Economics
252
Review
Questions - Chapter 8 - The Business Cycle
(1) Alternating
periods of economic growth and contraction in real GDP define:
(a) the business cycle.
(b) Say’s
Law.
(c) the Law of Demand.
(d) aggregate supply and not aggregate demand.
(2) Self-adjustment
of markets is assumed in:
(a) classical economic theory.
(b) Keynesian
theory.
(c) supply-side economic theory.
(d) the eclectic viewpoint.
(3) Unlike
classical economists, Keynes asserted that:
(a) the private market was inherently unstable.
(b) laissez-faire would lead to macro equilibrium.
(c) prices and wage were flexible.
(d) markets would naturally self-adjust.
(4) External
shocks include:
(a) wars, natural disasters, trade disruptions.
(b) tax policy, government spending, interest rate changes, and
the monetary policy.
(c) population growth, spending behavior, invention.
(d) internal market forces, policy levers.
(5) Internal
market forces include:
(a) wars, natural disasters, trade disruptions.
(b) tax policy, government spending, interest rate changes, and
the monetary policy.
(c) population growth, spending behavior, invention.
(d) external shocks, policy levers.
(6) 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.
(7) The
aggregate supply curve is upward-sloping because of:
(a) the real balances effect.
(b) the foreign trade effect.
(c) the interest rate effect.
(d) the cost effect.
Consider Figure 1 in
answering Questions (8) and (9).
Figure
1
(8) In
Figure 1, if equilibrium real output is Q(1), and full
employment output is Q(2), 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.
(9) In
Figure 1, if equilibrium real output is Q(1), and full
employment real output is Q(2), an appropriate monetarist policy lever would
be:
(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.
(10) Keynes
believed that unemployment was the result of:
(a) increased business investment which reduced consumer
spending.
(b) flexible wages and prices.
(c) insufficient spending on the part of consumers, business,
and government.
(d) increased government spending which reduced consumer
spending
Consider which Panel of
Figure 2 answers Questions (11), (12), and (13).
Figure
2
(11) OPEC
raises the price of its oil significantly
(a) Panel
A
(b) Panel
B
(c) Panel
C
(d) Panel
D
(12) American
consumers suddenly acquire a greater taste for Japanese products?
(a) Panel
A
(b) Panel
B
(c) Panel
C
(d) Panel
D
(13) A
technological breakthrough significantly reduces manufacturing costs in the
U.S.
(a) Panel
A
(b) Panel
B
(c) Panel
C
(d) Panel
D
(14) 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.
(15) A
laissez-faire policy approach during a recession would advocate:
(a) doing nothing.
(b) increasing AS by funding programs to improve worker skills.
(c) increasing AD by increasing government spending.
(d) increasing both AD and AS.