Banking Chapter 22 1 If an economy is initially at a state of long-run equilibrium, the short-run effect(s) from a decrease in aggregate demand will include

Chapter 22 – Understanding Business Cycle Fluctuations

Multiple Choice Questions

1. The period 1974-1975 is somewhat unique in U.S. economic history due to the fact that:

A. The output was growing rapidly and the inflation rate was falling

2. Focusing on the last fifty years in U.S. history, one would say that the number of recessions

has:

D. Decreased but their duration has increased

Chapter 22 – Understanding Business Cycle Fluctuations

3. A “shock” is something that creates a shift in:

A. The demand curve only

4. Permanent declines in inflation such as those seen in Chile and Sweden must have been a

result of:

D. A change to targeting interest rates instead of inflation rates

5. Which of the following statements is incorrect?

A. A fall in the central bank’s target inflation rate shifts the monetary policy reaction curve to

the left

Chapter 22 – Understanding Business Cycle Fluctuations

6. A reduction in the central bank’s inflation target shifts the dynamic aggregate demand curve

to the left resulting in:

A. Lower current output and higher inflation

7. A reduction in the central bank’s inflation target will result in:

D. The long-run aggregate supply curve having an upward slope

8. If an economy is initially at a state of long-run equilibrium, the short-run effect(s) from a

decrease in aggregate demand will include:

Chapter 22 – Understanding Business Cycle Fluctuations

9. An increase in aggregate demand will have the following effect on potential output:

A. Potential output will increase

10. An increase in aggregate demand with no adjustment in monetary policy will result in:

A. An increase in potential output and higher inflation

11. If monetary policymakers do not want an increase in government purchases, which

increases aggregate demand, to cause an increase in inflation, they would:

A. Shift the monetary policy reaction curve to the right, raising inflation at every real interest

rate

Chapter 22 – Understanding Business Cycle Fluctuations

12. Without a change in target inflation, anything that shifts the aggregate demand curve to

the right will cause:

D. A decrease in inflation in the long run

13. If monetary policymakers do not change their inflation target and aggregate demand shifts

left:

D. It will result in a permanent reduction in inflation

14. During the Vietnam War, monetary policy officials reacted to the increases in aggregate

demand resulting from military expenditures by:

D. Keeping the same inflation target and raising the real interest rates

Chapter 22 – Understanding Business Cycle Fluctuations

15. The 2008 and 2009 tax cuts and the increase in government spending that occurred at the

same time did not have the same inflationary impact as the similar policy in the 1960s

because:

A. The fiscal stimulus came at a time when the economy was weakening due to other factors

16. If inflation increases, this could be illustrated as a:

D. Movement down along the short-run aggregate supply curve

17. Which of the following would be classified as a negative supply shock?

D. An increase in demand for exports

Chapter 22 – Understanding Business Cycle Fluctuations

18. Which of the following would be classified as a negative supply shock?

D. Either an increase in the price of oil or an increase in government purchases

19. An increase in the price of oil should cause the short-run aggregate supply curve to:

A. Shift to the right

20. An increase in the price of oil should:

A. Shift the dynamic aggregate demand curve to the right

Chapter 22 – Understanding Business Cycle Fluctuations

21. Negative supply shocks cause shifts in:

D. The long-run supply curve

22. Stagflation is a term that usually describes an economy experiencing:

A. Low inflation.

23. Which of the following would shift the short-run aggregate supply curve to the right?

D. An increase in payroll taxes

Chapter 22 – Understanding Business Cycle Fluctuations

24. Stagflation occurs when:

D. The inflation rate increases and current output increases

25. An increase in the rate of inflation:

A. Can only result from increases in aggregate demand

26. An inflation shock that shifts the short-run aggregate supply curve upward means the

economy’s potential level of output will:

D. Decrease only if monetary policymakers do not respond

Chapter 22 – Understanding Business Cycle Fluctuations

27. Which of the following statements is most correct?

A. A recession is officially defined as two consecutive quarters where the real growth rate is

negative

28. “Official” recessions in the United States are declared by:

A. The Federal Reserve

D. Higher rates of inflation.

Chapter 22 – Understanding Business Cycle Fluctuations

30. Which of the following is not correct with regard to the definition of a recession as used

by the NBER?

D. A recession is characterized by lower levels of economic activity

31. According to the NBER, a severe decline in economic activity that lasted less than two

quarters:

D. Would immediately be called a recession

32. Business cycles vary in:

A. The length of recessions only

Chapter 22 – Understanding Business Cycle Fluctuations

33. A review of economic data suggests that:

A. Expansions are shorter than recessions

34. The longest recession since the 1940’s began in:

A. 1952

35. Stabilization policy refers to the use of:

A. Only fiscal policy

Chapter 22 – Understanding Business Cycle Fluctuations

36. Policymakers can stabilize the economy by shifting:

D. Neither the short-run aggregate supply curve nor the dynamic aggregate supply curve

D. Shifts in the monetary policy reaction function used to stabilize the economy shift the

short-run aggregate supply curve

38. If consumer and business sentiment were to increase dramatically, causing an

expansionary gap:

A. Monetary policymakers could stabilize the economy by shifting their monetary policy

reaction curve to the right

Chapter 22 – Understanding Business Cycle Fluctuations

39. What tool is available to monetary policymakers to shift the short-run aggregate supply

curve to the left following a positive inflation shock?

A. A rightward shift of the monetary policy reaction curve

40. Suppose that consumer and business confidence fall. What is the ultimate outcome for the

economy if monetary policymakers respond to keep inflation on an unchanged target?

D. If monetary policymakers respond, output would remain close to potential output but

inflation would still rise despite their actions

41. In practice, it is difficult to keep inflation and output from fluctuating when aggregate

expenditures change because:

Chapter 22 – Understanding Business Cycle Fluctuations

42. Unemployment insurance and the proportional nature of the tax system are examples of:

D. Expansionary fiscal policy

43. The dynamic aggregate demand curve shifts as a result of:

D. Fiscal policy but only when it’s used in conjunction with monetary policy

44. Tax cuts would have the same affect on the dynamic aggregate demand curve as:

Chapter 22 – Understanding Business Cycle Fluctuations

45. Comparing monetary and fiscal policy:

A. Fiscal policy has an advantage because it is faster to implement than monetary policy

46. Fiscal policy suffers from the problem of:

A. Being formulated and implemented by politicians

47. Monetary policy has the following advantage(s) over fiscal policy:

A. It is less influenced by politics

Chapter 22 – Understanding Business Cycle Fluctuations

22–17

48. Monetary policymakers can take advantage of the impact that positive inflation shocks

have on output by shifting the:

D. Short-run aggregate supply curve to the right

49. If a positive inflation shock occurs and monetary policymakers do not change the inflation

target:

D. Output will return to potential output and but inflation will exceed the inflation target

D. Output never decreased and inflation rose only slightly

Chapter 22 – Understanding Business Cycle Fluctuations

51. During the Great Moderation experienced in the United States during the 1990s the

volatility of inflation and growth:

D. Disappeared.

52. Most economists attribute the Great Moderation experienced in the United States during

the 1990s mainly to:

A. Good fortune

53. Possible explanations that have been offered for the Great Moderation experienced in the

United States during the 1990s include all of the following except:

Chapter 22 – Understanding Business Cycle Fluctuations

54. An increase in potential output will result in:

A. A temporary expansionary gap

55. Higher potential output levels:

A. Put upward pressure on real interest rates

56. Increases in potential output shift:

A. The long-run aggregate supply curve

Chapter 22 – Understanding Business Cycle Fluctuations

57. Disinflation occurs when:

A. The inflation rate is negative

58. Opportunistic disinflation occurs when policymakers:

D. All of the answers given are correct

59. The U.S. economy has likely experienced:

D. None of the answers provided is correct