11) Which of the following macroeconomic variables is procyclical and leads the business cycle?
A) Business fixed investment
B) Residential investment
C) Nominal interest rates
D) Unemployment
12) Which of the following macroeconomic variables is acyclical?
A) Real interest rates
B) Unemployment
C) Money supply
D) Consumption
13) Real interest rates are
A) procyclical, just like nominal interest rates.
B) acyclical, while nominal interest rates are procyclical.
C) acyclical, just like nominal interest rates.
D) countercyclical, while nominal interest rates are procyclical.
14) Which of the following macroeconomic variables is procyclical and lags the business cycle?
A) Business fixed investment
B) Employment
C) Stock prices
D) Nominal interest rates
15) Which of the following macroeconomic variables would you include in an index of leading
economic indicators?
A) Employment
B) Inflation
C) Real interest rates
D) Residential investment
16) Which of the following is not a leading variable?
A) Inflation
B) Stock prices
C) Average labor productivity
D) Residential investment
17) Which of the following macroeconomic variables would you exclude from an index of
leading economic indicators?
A) Money supply
B) Industrial production
C) Inventory investment
D) Residential investment
18) Which of the following macroeconomic variables could not be used as a leading economic
indicator?
A) Residential investment
B) Employment
C) The money supply
D) Stock prices
19) Industries that are extremely sensitive to the business cycle are the
A) durable goods and service sectors.
B) nondurable goods and service sectors.
C) capital goods and nondurable goods sectors.
D) capital goods and durable goods sectors.
20) You want to invest in a firm whose profits show large fluctuations throughout the business
cycle. Which of the following would you invest in?
A) A corporation that depends heavily on business fixed investment
B) A corporation that depends heavily on consumer services
C) A corporation that depends heavily on consumer nondurables
D) A corporation that depends heavily on government purchases
21) Which of the following macroeconomic variables is countercyclical?
A) Real interest rates
B) Unemployment
C) Money growth
D) Consumption
22) Which of the following is true?
A) Employment and unemployment are both coincident with the business cycle.
B) Employment and unemployment are both procyclical.
C) Employment is procyclical and unemployment is coincident with the business cycle.
D) Employment is procyclical and unemployment is countercyclical.
23) The job finding rate is defined as
A) the probability that someone who has been unemployed for over a year will find a job in the
next month.
B) the probability that someone who is not in the labor force will enter the labor force in the next
month.
C) the probability that someone who is employed will change jobs in the next month.
D) the probability that someone who is unemployed will find a job in the next month.
24) The job finding rate
A) equals 1 minus the job loss rate.
B) remains constant over the business cycle.
C) rises in recessions.
D) rises in expansions.
25) The probability that an employed worker will lose his or her job in the next month is known
as
A) the unemployment rate.
B) the job finding rate.
C) the underemployment rate.
D) the job loss rate.
26) The job loss rate
A) equals 1 minus the job finding rate.
B) remains constant over the business cycle.
C) rises in recessions.
D) rises in expansions.
27) Which of the following statements is true?
A) Both nominal and real interest rates are procyclical and leading.
B) Both nominal and real interest rates are procyclical and lagging.
C) Nominal interest rates are procyclical and real interest rates are countercyclical.
D) Nominal interest rates are procyclical and real interest rates are acyclical.
28) Using the seasonal business cycle as your guide, during which quarter would you be most
likely to expect an increase in your corporation’s sales?
A) The first quarter of the year (January-March)
B) The second quarter of the year (April-June)
C) The third quarter of the year (July-September)
D) The fourth quarter of the year (October-December)
29) Which of the following macroeconomic variables is the most seasonally procyclical?
A) Expenditure on services
B) The unemployment rate
C) Expenditure on durable goods
D) The real wage
30) Which of the following macroeconomic variables does not vary much over the seasons?
A) The nominal money stock
B) The unemployment rate
C) The real wage
D) Average labor productivity
31) Identify the comovement (i.e., direction and timing) of the following variables over a
business cycle: (a) industrial production; (b) unemployment; (c) nominal interest rates; (d)
nominal money supply growth; and (e) investment.
32) What are some of the problems with using the leading indicators to forecast recessions? If
you were a policymaker, would you rely on them?
8.4 Business Cycle Analysis: A Preview
1) What are the two main components of business cycle theories?
A) A description of shocks and a model of how the economy responds to them
B) A model of how people decide to spend and a description of the government’s role in the
economy
C) A model of how equilibrium is reached and a description of the government’s role in the
economy
D) A description of shocks and a description of the government’s role in the economy
2) Economists use the term shocks to mean
A) unexpected government actions that affect the economy.
B) typically unpredictable forces that have major impacts on the economy.
C) sudden rises in oil prices.
D) the business cycle.
3) Wars, new inventions, harvest failures, and changes in government policy are examples of
A) the business cycle.
B) economic models.
C) shocks.
D) opportunity costs.
4) The three main components of the aggregate demand-aggregate supply model include
A) AD, SRAS, LM.
B) SRAS, LRAS, IS.
C) AD, IS, LM.
D) AD, SRAS, LRAS.
5) The AD, SRAS, and LRAS curves each show a relationship between which two economic
variables?
A) The aggregate price level and output
B) The aggregate price level and the interest rate
C) Output and unemployment
D) Output and the interest rate
6) When plotted with the aggregate price level on the vertical axis and output on the horizontal
axis, which of the following curves slopes downward?
A) SRAS
B) AD
C) LRAS
D) None of the above
7) When plotted with the aggregate price level on the vertical axis and output on the horizontal
axis, which of the following curves is vertical?
A) SRAS
B) AD
C) LRAS
D) None of the above
8) When plotted with the aggregate price level on the vertical axis and output on the horizontal
axis, the long-run aggregate supply curve
A) slopes upward.
B) slopes downward.
C) is vertical.
D) is horizontal.
9) When plotted with the aggregate price level on the vertical axis and output on the horizontal
axis, the aggregate demand curve
A) slopes upward.
B) slopes downward.
C) is vertical.
D) is horizontal.
10) A decrease in government spending on the park system would cause
A) the aggregate demand curve to shift to the right.
B) the aggregate demand curve to shift to the left.
C) a movement down and to the right along the aggregate demand curve.
D) a movement up and to the left along the aggregate demand curve.
11) A decline in the stock market, which makes consumers poorer, would cause
A) the aggregate demand curve to shift to the right.
B) the aggregate demand curve to shift to the left.
C) a movement down and to the right along the aggregate demand curve.
D) a movement up and to the left along the aggregate demand curve.
12) In the short run, an increase in export sales would cause output to ________ and the price
level to ________.
A) rise; rise
B) rise; stay constant
C) fall; stay constant
D) fall; rise
13) After a shift in the aggregate demand curve, which variable adjusts to restore general
equilibrium?
A) price level
B) real interest rate
C) consumption spending
D) investment spending
14) In the long run, an increase in consumer spending would cause output to ________ and the
price level to ________.
A) rise; rise
B) rise; stay constant
C) stay constant; stay constant
D) stay constant; rise
15) In the long run, an increase in government purchases of military equipment would cause
output to ________ and the aggregate price level to ________.
A) stay constant; fall
B) fall; fall
C) fall; stay constant
D) stay constant; rise
16) According to classical macroeconomists, prices adjust ________ to shocks, so the
government should ________.
A) slowly; do little
B) rapidly; do little
C) rapidly; fight recessions
D) slowly; fight recessions
17) According to Keynesian macroeconomists, prices adjust ________ to shocks, so the
government should ________.
A) slowly; do little
B) rapidly; do little
C) rapidly; fight recessions
D) slowly; fight recessions
18) In the long run, an increase in productivity would cause output to ________ and the
aggregate price level to ________.
A) fall; rise
B) fall; fall
C) rise; fall
D) rise; rise
19) In the long run, a reduction in labor supply would cause output to ________ and the
aggregate price level to ________.
A) fall; rise
B) fall; fall
C) rise; fall
D) rise; rise
20) The key difference between classical and Keynesian macroeconomists is their differing
beliefs about
A) the slope of the aggregate demand curve.
B) the speed at which prices adjust.
C) the natural rate of unemployment.
D) the full-employment level of output.
21) Suppose labor supply declined. Would this affect the aggregate demand curve or the
aggregate supply curve? What would be the effect on output and the price level?
22) Suppose the economy is initially in long-run equilibrium. For each of the shocks listed
below, explain the short-run effects on output and the price level.
(a) A stock market crash reduces consumers’ wealth.
(b) Businesses decide to hold larger inventories.
(c) The government cuts defense spending.
(d) Foreign countries buy more U.S. goods.
23) Suppose the economy is initially in long-run equilibrium. For each of the shocks listed
below, explain the long-run effects on output and the price level.
(a) Labor supply decreases.
(b) The government shuts down the Bureau of Economic Analysis.
(c) Productivity increases.
24) For each outcome below, tell what type of shift must have taken place in either the aggregate
demand curve or the long-run aggregate supply curve.
(a) In the short run, the price level is unchanged and output rises.
(b) In the long run, the price level declines and output is unchanged.
(c) In the long run, the price level rises and output declines.