Deck 28: The Business Cycle, Inflation, and Deflation

Question 1

The key difference between new classical cycle theory and new Keynesian cycle theory is that the new classical cycle theory believes that ________ while the new Keynesian cycle theory believes that ________.

A)expected changes in aggregate demand change real GDP; expected changes in aggregate demand do not change real GDP
B)only unexpected changes in aggregate demand change real GDP; only expected changes in aggregate demand change real GDP
C)only unexpected changes in aggregate demand change real GDP; both expected and unexpected changes in aggregate demand change real GDP
D)the short-run aggregate supply curve is horizontal; the short-run aggregate supply curve is vertical.
E)expected and unexpected changes in aggregate demand change real GDP; only changes in labour productivity change aggregate demand

Answer 1

C

Question 2

The ________ cycle theory states that only unexpected fluctuations in aggregate demand bring fluctuations in real GDP around potential GDP.

A)new Keynesian
B)new classical
C)Keynesian
D)monetarist
E)real business

Answer 2

B

Question 3

According to ________ theory, a decrease in productivity growth shifts the ________.

A)real business cycle; AD curve rightward
B)Keynesian cycle; SAS curve leftward
C)real business cycle; demand for loanable funds curve leftward
D)Keynesian cycle; SAS curve rightward
E)real business cycle; AD curve leftward

Answer 3

C

Question 4

Both new Keynesian and new classical cycle theories claim that

A)animal spirits can trigger a business cycle.
B)shifts in the SAS curve are the main impulse for a business cycle.
C)unexpected changes in aggregate demand trigger a business cycle.
D)expected changes in the quantity of money can trigger a business cycle.
E)a change in the price of oil is the major cause of a business cycle.

Question 5

Figure 28.1.1
Use the figure below to answer the following questions.

Refer to Figure 28.1.1. Suppose the economy moves from point A to point C. According to the monetarist theory of the business cycle, what could have caused this movement?

A)an increase in the money wage rate
B)an increase in the growth rate of the quantity of money
C)a decrease in the growth rate of the quantity of money
D)an increase in uncertainty
E)animal spirits

Question 6

Which of the following is not a mainstream theory of the business cycle?

A)Keynesian cycle theory
B)monetarist cycle theory
C)new Keynesian cycle theory
D)real business cycle theory
E)new classical cycle theory

Question 7

In the Keynesian business cycle theory, business cycles begin with a change in

A)inflation expectations.
B)government expenditure.
C)business confidence.
D)monetary policy.
E)the money wage rate.

Question 8

In real business cycle theory, a decrease in productivity leads to all of the following events EXCEPT

A)a decrease in the demand for labour.
B)a decrease in the demand for loanable funds.
C)a rise in the real wage rate.
D)a fall in the real interest rate.
E)a decrease in the supply of labour.

Question 9

________ states that the main source of economic fluctuations is fluctuations in business confidence.

A)Real business cycle theory
B)New classical cycle theory
C)Keynesian cycle theory
D)Monetarist cycle theory
E)None of the above

Question 10

"Intertemporal substitution" in real business cycle theory refers to the change in the ________ as a result of the change in the real interest rate.

A)personal tax rate
B)demand for loanable funds
C)supply of labour
D)consumer demand for goods
E)demand for labour

Question 11

The new classical theory argues that the primary factor leading to business cycles is

A)expected fluctuations in aggregate demand.
B)expected fluctuations in short-run aggregate supply.
C)unexpected fluctuations in aggregate demand.
D)unexpected fluctuations in short-run aggregate supply.
E)unexpected fluctuations in long-run aggregate supply.

Question 12

Which business cycle theory emphasizes that, because of previously negotiated wage agreements, both expected and unexpected fluctuations in aggregate demand can change real GDP?

A)the new classical cycle theory
B)the new Keynesian cycle theory
C)the monetarist cycle theory
D)the Keynesian cycle theory
E)the real business cycle theory

Question 13

Which of the following are business cycle theories that regard fluctuations in aggregate demand as the factor that creates business cycles?
I. Keynesian cycle theory
II. real business cycle theory
III. monetarist cycle theory

A)I only
B)I and II
C)I and III
D)I, II and III
E)II and III

Question 14

According to the real business cycle theory, what effects follow from a change in productivity?
I. Investment demand changes.
II. The demand for labour changes.
III. Government expenditure changes.

A)I
B)I and II
C)I and III
D)II and III
E)I, II and III

Question 15

In new classical cycle theory, ________ bring fluctuations in real GDP around potential GDP.

A)unexpected changes in aggregate demand
B)expected changes in aggregate demand
C)fluctuations in money growth with rigid wages
D)fluctuations in investment coupled with rigid wages
E)expected changes in labour productivity

Question 16

Figure 28.1.1
Use the figure below to answer the following questions.

Refer to Figure 28.1.1. Suppose the economy moves from point D to point B. According to the monetarist theory of the business cycle, what could have caused this movement?

A)a decrease in the money wage rate
B)an increase in uncertainty about future sales and profits
C)an increase in the growth rate of the quantity of money
D)an increase in the money wage rate
E)a decrease in exports

Question 17

The key ripple effect in real business cycle theory is the ________ decision and it depends on the ________.

A)when-to-invest; real interest rate
B)when-to-work; real interest rate
C)what-to-save; nominal interest rate
D)where-to-work; real wage rate
E)when-to-work; rigidity of the money wage rate

Question 18

The factor leading to business cycles in the ________ cycle theory is unexpected fluctuations in aggregate demand while in the ________ cycle theory both unexpected and expected fluctuations in aggregate demand are factors that lead to business cycles.

A)new classical; monetarist
B)new classical; new Keynesian
C)new Keynesian; Keynesian
D)monetarist; new Keynesian
E)real business; monetarist

Question 19

New Keynesian economists believe that ________ is influenced by ________.

A)yesterday's money wage rate; today's rational expectations of the money wage
B)today's money wage rate; yesterday's rational expectations of the price level
C)yesterday's rational expectations of the price level; today's money wage rate
D)today's money wage rate; today's rational expectations of the price level
E)today's money wage rate; animal spirits

Question 20

According to ________, the business cycle is the result of aggregate demand growing at a fluctuating rate.

A)the Keynesian cycle theory only
B)only the Keynesian and monetarist cycle theories
C)the Keynesian, monetarist, and real business cycle theories
D)the Keynesian, monetarist, and new classical cycle theories
E)real business cycle theory

Question 21

Suppose that in response to a decrease in real interest rates, a person decides to reduce his supply of labour today and increase it in the future. This behaviour is most consistent with the

A)new classical cycle theory.
B)Keynesian cycle theory.
C)new Keynesian cycle theory.
D)real business cycle theory.
E)monetarist cycle theory.

Question 22

Stagflation occurs when the economy experiences both a

A)rising price level and increasing real GDP.
B)falling price level and decreasing real GDP.
C)rising price level and decreasing real GDP.
D)falling price level and increasing real GDP.
E)low exports and low imports.

Question 23

According to the real business cycle theory, during a recession the demand for labour ________ and the supply of labour ________.

A)increases; decreases
B)decreases; does not change
C)does not change; decreases
D)decreases; decreases
E)decreases; increases

Question 24

According to mainstream business cycle theory, ________ grows at a steady rate and ________ grows at a fluctuating rate.

A)aggregate demand; long-run aggregate supply
B)potential GDP; aggregate demand
C)potential GDP; short-run aggregate supply
D)short-run aggregate supply; long-run aggregate supply
E)short-run aggregate supply; aggregate demand

Question 25

In real business cycle theory, ________ are the main source of economic fluctuations.

A)unexpected changes in government expenditure
B)random fluctuations in investment
C)random fluctuations in productivity
D)unexpected changes in the full-employment quantity of labour
E)changes in the quantity of money

Question 26

In real business cycle theory, the supply of labour

A)increases if the real interest rate falls.
B)increases if the real interest rate rises.
C)increases if the demand for labour decreases.
D)is not influenced by changes in the real interest rate.
E)increases if the demand for loanable funds decreases.

Question 27

According to real business cycle theory, workers' decisions to work now versus later depend on

A)the real wage rate today but not the real wage rate in the future.
B)the money wage rate.
C)the real interest rate.
D)labour productivity.
E)none of the above

Question 28

At full employment, an increase in the quantity of money (ceteris paribus)can start

A)demand-pull inflation, as can an increase in government expenditure.
B)demand-pull inflation, but an increase in government expenditure cannot.
C)cost-push inflation, as can an increase in government expenditure.
D)cost-push inflation, but an increase in government expenditure cannot.
E)demand-pull and a cost-push inflation, as can an increase in government expenditure.

Question 29

Which one of the following can start a demand-pull inflation?

A)a sharp increase in the price of oil
B)higher wages negotiated by unions
C)a cut in the interest rate
D)a decrease in investment as a result of a decrease in expected future profits
E)a decrease in government expenditure on goods and services

Question 30

According to real business cycle theory, a fall in the real interest rate ________ the supply of labour and ________ employment.

A)decreases; decreases
B)increases; increases
C)decreases; increases
D)increases; decreases
E)does not change; does not change

Question 31

In real business cycle theory, the supply of labour

A)increases if the nominal interest rate rises.
B)is independent of the real interest rate.
C)decreases if the real interest rate rises.
D)decreases if the real interest rate falls.
E)decreases if the real wage rate decreases.

Question 32

Suppose that the business cycle in Canada is best described by RBC theory. An advance in technology increases productivity. The when-to-work decision depends on the real interest rate. The ________ the real interest rate, other things remaining the same, the ________ is the supply of labour today. RBC theorists believe the when-to-work effect is ________.

A)lower; smaller; small
B)higher; smaller; small
C)higher; larger; large
D)lower; larger; large
E)higher; larger; small

Question 33

Suppose that a severe shock that decreases the demand for loanable funds hits Canada. Which of the following can we expect to occur according to real business cycle theory?

A)The real interest rate will fall.
B)People will work fewer hours.
C)The real wage rate will fall.
D)The demand for loanable funds will decrease.
E)All of the above are true.

Question 34

According to real business cycle theory, if the Bank of Canada increases the quantity of money when real GDP decreases, real GDP

A)will increase but only temporarily.
B)will increase permanently.
C)and the price level will both be unaffected.
D)will be unaffected, but the price level will rise.
E)will decrease due to the inefficiencies introduced into production as a result.

Question 35

Which of the following would cause the aggregate demand curve to keep shifting rightward year after year?

A)a one-time tax cut
B)a one-time increase in government expenditures on goods and services
C)inflation
D)excess wage demands
E)a persistent increase in the quantity of money

Question 36

Suppose the economy is in long-run equilibrium when the price of oil rises. Which one of the following is not a short-run effect of this situation?

A)an increase in real GDP above long-run real GDP
B)an increase in the price level
C)a decrease in real GDP
D)an increase in unemployment
E)a decrease in consumer spending

Question 37

Demand-pull inflation can start

A)aggregate demand increases.
B)aggregate supply decreases.
C)input costs rise.
D)people incorrectly forecasting inflation.
E)unemployment that is above the natural rate.

Question 38

Inflation that starts because aggregate demand increases is called

A)cost-push inflation.
B)demand-pull inflation.
C)anticipated inflation.
D)unanticipated inflation.
E)political inflation.

Question 39

According to real business cycle theory, an increase in productivity ________ the demand for loanable funds, ________ the demand for labour, and ________ the supply of labour. The real interest rate will ________.

A)increases; increases; does not change; fall
B)increases; increases; does not change; rise
C)decreases; decreases; decreases; fall
D)increases; increases; increases; rise
E)increases; increases; increases; fall

Question 40

Real business cycle theorists believe that the intertemporal substitution effect ________. Many other economists believe that the intertemporal substitution effect ________.

A)is large; is negligible
B)is negligible; is large
C)occurs in the money market; occurs in the labour market
D)occurs in the labour market; occurs in the money market
E)none of the above

Question 41

Figure 28.2.2
Use the figure below to answer the following questions.

Refer to Figure 28.2.2. The economy is in long-run equilibrium. If the short-run aggregate supply curve shifts leftward from SAS₀ to SAS₁, ceteris paribus, then people expect

A)a 10 percent inflation.
B)the price level to rise to 110.
C)the real wage rate to fall by 10 percent.
D)a real GDP decrease of $50 billion.
E)a 15 percent inflation.

Question 42

An economy is in long-run equilibrium when aggregate supply unexpectedly decreases. Then real GDP (ceteris paribus)will be

A)above potential GDP.
B)below potential GDP.
C)equal to potential GDP.
D)either above, below, or equal to potential GDP depending on the position of the aggregate demand curve.
E)either above or equal to potential GDP depending on the position of the aggregate demand curve.

Question 43

Figure 28.2.2
Use the figure below to answer the following questions.

Refer to Figure 28.2.2. If the short-run aggregate supply curve does not shift, and remains at SAS₀, then the expected inflation rate is

A)zero.
B)10 percent.
C)15 percent.
D)5 percent.
E)-10 percent.

Question 44

Figure 28.2.2
Use the figure below to answer the following questions.

Refer to Figure 28.2.2. Complete the following sentence. The figure illustrates

A)cost-push inflation.
B)demand-pull inflation.
C)a cost-push inflation spiral.
D)a one-time rise in the price level.
E)a deflation.

Question 45

Stagflation can result from

A)a leftward shift of the demand curve.
B)a rightward shift of the demand curve.
C)a leftward shift of the short-run aggregate supply curve.
D)a rightward shift of the short-run aggregate supply curve.
E)a rightward shift of the long-run aggregate supply curve.

Question 46

A forecast based on all the relevant information is

A)an adaptive expectation.
B)a future expectation.
C)a rational expectation.
D)always a correct expectation.
E)a perfect forecast.

Question 47

Figure 28.2.2
Use the figure below to answer the following questions.

Refer to Figure 28.2.2. The economy is in long-run equilibrium. If the short-run aggregate supply curve shifts leftward from SAS₀ to SAS₁, ceteris paribus, then the actual inflation rate

A)is greater than the expected inflation rate.
B)is less than the expected inflation rate.
C)is the same as the expected inflation rate.
D)cannot be determined without more information.
E)depends on what happens to wage settlements.

Question 48

Figure 28.2.3
Use the figure below to answer the following questions.

Refer to Figure 28.2.3. Assume that the figure illustrates an economy initially in equilibrium at the intersection of the SAS₀ curve and the AD₀ curve. If the aggregate demand curve is correctly expected to shift to AD₁, new equilibrium real GDP is ________ and the new equilibrium price level is ________.

A)$380 billion; 125
B)$500 billion; 150
C)$500 billion; 100
D)$620 billion; 125
E)$500 billion; 125

Question 49

Figure 28.2.1
Use the figure below to answer the following question.

Refer to Figure 28.2.1. The figure illustrates an economy initially in equilibrium at the intersection of the SAS₀ curve and the AD₀ curve. Which of the following shifts the short-run aggregate supply curve from SAS₀ to SAS₁?

A)an increase in the price of oil
B)an increase in the price level
C)an increase in the marginal product of labour
D)an increase in the demand for money
E)a decrease in the money wage rate

Question 50

A cost-price inflation spiral results if the policy response to stagflation is to keep

A)decreasing aggregate demand.
B)decreasing short-run aggregate supply.
C)increasing aggregate demand.
D)increasing short-run aggregate supply.
E)doing nothing.

Question 51

Figure 28.2.2
Use the figure below to answer the following questions.

Refer to Figure 28.2.2. Consider the market for labour as the short-run aggregate supply curve shifts leftward from SAS₀ to SAS₁. This shift could have been the result of an agreement between workers and employers for a

A)10 percent decrease in the money wage rate.
B)10 percent increase in the money wage rate.
C)15 percent decrease in the money wage rate.
D)15 percent increase in the money wage rate.
E)10 percent increase in the real wage rate.

Question 52

Figure 28.2.3
Use the figure below to answer the following questions.

Refer to Figure 28.2.3. Assume that the figure illustrates an economy initially in equilibrium at the intersection of the SAS₀ curve and the AD₀ curve. If the aggregate demand curve is expected to remain at AD₀ but shifts to AD₁, the new equilibrium real GDP is ________ and the new equilibrium price level is ________.

A)$380 billion; 125
B)$500 billion; 150
C)$500 billion; 100
D)$620 billion; 125
E)$500 billion; 125

Question 53

An increase in the price level due to an increase in the price of oil

A)creates stagflation in the short-run and will trigger a cost-push inflation.
B)creates stagflation in the short-run and may trigger off a cost-push inflation.
C)increases output above potential GDP.
D)leads to an increase in the money wage rate.
E)leads to a decrease in the money wage rate.

Question 54

Suppose the quantity of money is expected to remain unchanged but it actually increases. The price level

A)rises and real GDP increases.
B)rises and real GDP decreases.
C)falls and real GDP increases.
D)falls and real GDP decreases.
E)rises and real GDP stays the same.

Question 55

Figure 28.2.3
Use the figure below to answer the following questions.

Refer to Figure 28.2.3. Assume that the figure illustrates an economy initially in equilibrium at the intersection of the SAS₀ curve and the AD₀ curve. If the aggregate demand curve is expected to shift to AD₁ but remains at AD₀, the new equilibrium real GDP is ________ and the new equilibrium price level is ________.

A)$380 billion; 100
B)$500 billion; 150
C)$500 billion; 100
D)$620 billion; 125
E)$380 billion; 125

Question 56

Figure 28.2.2
Use the figure below to answer the following questions.

Refer to Figure 28.2.2. If SAS shifts from SAS₀ to SAS₁, then

A)inflation is expected to be 10 percent.
B)inflation will be 10 percent.
C)potential GDP will decrease
D)unemployment will fall.
E)deflation occurs.

Question 57

A correctly anticipated increase in the quantity of money, in an economy with an unchanging long-run aggregate supply, will result in

A)a rise in the price level and an increase in real GDP.
B)a rise in the price level and a decrease in real GDP.
C)a proportional rise in the price level and no change in real GDP.
D)no change in the price level and an increase in real GDP.
E)no change in the price level and no change in real GDP.

Question 58

Figure 28.2.4
Use the figure below to answer the following question.

Refer to Figure 28.2.4. The figure illustrates an economy initially in equilibrium at point A. If the quantity of money is expected to increase by 50 percent, what is the rational expectation of the price level?

A)100
B)120
C)130
D)150
E)We cannot tell without more information on wage negotiations.

Question 59

Cost-push inflation can result from an initial

A)decrease in personal income taxes.
B)increase in personal income taxes.
C)increase in government expenditure.
D)increase in the money wage rate.
E)increase in transfer payments.

Question 60

Figure 28.2.2
Use the figure below to answer the following questions.

Refer to Figure 28.2.2. The vertical distance between SAS₀ and SAS₁ represents the

A)actual inflation rate.
B)expected increase in real GDP.
C)actual decrease in real GDP.
D)expected inflation rate.
E)expected decrease in the real wage rate.

Question 61

Suppose that the money prices of raw materials rise. With no action by the Bank of Canada, I. the aggregate demand curve shifts rightward and the price level rises.
II. the aggregate demand curve shifts rightward and the aggregate supply curve shifts leftward.
III. the initial outcome is lower employment and a rise in the price level.

A)I only
B)II only
C)III only
D)I and II only
E)I, II, and III

Question 62

An unanticipated deflation does all of the following except

A)redistributes income.
B)redistributes wealth.
C)lowers real GDP.
D)lowers employment.
E)decreases the real wages of workers with long-term wage contracts.

Question 63

Suppose OPEC unexpectedly collapses, which leads to a fall in the price of oil. As a result, the price level

A)rises, and real GDP increases.
B)rises, and real GDP decreases.
C)falls, and real GDP increases.
D)falls, and real GDP decreases.
E)rises, and real GDP remains the same.

Question 64

Fact 28.2.1 High Food and Energy Prices Here to Stay
On top of rising energy prices, a severe drought, bad harvests, and a poor monsoon season in Asia have sent grain prices soaring. Globally, this is the third major food price shock in five years.
Source: The Telegraph, August 29, 2012
Consider Fact 28.2.1. The news clip is describing ________ inflation.

A)cost-push
B)cost-pull
C)demand-pull
D)demand-push
E)expected

Question 65

The economy starts out at a full-employment equilibrium. Some events then occur that generate a demand-pull inflation. All of the following events except an increase in ________ might start a demand-pull inflation.

A)the money wage rate
B)exports
C)the quantity of money
D)government expenditure
E)transfer payments

Question 66

Stagflation is the result of

A)a decrease in aggregate demand.
B)a decrease in short-run aggregate supply.
C)an increase in aggregate demand.
D)an increase in short-run aggregate supply.
E)a decrease in short-run aggregate supply combined with a simultaneous increase in aggregate supply.

Question 67

Choose the statement that is incorrect.

A)In a deflation, the inflation rate is positive but decreasing in consequent years.
B)In a deflation, the price level persistently falls.
C)A one-time fall in the price level occurs when there is an increase in capital that increases potential GDP.
D)A one-time fall in the price level occurs either because aggregate demand decreases or because short-run aggregate supply increases.
E)A one-time fall in the price level is not a deflation.

Question 68

Suppose aggregate demand increases by more than expected. Which of the following does not occur?

A)Real GDP is greater than potential GDP.
B)The price level rises.
C)Unemployment falls.
D)The natural unemployment rate does not change.
E)Stagflation occurs.

Question 69

A correctly anticipated increase in the quantity of money

A)increases the price level with no change in real GDP.
B)does not change the price level or real GDP.
C)does not change the price level but increases real GDP.
D)increases the price level and increases real GDP.
E)does not change the price level but decreases real GDP.

Question 70

When the price level is rising and, simultaneously, real GDP is decreasing,

A)the natural unemployment rate is rising.
B)the natural unemployment rate is falling.
C)stagflation is occurring.
D)the economy is experiencing an expansionary gap.
E)potential GDP is decreasing.

Question 71

Figure 28.2.6
Use the figure below to answer the following questions.

Refer to Figure 28.2.6. Starting at point A, the initial effect of a cost-push inflation is a move to point ________. As a cost-push inflation spiral proceeds, it follows the path ________.

A)C; B, H, G, I
B)C; E, H, I
C)B; E, G, I
D)E; I
E)B; D, G, I

Question 72

Figure 28.2.6
Use the figure below to answer the following questions.

Refer to Figure 28.2.6. Starting at point A, the initial effect of a demand-pull inflation is a move to point ________. As a demand-pull inflation spiral proceeds, it follows the path ________.

A)E; I
B)C; E, H, I
C)C; B, H, G, I
D)B; E, G, I
E)C; F, H, I

Question 73

Deflation is

A)a one-time fall in the price level.
B)a persistent and ongoing falling price level.
C)always accompanied by an increase in the natural unemployment rate.
D)always accompanied by a decrease in the natural unemployment rate.
E)unknown in the twenty-first century.

Question 74

A forecast that is based on all the relevant information available is

A)usually no better than a random guess given that the future bears many uncertainties.
B)usually accurate.
C)called a rational expectation.
D)useful only in the prediction of cost-push inflation.
E)useful only in the prediction of demand-pull inflation.

Question 75

Choose the statement that is incorrect.

A)An economy experiences deflation when it has a persistently falling price level.
B)During a period of deflation, the inflation rate is negative.
C)A one-time fall in the price level is not deflation.
D)The price level falls if aggregate supply increases at a persistently slower rate than aggregate demand.
E)Deflation can end if the central bank ensures that the quantity of money grows at the target inflation rate plus the growth rate of potential GDP minus the growth rate of the velocity of circulation.

Question 76

Deflation occurs when

A)aggregate demand increases at a persistently slower rate than aggregate supply.
B)aggregate demand increases at a persistently faster rate than aggregate supply.
C)the growth rate of potential GDP slows.
D)the quantity of money remains constant.
E)the quantity theory of money is disregarded.

Question 77

Along the short-run Phillips curve, everything remaining the same, the higher the

A)unemployment rate, the lower the inflation rate.
B)price level, the lower the inflation rate.
C)money wage rate, the lower is the unemployment rate.
D)quantity of money, the lower the unemployment rate.
E)growth rate of the quantity of money, the higher the inflation rate.

Question 78

Deflation ends with

A)an increase in the growth rate of the money stock.
B)a one-time increase in the quantity of money.
C)a rise in the interest rate.
D)a decrease in the growth rate of the money stock.
E)a one-time decrease in the quantity of money.

Question 79

The economy starts out at a full-employment equilibrium. Some events then occur that generate a cost-push inflation. Which of the following events might start a cost-push inflation?

A)a decrease in exports
B)an increase in the quantity of money
C)a decrease in government expenditure
D)an increase in the money wage rate or an increase in the money prices of raw materials
E)an increase in taxes

Question 80

Figure 28.2.5
Use the figure below to answer the following question.

Refer to Figure 28.2.5. Which one of the graphs in the figure represents an economy experiencing stagflation?

A)(a)only
B)(b)only
C)(c)only
D)(d)only
E)Both (a)and (c)