Deck 11: The Nature and Causes of Economic Fluctuations

Question 1

Economic fluctuations in the United States have occurred more and more frequently as time has passed.

Answer 1

False

Question 2

Between December 2007 and June 2009,

A) the United States economy was in recession and millions of jobs were lost.
B) the United States economy moved upward and millions of jobs were created.
C) the United States economy grew, but not many jobs were created.
D) the United States economy moved downward, but still many jobs were created.
E) the United States economy remained stationary.

Answer 2

A

Question 3

Over the period from 1982 to 2007, economic fluctuations

A) have become more severe than in the past.
B) have occurred more often than in the past.
C) have not changed in severity when compared to past economic fluctuations.
D) have become less severe than in the past.
E) have occurred just as often as in the past.

Answer 3

D

Question 4

The 2008-09 recession proved to be mild and very short-lived.

Question 5

To compare economic fluctuations in different countries, one should look at

A) the percent difference between real and nominal GDP.
B) the difference between potential and real GDP measured in dollars.
C) the difference between real and nominal GDP measured in dollars.
D) the difference between aggregate demand and real GDP measured in dollars.
E) the percent difference between potential and real GDP.

Question 6

Economic fluctuations have been common for at least 200 years, but they have diminished in frequency and severity in the United States and many other countries, particularly in the last 25 years.

Question 7

The 2008-09 recession was

A) longer lasting and much more severe than the 2001 recession.
B) shorter than the 2001 recession, but much more severe.
C) longer lasting than the 2001 recession, but less severe.
D) the first recession of the 21^st century in the United States.
E) shorter and less severe than the 2001 recession.

Question 8

Economic fluctuations have been common only since the beginning of the twentieth century.

Question 9

Which of the following statements is false?

A) Economic fluctuations include recessions and rapid expansions.
B) Economic fluctuations seem to have diminished in severity.
C) Economic fluctuations are an important subject in the study of economics.
D) Economic fluctuations did not occur until the twentieth century.
E) Economic fluctuations are departures from the long-run growth trend.

Question 10

Potential GDP represents what firms would want to produce in "normal times," when the economy is in neither a recession nor a boom.

Question 11

According to Exhibit 23-1, which of the following best explains the change in real GDP from year B to year D?

A) The available supply of labor fell.
B) Foreign countries must have decided to purchase more U.S. goods.
C) The government must have cut taxes.
D) Consumers must have become more optimistic.
E) Firms must have become more pessimistic.

Question 12

Changes in aggregate demand occur when

A) foreign countries are experiencing recession.
B) the government changes the tax laws.
C) the government reduces military spending.
D) consumers become more optimistic about the future and increase their spending.
E) All of these

Question 13

The text defines economic fluctuations as

A) the rise and fall of real GDP.
B) periods of time when there is excessive GDP volatility.
C) periods of time when the economy is in either a recession or a boom.
D) departure of the economy from its long-term growth trend.
E) the rise and fall of unemployment.

Question 14

The economy's long-term growth trend for GDP is known as real GDP and is determined by the available supply of capital, labor, and technology.

Question 15

When the unemployment rate is equal to the natural unemployment rate, capacity utilization is usually close to

A) 80 percent.
B) 90 percent.
C) 70 percent.
D) 60 percent.
E) 100 percent.

Question 16

The study of economic fluctuations is

A) more important than the study of long-run economic growth.
B) not necessary to understanding economics.
C) as important as the study of long-run economic growth.
D) less important than the study of long-run economic growth.
E) overrated, because economic fluctuations don't affect many people.

Question 17

In a boom year,

A) potential GDP equals real GDP.
B) prices fall.
C) aggregate demand has increased.
D) unemployment is rising.
E) potential GDP is greater than real GDP.

Question 18

Manufacturing capacity utilization in normal times typically equals

A) 60 percent.
B) 99 percent.
C) 110 percent.
D) 100 percent.
E) 80 percent.

Question 19

Between 2001 and 2007

A) the United States economy was in recession.
B) the United States economy moved upward and millions of jobs were created.
C) the United States economy grew, but not many jobs were created.
D) the United States economy moved downward, but still many jobs were created.
E) the United States economy remained stationary.

Question 20

At the end of a recession

A) real GDP is greater than potential GDP.
B) potential GDP is greater than real GDP.
C) potential GDP is less than real GDP.
D) real GDP is falling.
E) potential GDP equals real GDP.

Question 21

Is it possible for economic fluctuations to occur for reasons not associated with changes in aggregate demand? Explain.

Question 22

Which of the following would a real business cycle theorist emphasize as a primary cause of economic fluctuations?

A) Changes in the weather that severely impact the agricultural sector
B) Changes in investment spending
C) Changes in technology
D) Changes in taxes
E) Changes in government spending

Question 23

When firms are at full capacity, real GDP equals potential GDP.

Question 24

If capacity utilization is 98 percent,

A) the unemployment rate will be below the natural rate of unemployment.
B) the unemployment rate will equal the natural unemployment rate.
C) real GDP equals potential GDP.
D) workers will be laid off.
E) real GDP is below potential GDP.

Question 25

Real business cycle theories focus on changes in potential GDP as the source of economic fluctuations.

Question 26

Why are most economists skeptical about the real business cycle theory of economic fluctuations?

Question 27

Which of the following does not occur when real GDP rises above potential GDP?

A) The unemployment rate falls below the natural unemployment rate.
B) The capacity utilization rate increases.
C) Firms increase their prices.
D) The unemployment rate rises above the natural unemployment rate.
E) Demand increases.

Question 28

Economic fluctuations are largely a result of changes in aggregate demand.

Question 29

Potential GDP growth is relatively smoother than aggregate demand growth.

Question 30

When the unemployment rate drops below the natural unemployment rate,

A) the economy is in a recession.
B) real GDP is rising above potential GDP.
C) real GDP is falling below potential GDP.
D) the capacity utilization rate is declining.
E) All of these

Question 31

The actual unemployment rate will fall below the natural unemployment rate when real GDP rises above potential GDP.

Question 32

Why is it relevant to study economic fluctuations?

Question 33

In real business cycle theories, changes in tastes are most frequently assumed to be the reason for changes in potential GDP.

Question 34

Which of the following relationships do forecasters use to make their one-year-ahead predictions for real GDP?

A) Real GDP is the sum of consumption, investment, government purchases, and net exports.
B) Real GDP is determined by the amount of capital, labor, and technology employed in the economy.
C) Real GDP is determined by the capital and labor employed in the economy.
D) Real GDP in any year should equal real GDP in the previous year.
E) Real GDP equals nominal GDP during the base year.

Question 35

President Obama's State of the Union address in 2011 made it clear that the recovery from the 2008/09 recession was strong and widespread across the entire U.S. economy.

Question 36

Explain the connection between fluctuations in the unemployment rate around the natural rate of unemployment and fluctuations in real GDP around potential GDP.

Question 37

A macroeconomic theory that stresses the fact that shifts in potential GDP are a primary cause of fluctuations in real GDP is known as

A) potential GDP theory.
B) real business cycle theory.
C) economic cycle theory.
D) perennial growth theory.
E) None of these

Question 38

Changes in the factors that underlie potential GDP growth

A) are the major sources of economic fluctuations.
B) evolve too quickly to be able to explain economic fluctuation.
C) are as important as changes in aggregate demand in explaining economic fluctuations.
D) evolve too slowly to be able to explain economic fluctuations.
E) were, until the 1920s, a valid explanation of economic fluctuations.

Question 39

In normal times, when the economy is in neither a recession nor a boom, manufacturing capacity utilization is at 100 percent.

Question 40

Proponents of real business cycle theories argue that economic fluctuations are a response to changes in

A) money velocity.
B) the money supply.
C) potential GDP.
D) real GDP.
E) aggregate demand.

Question 41

What is meant by a conditional forecast, and what is it used for?

Question 42

A conditional forecast of real GDP is

A) a forecast using one of the 54 forecasts listed in Blue Chip Economic Indicators.
B) a forecast based on potential GDP as opposed to the spending components of GDP.
C) another name for the Blue Chip Consensus forecast.
D) a forecast that explains what real GDP will be under alternative assumptions about the spending components.
E) a forecast that is conditional on the time period in which it was made.

Question 43

Most short-term forecasts are based on expected changes in aggregate demand.

Question 44

Economic forecasters seldom differ in their one-year-ahead forecasts of real GDP.

Question 45

Because it represents a completely separate section of the economy, government purchases do not often affect the other elements of aggregate demand: consumption, investment, and net exports.

Question 46

Which of the following statements is false?

A) The assumption that income is the only influence on consumption is a simplifying assumption.
B) Assuming consumption spending responds to income will improve a forecast.
C) The assumption that only consumption spending responds to income is a simplifying assumption.
D) Consumption responds to changes in other factors besides income.
E) The assumption that investment and net exports do not respond to changes in income is based on evidence from the U.S. economy.

Question 47

An improvement in consumer confidence will affect the growth rate of the economy.

Question 48

Other things being equal, the forecast for real GDP is likely higher if government purchases increase by a sizable amount.

Question 49

The type of forecast that describes what real GDP will be under alternative assumptions about the components of spending is commonly known as

A) a conditional forecast.
B) a prudential forecast.
C) an alternatives forecast.
D) a sensible forecast.
E) None of these

Question 50

Suppose real GDP in 2015 is $15,500 billion, and the forecast for real GDP in 2016 is $15,950 billion, then the forecast of real GDP growth for the year 2016 was

A) 0.3 percent.
B) 2.9 percent.
C) 29 percent.
D) 4.5 percent.
E) 3.5 percent.

Question 51

Which of the following statements is true?

A) Most conditional forecasts assume that a change in government purchases has no effect on the other spending components of real GDP.
B) Only consumption spending is affected by changes in government purchases.
C) A change in government purchases has no effect on the other spending components of real GDP.
D) Consumption, investment, and net export spending are all likely to change as a result of a change in government purchases.
E) An increase in government purchases by $10 million will cause real GDP to increase by exactly $10 million.

Question 52

Suppose real GDP in 2015 is $6,105 billion. If the forecasted rate of growth for the year 2016 is 2.75 percent, then in the year 2016, real GDP will be

A) $6,500 billion.
B) $6,273 billion.
C) $7,784 billion.
D) $5,942 billion.
E) $6,300 billion.

Question 53

To forecast real GDP, economic forecasters divide aggregate demand into its four key components: private sector, public sector, investment sector, and foreign sector.

Question 54

A conditional forecast is based on what is likely to happen.

Question 55

To simplify the analysis, the textbook assumes that

A) consumption is the only component of expenditures that responds to income and income is the only influence on consumption.
B) consumption is the only component of expenditures that responds to government purchases and government purchases are the only influence on consumption.
C) net exports are zero.
D) there is no investment spending.
E) expenditures change only because of changes in consumption.

Question 56

The notion of the consumption function originated with

A) Edmund Phelps.
B) John Maynard Keynes.
C) Robert Lucas.
D) Milton Friedman.
E) Joseph Schumpeter.

Question 57

Why are most short-term forecasts based on expected changes in aggregate demand?

Question 58

One year-ahead-forecasts for real GDP

A) reflect forecasters' beliefs about the determinants of potential GDP over the next year.
B) are usually equal to the current year's GDP.
C) are usually equal to a weighted average of real GDP over the past five years.
D) reflect what forecasters believe will happen to the different spending components of real GDP.
E) have no real use and are seldom done.

Question 59

In the United States, consumption is by far the largest component of aggregate demand.

Question 60

An expected change in any of the four GDP components has no effect on the forecast for real GDP.

Question 61

Which of the following statements is true?

A) A change in sales tax has no effect of disposable income.
B) Interest and dividend payments are not included in disposable income.
C) A decrease in transfer payments reduces disposable income.
D) Household consumption is not sensitive to changes in disposable income.
E) All of these

Question 62

The consumption function describes

A) the negative relationship between consumption and government spending.
B) the positive relationship between consumption and income.
C) the negative relationship between consumption and the interest rate.
D) the negative relationship between consumption and income.
E) the positive relationship between consumption and the interest rate.

Question 63

Disposable income is the income that households

A) save for entertainment purposes and vacations.
B) receive in wages, dividends, and interest payments minus taxes they pay to the government and minus mortgage payments.
C) have available for saving, once the necessary living expenses have been subtracted from the wages, dividends, and interest payments they receive.
D) receive in wages, dividends, and interest payments plus transfers they may receive from the government minus any taxes they pay to the government.
E) None of these

Question 64

When Tom's income is $20,000, he spends $18,000 and when his income increases to $30,000, he spends $23,000. His MPC is

A) 0.3.
B) 0.5.
C) 0.65.
D) 0.77.
E) 0.90.

Question 65

The consumption function for the whole economy

A) looks different when real GDP is used instead of disposable income.
B) looks similar for either real GDP or disposable income.
C) is nonlinear when real GDP is used.
D) is nonlinear when aggregate income is used.
E) is nonlinear when disposable income is used instead of real GDP.

Question 66

Disposable income and real GDP behave the same way because

A) taxes and transfer payments are not proportional to income.
B) disposable income is the same as real GDP.
C) taxes and transfer payments are less than 10 percent of income.
D) taxes and transfer payments are nearly proportional to income.
E) taxes and transfer payments are a negligible fraction of income.

Question 67

Exhibit 23-2
Given the data in Exhibit 23-2, what is the marginal propensity to consume?

A) 0.80
B) 0.90
C) 0.75
D) 1.25
E) 0.60

Question 68

The marginal propensity to consume is best defined as

A) the change in consumption expenditure caused by an increase in the interest rate.
B) the change in consumption expenditure caused by a one-unit increase in income.
C) the change in real GDP caused by a change in consumption expenditure.
D) the change in consumption expenditure caused by a change in some other spending category.
E) total consumption divided by total income.

Question 69

If two successive levels of disposable personal income are $160 and $190 billion, respectively, and if the change in consumption spending is $20 billion between these two levels of disposable personal income, then the MPC will equal

A) .50.
B) .67.
C) .80.
D) .20.
E) 1.50.

Question 70

Marginal propensity to consume measures

A) how much consumption changes for a given change in income.
B) the amount of consumption at a given income level.
C) how much is saved as income increases.
D) the amount needed for basic food and shelter.
E) how much real GDP changes for a given change in consumption.

Question 71

If the marginal propensity to consume declines, then

A) for any given change in income, there will be a smaller change in saving.
B) nothing will happen to the consumption function.
C) for any given change in income, there will be a larger change in consumption.
D) for any given change in consumption, there will be a smaller change in income.
E) for any given change in income, there will be a smaller change in consumption.

Question 72

Exhibit 23-2
Given the data in Exhibit 23-2, what is the level of consumption if income increases to 400?

A) 480
B) 450
C) 515
D) 465
E) 470

Question 73

Which of the following statements is false?

A) Aggregate income is equal to real GDP.
B) The consumption function is a linear relationship between consumption and income.
C) The consumption function shows the relationship between consumption and disposable income.
D) The consumption function shows the relationship between consumption and real GDP.
E) The consumption function is a nonlinear relationship between consumption and income.

Question 74

According to the consumption function, as income increases, consumption

A) increases by the same amount.
B) decreases by a smaller amount.
C) decreases by a greater amount.
D) increases by a greater amount.
E) increases by a smaller amount.

Question 75

Suppose consumption increases by $250 million when income increases by $300. What is the marginal propensity to consume?

A) 0.833
B) 83.3
C) 250
D) 50
E) None of these

Question 76

The size of the MPC determines how a change in spending affects income.

Question 77

The slope of the consumption function is equal to

A) the nominal interest rate.
B) the real interest rate.
C) the marginal propensity to consume.
D) the relative price of consumption.
E) the marginal propensity to save.

Question 78

Suppose consumption is $2,700 million when income equals $2,000 million, and consumption increases to $3,125 million when income equals $2,500. What is the marginal propensity to consume?

A) 425
B) 0.85
C) 0.15
D) 850
E) None of these

Question 79

The consumption function shows the relationship between consumption and

A) the interest rate.
B) the money supply.
C) the price level.
D) potential GDP.
E) income.

Question 80

The relationship describing how consumption depends on income is known by economists as

A) the income function.
B) the budget constraint function.
C) the purchasing function.
D) the affordable function.
E) None of these