Deck 10: Economic Fluctuations

Question 1

Which statement best describes economic fluctuations?

A) Expansions and contractions typically have about the same lengths.
B) Expansions typically last 7 years,while recessions typically last 3 years.
C) Expansions tend to be shorter than contractions.
D) The percent change in output is larger during recessions than during expansions.
E) Expansions and contractions vary in duration and magnitude,with expansions tending to last longer than contractions.

Answer 1

Expansions and contractions vary in duration and magnitude,with expansions tending to last longer than contractions.

Question 2

Which of the following best defines an expansion?

A) Real GDP is below its potential level.
B) Real GDP is increasing.
C) Unemployment is unusually high.
D) Real GDP is decreasing.
E) Real GDP exceeds its potential level.

Answer 2

Real GDP exceeds its potential level.

Question 3

Which of the following is true in the classical model?

A) A spontaneous increase in spending can cause an increase in output and employment.
B) An increase in output and employment can cause a decrease in spending.
C) A spontaneous decrease in spending can cause an increase in output and employment.
D) An increase in output and employment can cause an increase in spending.
E) A spontaneous decrease in spending can cause a decrease in output and an increase in employment.

Answer 3

An increase in output and employment can cause an increase in spending.

Question 4

You are reading a newspaper article that refers to expansions and contractions in the economy.The references are to changes in

A) wage rates
B) inflation rates
C) movements in exchange rates
D) real GDP
E) investment expectations

Question 5

Since 1960,real GDP has fluctuated to some extent;however,there has been virtually no overall growth when the entire time span is considered.

Question 6

As the economy goes through an expansion,

A) fluctuations in GDP become more severe
B) unemployment finally stabilizes
C) investment stabilizes
D) the classical model becomes a better predictor
E) unemployment falls.

Question 7

What would a leftward shift of the labor demand curve indicate?

A) Firms want to hire more workers than before at any given wage than before.
B) Firms want to pay a higher wage than before at any given level of employment.
C) Households want to supply fewer hours of work than before at any given wage rate.
D) Firms want to hire fewer workers than before at any given wage rate.
E) Households want to supply more hours of work than before at any given wage rate.

Question 8

Which of the following occurs during a recession?

A) Output falls,employment rises,and unemployment rises.
B) Output rises,employment falls,and unemployment falls.
C) Output falls,employment falls,and unemployment rises.
D) Output rises,employment rises,and unemployment falls.
E) Output falls,employment falls,and unemployment falls.

Question 9

An economic expansion reflects

A) any movement from disequilibrium to a new equilibrium
B) the increase in output and decrease in employment level following a recession
C) the increase in output and employment levels following a recession
D) the rising wage rates that follow economic instability
E) instability in government tax revenues.

Question 10

When GDP is rising,the economy is experiencing

A) a contraction
B) a recession
C) a financial crisis
D) an expansion
E) equilibrium

Question 11

A student seeking a job right after graduation should be especially attentive to

A) long-run growth patterns in the economy
B) what is the current phase of the business cycle
C) technological change
D) sales of durable goods
E) the duration of strikes

Question 12

During a recession,a rising unemployment rate is

A) rare
B) stimulating higher levels of inflation
C) predicted by the classical model
D) the basis for a new economics expansion
E) almost inevitable

Question 13

In the classical model,a falling demand for labor will

A) not cause unemployment because the labor market always clears
B) cause a recession with lower employment and a lower real wage
C) cause a recession with lower employment and an increasing real wage
D) cause a recession with lower unemployment and a lower real wage
E) cause a recession with higher employment and an increasing real wage.

Question 14

GDP as predicted by the classical model is

A) lower than the actual level of GDP
B) higher than the actual level of GDP
C) smoother and steadier than actual GDP
D) more unstable over time than actual GDP
E) an accurate predictor of actual GDP

Question 15

Recessions typically last longer than expansions.

Question 16

A period during which GDP exceeds its potential level is best known as a(n)

A) expansion
B) contraction
C) boom
D) recession
E) depression

Question 17

During recessions,output

A) and unemployment both fall
B) and unemployment both rise
C) rises,but unemployment falls
D) falls,but unemployment rises
E) rises and unemployment remains constant

Question 18

A weakness in the classical economic claim that a recession is caused by a decrease in labor demand curve is

A) that labor demand never changes
B) that labor demand increases during a recession
C) that labor supply decreases during a recession
D) the confusion between a shift of the labor demand curve and a movement along that curve
E) the impossibility in the classical model of total spending ever being deficient

Question 19

If workers become more productive,which of the following would happen in the labor market?

A) Labor supply would increase.
B) Labor supply would decrease.
C) Labor demand would increase and labor supply would decrease.
D) Labor demand would decrease and so would labor supply.
E) Labor demand would increase.

Question 20

Which of the following statements best describes the U.S.economy since 1960?

A) Potential output has risen steadily,but actual output has fluctuated above and below full-employment output.
B) Actual output has risen steadily,but potential output has fluctuated above and below actual output.
C) Potential output and actual output have both not risen steadily.
D) Potential output and actual output have both fluctuated above and below what the classical model predicts.
E) Potential output has remained constant but actual output has risen.

Question 21

If workers become less productive,which of the following would happen in the labor market?

A) Labor supply would decrease.
B) Labor supply would increase.
C) Labor demand would decrease and labor supply would increase.
D) Labor demand would increase and so would labor supply.
E) Labor demand would decrease.

Question 22

Since a long run consists of many short runs,the classical model is

A) incorrect every time we look at output data
B) accurate during the short run
C) paradoxically quite accurate in the long run;however,it is not very accurate in the short run
D) our best guide to fluctuations in the economy
E) paradoxically quite accurate in the short run;however,it is not very accurate in the long run

Question 23

Why is it unlikely that expansions could be explained by a decrease in labor demand in the classical model?

A) It would be hard to say why productivity decreases.
B) Productivity increases are too fast and variable to explain expansions.
C) Productivity tends to improve at a constant and steady rate.
D) Only unexplained spending changes can lead to changes in output and employment,not the other way around.
E) Productivity improvements are rather slow.

Question 24

The classical model is a poor predictor of short-run economic fluctuations in part because it assumes that

A) all workers wish to work
B) government will prevent these fluctuations
C) the labor market always clears
D) the long run is just a series of short-run periods
E) labor demand curve is stable

Question 25

Which of the following could lead to a decrease in worker productivity?

A) An increase in the physical capital stock
B) A decrease in the number of workers
C) A war that destroys an enormous amount of plant and equipment

Question 26

If a new computer program was developed that dramatically improved productivity in most firms,what would happen in the labor market?

A) The real wage would not change but employment would decrease.
B) The real wage would increase and employment would decrease.
C) The real wage would decrease and so would employment.
D) The real wage would decrease and employment would increase.
E) The real wage would increase and so would employment.

Question 27

Which of the following assumptions of the classical model is the best reason we cannot use it to explain short-run economic fluctuations?

A) Markets never clear in the long run.
B) The labor market clears.
C) Prices remain constant and supply and demand adjust.
D) It does not show how an economy recovers from a recession.
E) Government intervention is essential to get markets to clear.

Question 28

The classical model is one of the best that economists have for capturing the rapidly changing nature of the supply and demand for labor and ultimately for explaining recessions.

Question 29

A logical explanation for recessions might be that households have suddenly altered their willingness to work.A problem with this explanation is

A) it is inconsistent with patterns of job searches during recessions
B) the demand for labor rarely shifts
C) the large number of women who entered the labor force in the last four decades
D) it is inconsistent with the classical model
E) the work ethic that is responsible for the decline in American vacations.

Question 30

Which of the following could lead to an increase in worker productivity?

A) A decrease in the physical capital stock
B) An increase in the number of workers
C) A war that destroys an enormous amount of plant and equipment
D) An increase in the physical capital stock
E) A decrease in the human capital stock

Question 31

The classical assumption that labor markets clear makes it difficult for that model to explain recessions.

Question 32

One difficulty with any explanation of economic fluctuations based on a shift in labor supply is that

A) workers' preferences tend to change very quickly
B) labor supply shifts all the time without causing recessions or expansions
C) labor supply is difficult to measure
D) workers' preferences tend to change very slowly
E) the unemployment rate changes during economic fluctuations

Question 33

The classical model does not do a good job of explaining short-run fluctuations in the level of economic activity.

Question 34

The existence of economic fluctuations makes it clear that

A) we should stimulate the economy with tax cuts
B) recessions are caused by shifts in labor supply
C) we should pass a balanced budget amendment to the U.S.Constitution
D) we need active monetary regulation
E) the classical model has a flaw

Question 35

A weakness of the classical model is

A) the quality of its explanations for long-run movements of the economy
B) its confusion between the long and short run
C) its assumption that the labor market always clears
D) its treatment of crowding out in the long run
E) its inadequate attention to the long run

Question 36

When explaining expansions and recessions,the classical model is

A) reliable
B) seriously flawed
C) the favorite explanatory tool of economists
D) overly focused on the labor market
E) sometimes accurate and sometimes not

Question 37

Which of the following could cause a decrease in labor supply?

A) An increased preference for working in the labor market
B) An increase in the number of two-family households
C) An increased preference for enjoying leisure time
D) A trend toward less schooling and toward earlier entrance into the labor market
E) An increase in the retirement age

Question 38

Suppose a report on the internet indicates that job prospects for graduates are bright because full employment is achieved automatically.Economists are likely to

A) be disappointed in the degree of economic understanding possessed by the author of the report
B) be excited about the earning potential of new entrants into the labor market
C) be anxious about inflationary indicators
D) anticipate a recession
E) encourage a tax cut to stimulate the economy

Question 39

In order for the classical model to explain expansions and recessions,which of the following would have to be true?

A) Labor supply could not change.
B) The labor market equilibrium would have to change suddenly and significantly.
C) Labor demand could not change.
D) The labor market equilibrium would have to change slowly.
E) The labor market equilibrium could not move.

Question 40

Suppose a major computer virus struck the nation's computers and all hard drives were erased.What would happen in the labor market?

A) The real wage would increase and so would employment.
B) The real wage would not change,but employment would decrease.
C) The real wage would increase and employment would decrease.
D) The real wage would decrease and so would employment.
E) The real wage would decrease and employment would increase.

Question 41

Of the recessions and expansions from 1950 to 1990,the common events were

A) reactions to war and oil prices
B) tax increases and tax cuts
C) changes in exports
D) Decreases in welfare spending
E) Increases and decreases in health care spending

Question 42

A shock that could trigger a recession is a

A) large increase in oil prices
B) stock market bubble
C) sudden increase in military spending
D) large decrease in oil prices
E) sudden decrease in the interest rate

Question 43

The recession of 1982 was largely caused

A) on purpose by the Federal Reserve's decision to raise interest rates to combat inflation.
B) on purpose by the Federal Reserve's decision to cut interest rates to combat inflation.
C) by accident as a result of the Reagan era tax cuts.
D) by dramatically rising oil prices.
E) on purpose by the Reagan Administration's decision to raise interest rates to combat inflation.

Question 44

Over time the full-employment level of output in the United States has risen steadily.

Question 45

A shock that could trigger a recession is a

A) large military buildup
B) large increase in the price of oil
C) sudden unexplained increase in consumption
D) new technological breakthrough
E) large decrease in the price of oil

Question 46

A shock that could trigger an expansion is a

A) large increase in oil prices
B) financial crisis
C) sudden cutback in military spending
D) large decrease in oil prices
E) sudden increase in the interest rate

Question 47

A spending shock typically involves a dramatic reduction in spending in virtually all sectors of the economy simultaneously.

Question 48

The classical model explains away unemployment as a long-run problem by assuming that

A) coordination in labor markets will occur within an acceptable period of time
B) the economy consists of multiple,coordinated sectors
C) it causes firms to cut back on their long-run production plans
D) what is a problem during one period will seem more like an opportunity for economic growth during another period
E) higher saving will stimulate increased investment

Question 49

Which of the following is a common reaction to an increase in the interest rate?

A) A decline in oil prices
B) A war
C) A decrease in spending on new homes
D) An expansion
E) An increase in military spending

Question 50

The existence of recessions highlights

A) the strengths of the Federal Reserve
B) the need for the "other things equal" assumption
C) our failure to consider differences between the short run and long run
D) how confusing the economy can become
E) the interdependence between production and income

Question 51

The classical model fails to recognize that

A) labor markets always clear
B) managers develop paternalistic feelings toward their workers
C) labor markets do not always clear
D) what was true yesterday might not be true today
E) search costs are low during recessions

Question 52

A shock to the economy is a change in

A) production that only affects a few sectors
B) production that initially affects the whole economy and then one or more sectors
C) spending or production that initially affects one or more sectors and then spreads throughout the whole economy
D) spending that only affects a few sectors
E) spending that initially affects the whole economy and then one or more sectors

Question 53

Which of the following shocks is most likely to cause an expansion?

A) Defense spending falls
B) Defense spending rises
C) Defense spending rises and then falls
D) Oil prices surge upward
E) Oil prices rise slowly

Question 54

Assume the economy is at full employment.Which of the following would you expect if oil prices suddenly decreased?

A) A recession
B) A decrease in employment below its full-employment level
C) An economic contraction
D) A technological breakthrough
E) An increase in employment above its full-employment level

Question 55

The expansion of 2002 and beyond was due,at least in part to

A) interest rate increases.
B) increases in housing wealth.
C) increases in investment spending.
D) large reductions in federal spending.
E) increases in taxes.

Question 56

Which of the following defines a recession?

A) Real GDP is increasing.
B) Real GDP is decreasing.
C) Real GDP is below its full employment level.
D) Unemployment is unusually low.
E) Employment growth is positive.

Question 57

When real GDP is falling,the economy is experiencing

A) a recession.
B) a financial crisis.
C) an expansion.
D) equilibrium.
E) environmental deterioration.

Question 58

The process of moving from disequilibrium to equilibrium in labor markets creates special problems because

A) we are all workers threatened by recession
B) we cannot spend money we have not earned
C) the process is very short
D) the process is especially lengthy
E) negative shocks create economic expansions

Question 59

The reason a shock to one sector can spread to the whole economy is that

A) a decrease in production in one sector leads to an overall decrease in spending
B) firms will need to help bail out other firms that are having troubles
C) an increase in production in one sector will lead to an overall decrease in spending
D) most shocks are not sector-specific but economy-wide
E) workers laid off in the one sector will purchase more goods in another sector

Question 60

Which of the following shocks have caused most of the recessions since 1950?

A) Both c and e
B) Increased government spending
C) Oil price increases
D) The beginning of a war
E) Changes in Federal Reserve Policy

Question 61

In the classical model,an increasing demand for labor will

A) cause an expansion with higher employment and a higher real wage.
B) cause a shortage of labor because the labor market always clears.
C) cause a recession with lower employment and a lower real wage.
D) cause a recession because wages are fixed in the short run.
E) cause an expansion with lower employment and a higher real wage.

Question 62

The classical model predicts the real GDP will always be

A) rising.
B) falling.
C) equal to its full-employment level.
D) constant.
E) equal to its full-taxation level.

Question 63

Which of the following is the main weakness of the classical model?

A) It assumes that the labor supply curve is vertical.
B) It assumes that the labor supply curve is horizontal.
C) It assumes that the labor market clears.
D) It assumes that the labor demand curve is horizontal.
E) It assumes that the labor demand curve is vertical.

Question 64

What do all expansions and recessions since 1950 have in common?

A) Changes in oil prices.
B) Changes in interest rates.
C) Changes in spending.
D) Changes in productivity.
E) None of the above.

Question 65

Which of the following shocks could trigger an expansion?

A) A large cut-back in military spending.
B) A large increase in the price of oil.
C) A sudden decrease in consumption.
D) A large military buildup.
E) A sudden decrease in investment.

Question 66

Which of the following is a common reaction to a decrease in the interest rate?

A) An increase in oil prices.
B) A decrease in stock market prices.
C) An increase in spending on new homes.
D) An increase in military spending.
E) An increase in federal highway spending.

Question 67

Which of the following could explain a leftward shift of the labor demand curve?

A) Firms are unable to sell all the output they produce.
B) Workers have become less productive.
C) Workers have become more productive.
D) Both (a)and (b)are correct.
E) The demand curve for the product that firms sell shifts to the right.

Question 68

Which of the following shocks is most likely to cause an expansion?

A) An upward spike in oil prices.
B) An increase in autonomous consumption spending.
C) A significant decline in business equipment spending.
D) A sudden increase in the interest rate.
E) A significant decline in exports.

Question 69

The assumption that labor markets clear makes it very easy for the classical model to explain expansions.

Question 70

Which of the following occurs during a recession?

A) Output rises,employment rises and unemployment falls.
B) Output falls,employment falls and unemployment rises.
C) Output rises,employment falls and unemployment falls.
D) Output rises,employment rises and unemployment rises.
E) Output rises,employment rises and tax revenues fall..

Question 71

What would a rightward shift of the labor demand curve indicate?

A) Firms want to hire more workers than before at any given wage rate.
B) Households want to supply more hours of work than before at any given wage rate.
C) Firms want to pay a lower wage rate than before at any given level of employment.
D) Households want to supply fewer hours of work than before at any given wage rate.
E) Firms want to hire less workers than before at any given wage rate.

Question 72

The classical model does a poor job of explaining the __________ because it assumes that the __________ always clears.

A) long run;labor market.
B) long run;financial market.
C) short run;labor market.
D) short run;financial market.
E) short run;housing market.

Question 73

The classical model does a good job of explaining short-run fluctuations in the level of economic activity.

Question 74

What is true of both expansions and recessions?

A) There is a poorer than normal match between workers and their jobs.
B) The labor market clears.
C) The economy operates at its potential output.
D) Cyclical unemployment is zero.
E) None of the above.

Question 75

The assumption that labor markets clear makes it very easy for the classical model to explain recessions.

Question 76

Say's law will prevent recessions only if a critical assumption of the classical model holds: That the interest rate adjusts until saving is equal to business and government borrowing.

Question 77

The economic expansion that began in 1991

A) lasted approximately five years.
B) lasted approximately twelve years.
C) lasted approximately nine years.
D) was the longest expansion in U.S.history.
E) was the second longest expansion in U.S.history.

Question 78

Suppose Mike and Renee are the only two people in a very simple economy and that they produce and exchange two goods,soda and pretzels.Which of the following might cause a recession in this simple economy?

A) Mike gets the idea that Renee wants more soda,which Mike produces.
B) Renee gets the idea that Mike wants more pretzels,which she produces.
C) Mike gets the idea that Renee wants less soda,which he produces.
D) Renee gets the idea that Mike wants less soda,which he produces.
E) The production of pretzels being equal to the production of soda.

Question 79

Why is a rightward shift of the labor supply curve difficult to rationalize in the classical model?

A) The labor supply curve is based on firms' preferences.
B) Labor supply is very difficult to measure.
C) The labor supply curve is almost never a known entity.
D) Workers' preferences and therefore labor supply tend to change very slowly.
E) Workers' preferences and therefore labor supply tend to change very quickly.

Question 80

Which of the following occurs during an expansion?

A) Output rises,employment rises and unemployment falls.
B) Output falls,employment rises and unemployment falls.
C) Output rises,employment falls and unemployment falls.
D) Output rises,employment rises and unemployment rises.
E) Output rises,employment rises and tax revenues fall..