?
A) Aggregate supply would have shifted to the left.
B) Aggregate supply would have shifted to the right.
C) Aggregate demand would have shifted to the left.
D) Aggregate demand would have shifted to the right.
Answer: D Type: Analytical Page: 162
112. Assume the economy is initially in equilibrium on AD2 and AS2. Which curve would have shifted, and in
what direction would it have shifted, if a new equilibrium were to occur at an output level of $300 billion and
a price level of P3 in Figure 8.3?
A) Aggregate supply would have shifted to the left.
B) Aggregate supply would have shifted to the right.
C) Aggregate demand would have shifted to the left.
D) Aggregate demand would have shifted to the right.
Answer: A Type: Analytical Page: 162
113. Macro equilibrium is established at which level of real output, given AD1 and AS2 in Figure 8.3?
A) $200 billion. B) $100 billion. C) $300 billion. D) $400 billion.
Answer: C Type: Analytical Page: 162
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Chapter 8: The Business Cycle
114. Macro equilibrium is established at which price level, given AD1 and AS1 in Figure 8.3?
A) P1 . B) P2 . C) P3 . D) P4 .
Answer: B Type: Analytical Page: 162
115. Given AD2 and AS1, the equilibrium price level in Figure 8.3 is:
A) P1 . B) P2 . C) P3 . D) P4 .
Answer: C Type: Analytical Page: 162
116. Given AD1 and AS1, if the average price level in Figure 8.3 were at P3 :
A) A surplus would exist initially.
B) The aggregate quantity demanded would exceed the aggregate quantity supplied.
C) The average price level would rise.
D) The equilibrium price level would be P3.
Answer: A Type: Analytical Page: 162
117. Given AD1 and AS1 in Figure 8.3, the Classical approach to achieving full employment at an output of $300
billion would be to:
A) Increase taxes and increase government spending so as to shift AD1 to AD2.
B) Increase the growth of the money supply so as to shift AD1 to AD2.
C) Do nothing and wait for "natural" market forces to achieve full employment.
D) Use all available supply-side options.
Answer: C Type: Analytical Page: 166
118. Given AD1 and AS1 in Figure 8.3, the Keynesian approach to achieving a higher level of output would be to:
A) Use various demand-side options, such as price controls.
B) Increase the growth of the money supply so as to shift AS1 to AS2.
C) Do nothing.
D) Employ an expansionary fiscal policy—tax cuts and/or more government spending—so as to shift AD1
to AD2.
Answer: D Type: Analytical Page: 166
119. A supply-side policy approach in Figure 8.3, given AD1 and AS1, to achieve both lower prices and more
output would be to:
A) Increase the growth of the money supply.
B) Reduce marginal tax rates and government regulation in an effort to move AS1 to AS2.
C) Wait until natural market forces establish full employment.
D) Increase aggregate spending.
Answer: B Type: Analytical Page: 168
Use the following to answer questions 120-123:
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Chapter 8: The Business Cycle
Figure 8.4
Aggregate supply and demand
120. At what price level does equilibrium occur in Figure 8.4?
A) P1. B) P2. C) P3. D) P4.
Answer: B Type: Analytical Page: 162
121. At what level of output does equilibrium occur in Figure 8.4?
A) Q2. B) Q3. C) Q4. D) Q5.
Answer: C Type: Analytical Page: 162
122. At which of the following price levels would a shortage occur in Figure 8.4?
A) P1. B) P2. C) P3. D) P4.
Answer: A Type: Analytical Page: 163
123. At which of the following price levels would a surplus occur in Figure 8.4?
A) P1only. B) P2only. C) P1 and P2. D) P3.
Answer: D Type: Analytical Page: 163
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Chapter 8: The Business Cycle
Use the following to answer questions 124-129:
Figure 8.5
AS2
AS1
PRICE LEVEL
P3
P2
P1
AD2
AD1
Q1
Q2
Q3
REAL OUTPUT
124. Using Figure 8.5, if the equilibrium real output is Q 2 then:
A) Aggregate demand must be AD1.
B) Aggregate demand could be either AD1 or AD2 depending on the level of aggregate supply.
C) The equilibrium price level is P2.
D) Aggregate supply must be AS1 and the equilibrium price level must be P1.
Answer: B Type: Complex Understanding Page: 163
125. In Figure 8.5, if equilibrium real output is Q1 and full employment real output is Q2, an appropriate fiscal
policy lever would be to:
A) Increase AD by increasing income taxes.
B) Increase AD by increasing government spending.
C) Increase AS by reducing government regulations.
D) Reduce AS by tightening air pollution standards in order to improve air quality.
Answer: B Type: Complex Understanding Page: 166
126. In Figure 8.5, if equilibrium real output is Q1 and full employment real output is Q2, an appropriate
monetarist policy lever would be to:
A) Increase AD by decreasing income taxes.
B) Increase AS by increasing the money supply.
C) Increase AD by reducing interest rates.
D) Increase AD by reducing government regulations.
Answer: C Type: Basic Understanding Page: 166
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Chapter 8: The Business Cycle
127. In Figure 8.5, if this economy's inflation goal is a price level of P 2 but the equilibrium price level is P3, an
appropriate fiscal policy lever would be to:
A) Decrease AD by decreasing income taxes.
B) Decrease AS by decreasing the money supply.
C) Decrease AD by reducing transfer payments.
D) Increase AS by reducing government regulations.
Answer: C Type: Complex Understanding Page: 166
128. In Figure 8.5, if this economy's inflation goal is a price level of P 2 but the equilibrium price level is P3, an
appropriate monetary policy lever would be to:
A) Decrease AS by decreasing the money supply. C) Decrease AD by increasing income taxes.
B) Decrease AD by increasing interest rates.
D) Increase AS by increasing the money supply.
Answer: B Type: Basic Understanding Page: 166
129. Using Figure 8.5, if the equilibrium price level is P 1, then:
A) Aggregate demand is AD2, and the equilibrium output level is Q2.
B) Aggregate demand is AD2, and the equilibrium output level is Q1.
C) Aggregate demand is AD1, and the equilibrium output level is Q3.
D) Aggregate demand is AD1, and the equilibrium output level is Q2.
Answer: D Type: Basic Understanding Page: 166
Use the following to answer questions 130-142:
Choose the letter below that best represents the type of shift that would occur in each situation in the United States.
Figure 8.6
Shifts of aggregate supply and demand
Price Level
Price Level
Price Level
Real Output
(A)
Aggregate Demand
(rightward)
Aggregate Demand
(leftward)
Aggregate Supply
(rightward)
Real Output
(B)
Price Level
Aggregate Supply
(leftward)
Real Output
( C)
130. OPEC raises the price of its oil significantly. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: A Type: Analytical Page: 164
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Real Output
(D)
Chapter 8: The Business Cycle
131. American consumers suddenly acquire a greater taste for Japanese products, ceteris paribus. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: C Type: Analytical Page: 164
132. A technological breakthrough significantly reduces the cost of computerizing production lines. (See Figure
8.6)
A) A. B) B. C) C. D) D.
Answer: B Type: Analytical Page: 164
133. A new government program results in a sudden increase in U.S. exports. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: D Type: Analytical Page: 164
134. Between 1995 and 2000, the stock market's value increased significantly, adding billions of dollars to the
wealth of U.S. households and businesses. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: D Type: Analytical Page: 164
135. On October 24, 1929, the U.S. stock market crashed. By the end of the year, over $40 billion of wealth had
vanished. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: C Type: Analytical Page: 164
136. Between 1930 and 1935, millions of U.S. farm families lost their farms, and less was produced by the
remaining farms. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: A Type: Analytical Page: 164
137. During the Great Depression most other countries suffered similarly long and deep losses of output and
employment, which in turn meant less purchases of U.S. goods and services. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: C Type: Analytical Page: 164
138. During World War II, the U.S. government spent huge amounts of money to fund the war effort, ceteris
paribus. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: D Type: Analytical Page: 164
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Chapter 8: The Business Cycle
139. When the economy overheated, the U.S. government cooled it down with higher taxes, spending reductions,
and less money. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: C Type: Analytical Page: 164
140. In 2001 interest rates dropped to 40-year lows which decreased the cost of borrowing for businesses and
consumers. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: D Type: Analytical Page: 164
141. During the late 1990s, productivity in many U.S. industries increased because of technological advances.
(See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: B Type: Analytical Page: 164
142. The value of the dollar plummeted in international currency markets, causing foreigners to buy more
American goods. (See Figure 8.6)
A) A. B) B. C) C. D) D.
Answer: D Type: Analytical Page: 164
Use the following to answer questions 143-147:
Figure 8.7
PRICE LEVEL
AS
AD5
AD4
AD3
AD1
AD2
REAL OUTPUT
Page 25
Chapter 8: The Business Cycle
143. Using Figure 8.7, a shift in aggregate demand from AD1 to AD2 is most likely to cause:
A) An increase in real output and an increase in the price level.
B) An increase in real output, but no change in the price level.
C) An increase in price level, but no change in real output.
D) An decrease in price level, but no change in real out put.
Answer: B Type: Complex Understanding Page: 162
144. Using Figure 8.7, a shift in aggregate demand from AD 3 to AD4 is most likely to cause:
A) An increase in real output and an increase in the price level.
B) An increase in real output, but no change in the price level.
C) An increase in price level, but no change in real output.
D) An decrease in price level, but no change in real out put.
Answer: A Type: Complex Understanding Page: 162
145. Using Figure 8.7, a shift in aggregate demand from AD 4 to AD5 is most likely to cause:
A) An increase in real output and an increase in the price level.
B) An increase in real output, but no change in the price level.
C) An increase in price level, but no change in real output.
D) An decrease in price level, but no change in real out put.
Answer: C Type: Complex Understanding Page: 162
146. For the economy depicted in Figure 8.7, the worst unemployment problem would exist when AD is located
at:
A) AD1. B) AD2. C) AD3. D) AD5.
Answer: A Type: Basic Understanding Page: 162
147. For the economy depicted in Figure 8.7, the worst inflation problem would exist when AD is located at:
A) AD1. B) AD2. C) AD3. D) AD5.
Answer: D Type: Basic Understanding Page: 162
The following multiple-choice questions require critical thinking about In the News and World View articles that
appeared in the text.
148. One In the News article is titled "Market in Panic as Stocks Are Dumped in 12,894,600 Share Day; Bankers
Halt It." Which of the following shifts in the stock market would be most likely based on the headline?
A) Supply curve and demand curve should shift leftward.
B) Supply curve should shift leftward, and demand curve should shift rightward.
C) Supply curve should shift rightward, and demand curve should shift leftward.
D) Supply curve and demand curve should shift rightward.
Answer: C Type: Complex Understanding Page: 151
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Chapter 8: The Business Cycle
149. An In the News article reports "The stock markets of the country tottered on the brink of panic yesterday as a
prosperous people . . . attempted simultaneously to sell a record-breaking volume of securities for whatever
they would bring." Which of the following shifts would be most likely based on this information?
A) Aggregate demand should shift to the left.
C) Aggregate supply should shift to the left.
B) Aggregate demand should shift to the right.
D) Aggregate supply should shift to the right.
Answer: A Type: Complex Understanding Page: 151
150. One World View article states "The Great Depression was not confined to the U.S. economy." This implies
that many other countries:
A) Were producing inside their production-possibilities curves.
B) Experienced high rates of unemployment.
C) Experienced a decrease in real GDP.
D) All of the above.
Answer: D Type: Complex Understanding Page: 155
151. One World View article is titled "Global Depression." The countries that experienced the depression:
A) Experienced GDP growth, but at a rate below the long-term trend.
B) Experienced higher employment levels than previously recorded.
C) Suffered substantial losses of output and employment.
D) Experienced high unemployment but an increase in output.
Answer: C Type: Complex Understanding Page: 155
152. Three World View articles discuss the different short-term growth rates across countries. Short-term growth
involves:
A) An increase in aggregate supply.
B) An increase in aggregate demand.
C) A rightward shift of the production-possibilities curve.
D) Expansionary supply-side policy.
Answer: B Type: Complex Understanding Page: 158
True/False Questions
STABLE OR UNSTABLE?
T
F 153. Classical economists believe in the use of policy levers to achieve desired macro outcomes.
Answer: False Type: Basic Understanding Page: 151
T
F 154. The cornerstone of Classical thought is flexible wages and prices.
Answer: True Type: Basic Understanding Page: 151
T
F 155. Keynes believed that a market-driven economy was inherently stable.
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Chapter 8: The Business Cycle
Answer: False Type: Basic Understanding Page: 152
T
F 156. According to the Classical view, the economy will not self-adjust to deviations from its long-term
growth trend.
Answer: False Type: Basic Understanding Page: 152
T
F 157. According to Keynes, the inherent instability of the market place requires government intervention.
Answer: True Type: Basic Understanding Page: 152
HISTORICAL CYCLES
T
F 158. The average growth rate of the U.S. economy was approximately 3 percent per year from 1929
through 2001.
Answer: True Type: Basic Understanding Page: 154
T
F 159. During a recession, real output actually falls.
Answer: True Type: Basic Understanding Page: 156
T
F 160. World War II contributed to the Great Depression because it eliminated the demand for civilian
goods and services.
Answer: False Type: Basic Understanding Page: 155
T
F 161. A growth recession occurs when GDP grows at a rate below the long-term growth trend.
Answer: True Type: Basic Understanding Page: 156
T
F 162. During the 1990s, the U.S. economy experienced one of the longest periods of economic expansion
in history.
Answer: True Type: Basic Understanding Page: 157
A MODEL OF THE MACRO ECONOMY
T
F 163. One measure of macroeconomic performance is the price level.
Answer: True Type: Basic Understanding Page: 157
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Chapter 8: The Business Cycle
T
F 164. One measure of macroeconomic performance is the level of unemployment.
Answer: True Type: Basic Understanding Page: 157
T
F 165. If the population is growing, then the economy must be expanding.
Answer: False Type: Basic Understanding Page: 158
T
F 166. Changes in the availability of money have little impact on the macro performance of the economy.
Answer: False Type: Basic Understanding Page: 158
T
F 167. External shocks include wars, natural disasters, and trade disruptions.
Answer: True Type: Basic Understanding Page: 158
T
F 168. All economists believe that market-driven economies are stable.
Answer: False Type: Basic Understanding Page: 158
AGGREGATE DEMAND AND AGGREGATE SUPPLY
T
F 169. Business cycles result from recurrent shifts of the aggregate supply and demand curves.
Answer: True Type: Basic Understanding Page: 159
T
F 170. Macro outcomes are the result of the interaction between aggregate supply and aggregate demand.
Answer: True Type: Basic Understanding Page: 159
T
F 171. The real-balances effect states that higher prices make money more valuable.
Answer: False Type: Definition Page: 160
T
F 172. The quantity of real output supplied rises as the price level rises, ceteris paribus.
Answer: True Type: Basic Understanding Page: 161
T
F 173. The profit effect depends on some costs declining when the average price level rises.
Answer: False Type: Basic Understanding Page: 161
T
F 174. The profit effect occurs because, in the short run, resource costs typically do not increase as rapidly
Page 29
Chapter 8: The Business Cycle
as the price of goods and services.
Answer: True Type: Basic Understanding Page: 161
T
F 175. A stable equilibrium means there is no tendency for price or output to change.
Answer: True Type: Basic Understanding Page: 162
T
F 176. Equilibrium is unique; it is the only price-output combination that is mutually compatible with
aggregate supply and demand.
Answer: True Type: Definition Page: 162
T
F 177. A surplus occurs at the price level where aggregate demand equals aggregate supply.
Answer: False Type: Basic Understanding Page: 162
COMPETING THEORIES OF SHORT-RUN INSTABILITY
T
F 178. Economic policy explains the business cycle, while macroeconomic theories try to control it.
Answer: False Type: Basic Understanding Page: 166
T
F 179. Supply-side theories of the business cycle focus on the unwillingness of producers to supply more
goods and services at existing prices.
Answer: True Type: Basic Understanding Page: 168
T
F 180. Eclectic economists blame both the demand side and the supply side for the undesirable macro
outcomes.
Answer: True Type: Basic Understanding Page: 168
LONG-RUN SELF-ADJUSTMENT
T
F 181. The long-run aggregate supply curve is upward sloping, while the short-run aggregate supply curve
tends to be vertical.
Answer: False Type: Basic Understanding Page: 169
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Chapter 8: The Business Cycle
T
F 182. In the long run the AS curve is vertical so shifts in the aggregate demand curve affect output but not
the price level.
Answer: False Type: Basic Understanding Page: 169
T
F 183. In the long run, shifts in the aggregate demand curve affect the price level but not the level of output.
Answer: True Type: Basic Understanding Page: 169
Page 31