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.
b. both the output and the inflation rate were falling.
c. output was falling yet the inflation rate rose dramatically.
d. output and the inflation rate were both rising.
2. A “shock” is something that creates a shift in:
a. the demand curve only.
b. the supply curve only.
c. either the demand curve or the supply curve.
d. both the demand curve and the supply curve at the same time.
3. Permanent declines in inflation such as those seen in Chile and Sweden must have been a
result of:
a. an increase in the central bank’s inflation target.
b. a decrease in the central bank’s inflation target.
c. less independence for their central banks.
d. a change to targeting interest rates instead of inflation rates.
4. 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.
b. A decrease in the central bank’s inflation target raises the real interest rate policymakers set
at each level of inflation.
c. Shifts in the monetary policy reaction curve shift the dynamic aggregate demand curve in
the same direction.
d. A fall in the central bank’s target inflation rate causes the monetary policy reaction curve
to flatten.
5. 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.
b. higher current output and higher inflation.
c. lower current output and lower
inflati
on.
d. higher current output and lower inflation.
6. A reduction in the central bank’s inflation target will result in:
a. an increase in potential output.
b. no change in potential output.
c. a decrease in potential output.
d. the long-run aggregate supply curve having an upward slope.
7. An increase in aggregate demand will have the following effect on potential output:
a. potential output will increase.
b. potential output will decrease.
c. potential output will increase at first and then decrease.
d. there won’t be a change in potential output from an increase in aggregate demand.
8. An increase in aggregate demand with no adjustment in monetary policy will result in:
a. an increase in potential output and higher inflation.
b. a decrease in potential output and higher inflation.
c. no change in potential output but higher inflation.
d. no change in inflation.
9. 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.
b. do nothing and let the economy’s self-correcting mechanism work.
c. shift the monetary policy reaction function left, increasing the real interest rate at every rate of
inflation.
d. increase the growth rate of money.
10. Without a change in target inflation, anything that shifts the aggregate demand curve to
the right will cause:
a. a temporary increase in output.
b. a permanent reduction in inflation.
c. a temporary decrease in inflation.
d. an increase in output in the long run.
11. If monetary policymakers do not change their inflation target and aggregate demand
shifts left:
a. there will be a temporary decrease in output.
b. potential output will decrease.
c. there will be an increase in inflation in the long run.
d. it will result in a permanent reduction in inflation.
12. During the Vietnam War, monetary policy officials reacted to the increases in
aggregate demand resulting from military expenditures by:
a. not shifting the monetary policy reaction function.
b. dramatically slowing money growth.
c. shifting the monetary policy reaction curve to the left.
d. keeping the same inflation target and raising the real interest rates.
13. 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.
b. monetary policymakers, having perceived the inflation risk, responded appropriately.
c. aggregate demand was far below potential output.
d. all of the answers provided are correct.
14. If inflation increases, this could be illustrated as a:
a. rightward shift of the long-run aggregate supply curve.
b. leftward shift of the long-run aggregate supply curve.
c. rightward shift of the short-run aggregate supply curve.
d. movement down along the short-run aggregate supply curve.
15. Which of the following would be classified as a negative supply shock?
a. An increase in the legal minimum wage
b. A decrease in the price of oil
c. An increase in government purchases
d. An increase in demand for exports
16. Which of the following would be classified as a negative supply shock?
a. An increase in the price of oil
b. An increase in government purchases
c. An increase in export demand
d. A decline of investor optimism
17. An increase in the price of oil should cause the short-run aggregate supply curve to:
a. shift to the right.
b. become vertical.
c. become horizontal.
d. shift to the left.
18. Negative supply shocks cause shifts in:
a. only the short-run aggregate supply curve.
b. the dynamic aggregate demand curve.
c. the monetary policy reaction curve but only if policymakers do not change their inflation target.
d. the short-run aggregate supply curve and, possibly, the long-run aggregate supply curve.
19. Stagflation is a term that usually describes an economy experiencing:
a. low inflation.
b. low inflation coupled with low growth.
c. high inflation coupled with low growth.
d. low unemployment rates and low inflation rates.
20. Which of the following would shift the short-run aggregate supply curve to the right?
a. An increase in oil prices
b. A reduction in the minimum wage
c. A change in the law requiring overtime pay for anyone working more than 30 hours a week
d. An increase in payroll taxes
21. Stagflation occurs when:
a. the inflation rate decreases and current output decreases.
b. the inflation rate increases and current output decreases.
c. the inflation rate decreases and current output increases.
d. the inflation rate increases and current output increases.
22. An increase in the rate of inflation:
a. can only result from increases in aggregate demand.
b. can only result from upward shifts in the short-run aggregate supply curve.
c. will result only if the long-run aggregate supply curve is vertical.
d. can result from shifts in either the dynamic aggregate demand curve or the short-run
aggregate supply curve.
23. An inflation shock that shifts the short-run aggregate supply curve leftward and
leaves the long-run supply curve unchanged means the economy’s potential level of
output will:
a. increase.
b. not change.
c. decrease.
d. decrease only if monetary policymakers do not respond.
24. 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.
b. A recession officially begins when unemployment exceeds 5.0 percent.
c. There is no hard and fast definition of a recession.
d. The official date of a recession is determined by the Federal Reserve Board, but usually with
at least a three-month delay.
25. “Official” recessions in the United States are declared by:
a. the Federal Reserve.
b. the U.S. department of the Treasury.
c. the National Bureau of Economic Research.
d. Congress.
26. Almost all recessions identified by the NBER are characterized by:
a. declining real GDP.
b. higher interest rates.
c. durations exceeding two years.
d. higher rates of inflation.
27. Which of the following is not correct with regard to the definition of a recession as used by
the NBER?
a. A recession occurs whenever there is a dip in the growth rate.
b. The exact length of time needed for a downturn to be declared a recession is not specified.
c. Many key economic indicators are used, some of which may move in opposite directions.
d. A recession is characterized by lower levels of economic activity.
28. According to the NBER, a severe decline in economic activity that lasted less than two
quarters:
a. could not be considered a recession.
b. could still be considered a recession.
c. would not be called a recession until more than two years had passed.
d. would immediately be called a recession.
29. Business cycles vary in:
a. the length of recessions only.
b. the time between recessions only.
c. both the length of recessions and the time between recessions.
d. none of the answers given is correct; business cycles are by definition recurring waves that
rise and fall in a periodic pattern.
30. A review of economic data suggests that:
a. expansions are shorter than recessions.
b. business cycles are recurrent and periodic.
c. over the last fifty years, recessions are becoming more common.
d. recessions are shorter in duration than expansions.
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31. The longest recession since the 1940’s began in:
a. 1952.
b. 1973.
c. 1981.
d. 2007.
32. Stabilization policy refers to the use of:
a. only fiscal policy.
b. only monetary policy.
c. either fiscal or monetary policy.
d. policy to shift the long-run aggregate supply curve.
33. Policymakers can stabilize the economy by shifting:
a. the short-run aggregate supply curve.
b. the dynamic aggregate demand curve.
c. the long-run aggregate supply curve.
d. neither the short-run aggregate supply curve nor the dynamic aggregate supply curve.
34. Which of the following statements is most correct?
a. Policymakers can eliminate the effects of negative supply shock.
b. Policymakers can neutralize movements in aggregate demand.
c. Policymakers can shift the short-run aggregate supply curve.
d. Shifts in the monetary policy reaction function used to stabilize the economy shift the short-
run aggregate supply curve.
35. 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
b. A leftward shift of the monetary policy reaction
curve
c
. Open market purchases of government securities
d. None of the answers given is correct; the actions of monetary policymakers affect the
dynamic aggregate demand curve
36. 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?
a. If monetary policymakers respond, output would remain close to potential output.
b. If monetary policymakers respond, output would fall below potential output.
c. If monetary policymakers respond, output would rise above potential output.
d. If monetary policymakers respond, output would remain close to potential output but inflation
would still rise despite their actions.
37. In practice, it is difficult to keep inflation and output from fluctuating when aggregate
expenditures change because:
a. it takes time for policymakers to recognize that shifts have occurred.
b. changes in interest rates do not have an immediate impact on the economy.
c. changes in consumer or business confidence can be very difficult to recognize as they are
occurring.
d. all of the answers given are correct.
38. Unemployment insurance and the proportional nature of the tax system are examples of:
a. discretionary fiscal policy.
b. automatic fiscal policy.
c. both discretionary and automatic fiscal policy.
d. expansionary fiscal policy.
39. The dynamic aggregate demand curve shifts as a result of:
a. discretionary fiscal policy.
b. automatic fiscal policy.
c. either discretionary or automatic fiscal policy.
d. fiscal policy but only when it‘s used in conjunction with monetary policy.
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40. Tax cuts would have the same directional effect on the dynamic aggregate demand curve as:
a. decreases in government purchases.
b. the Federal Reserve selling U.S. treasury securities.
c. the Federal Reserve buying U.S. treasury securities.
d. temporary tax increases.
41. Comparing monetary and fiscal policy:
a. fiscal policy has an advantage because it is faster to implement than monetary policy.
b. fiscal policy is easier to implement.
c. monetary policy is easier to implement.
d. history has shown fiscal policy to be more effective at stabilization.
42. Fiscal policy suffers from the problem of:
a. being formulated and implemented by politicians subject to short-run incentives.
b. being slow to implement.
c. being influenced by special interest groups.
d. all of the answers given are correct.
43. Monetary policy has the following advantage(s) over fiscal policy:
a. it is less influenced by politics.
b. it can be implemented faster.
c. it can usually be fine-tuned.
d. all of the answers given are correct.
44. Monetary policymakers can respond to the impact that positive inflation shocks have on
output by shifting the:
a. monetary policy reaction curve left.
b. monetary policy reaction curve right.
c. short-run aggregate supply curve to the left.
d. short-run aggregate supply curve to the right.
45. If a positive inflation shock occurs and monetary policymakers do not change the inflation
target:
a. output will eventually return to potential output and inflation will equal the inflation target.
b. output will eventually rise above potential output while inflation will equal the inflation target.
c. output will eventually fall below potential output while inflation will equal the inflation target.
d. output will eventually return to potential output but inflation will exceed the inflation target.
46. During the Great Moderation experienced in the United States during the 1990s the volatility
of inflation and growth:
a. moved in opposite directions.
b. both dropped significantly.
c. both increased but only slightly.
d. disappeared.
47. Most economists attribute the Great Moderation experienced in the United States during the
1990s mainly to:
a. good fortune.
b. slowing productivity growth.
c. aggressive fiscal policy.
d. better understanding and use of monetary policy.
48. Possible explanations that have been offered for the Great Moderation experienced in the
United States include all of the following except:
a. good fortune.
b. economies that have become more flexible in absorbing shocks.
c. calm financial markets.
d. better understanding and use of monetary policy.
49. Higher potential output levels:
a. put upward pressure on real interest rates.
b. put downward pressure on real interest rates and upward pressure on inflation rates.
c. put upward pressure on real interest rates and downward pressure on inflation rates.
d. none of the answers given is correct.
50. Increases in potential output shift:
a. the long-run aggregate supply curve.
b. the short-run aggregate supply curve.
c. both the long-run aggregate supply curve and the short-run aggregate supply curve.
d. the long-run aggregate supply curve, the short-run aggregate supply curve, and the dynamic
aggregate demand curve.
51. Disinflation occurs when:
a. the inflation rate is negative.
b. the inflation rate is 2 percent or less.
c. the inflation rate goes above ten percent.
d. the rate of inflation declines.
52. Opportunistic disinflation occurs when policymakers:
a. change the target inflation rate.
b. take advantage of positive supply shocks.
c. are able to permanently lower inflation.
d. all of the answers given are correct.