6) A variable that tends to move later than aggregate economic activity is called
A) a leading variable.
B) a coincident variable.
C) a lagging variable.
D) an acyclical variable.
7) Lagging variables are aggregate economic variables that
A) reach a peak after leading variables but before coincident variables reach a peak.
B) reach a peak after coincident variables reach a peak.
C) reach a peak two or more years after aggregate economic activity reaches a peak.
D) are insensitive to business cycles.
8) The CFNAI is a
A) leading index based on variables released with different frequencies.
B) coincident index based on variables released with different frequencies.
C) leading index based on 85 monthly variables.
D) coincident index based on 85 monthly variables.
9) The ADS Business Conditions Index is a
A) leading index based on variables released with different frequencies.
B) coincident index based on variables released with different frequencies.
C) leading index based on 85 monthly variables.
D) coincident index based on 85 monthly variables.
10) Diebold and Rudebusch showed that the composite index of leading indicators did not
improve forecasts of industrial production because
A) the index is not produced in a timely manner.
B) the government manipulates the index so it never predicts a recession.
C) the index is not designed for forecasting.
D) data on the components of the index are revised.
11) Which of the following macroeconomic variables is procyclical and coincident with the
business cycle?
A) Residential investment
B) Nominal interest rates
C) Industrial production
D) Unemployment
12) 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
13) Which of the following macroeconomic variables is acyclical?
A) Real interest rates
B) Unemployment
C) Money supply
D) Consumption
14) 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.
15) 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
16) 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
17) Which of the following is not a leading variable?
A) Inflation
B) Stock prices
C) Average labor productivity
D) Residential investment
18) 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
19) 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
20) 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.
21) 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
22) You want to invest in a firm whose profits show small 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 residential investment
C) A corporation that depends heavily on consumer nondurables
D) A corporation that depends heavily on consumer durables
23) Which of the following macroeconomic variables is countercyclical?
A) Real interest rates
B) Unemployment
C) Money growth
D) Consumption
24) 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.
25) 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.
26) 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.
27) 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.
28) 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.
29) 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.
30) 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)
31) 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
32) 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
33) 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.
34) 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) An increase in consumer spending caused by an increase in consumer confidence would
cause
A) the aggregate demand curve to shift up and to the right.
B) the aggregate demand curve to shift down and 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 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.
12) 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.
13) 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
14) 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
15) 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
16) 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
17) 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
18) 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
19) 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
20) 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
21) 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.
22) 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?
23) 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.
24) 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.
25) 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.