Chapter 8: Business Cycles

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One of the first organizations to investigate the business cycle was
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the National Bureau of Economic Research.
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The trough of a business cycle occurs when _____ hits its lowest point.
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aggregate economic activity
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The low point in the business cycle is referred to as the
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trough.
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When aggregate economic activity is increasing, the economy is said to be in
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an expansion.
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When aggregate economic activity is declining, the economy is said to be in
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a contraction.
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Peaks and troughs of the business cycle are known collectively as
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turning points.
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7. Who officially determines whether the economy is in a recession or expansion?
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The National Bureau of Economic Research
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Research on the effects of recessions on the real level of GDP shows that
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recessions cause both temporary and permanent declines in real GDP, but most of the decline is temporary.
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The tendency of many different economic variables to have regular and predictable patterns across industries over the business cycle is called
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comovement.
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The tendency for declines in economic activity to be followed by further declines, and for growth in economic activity to be followed by more growth is called
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persistence.
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The longest contraction in American history occurred
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during the 1870s.
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The long boom occurred in the
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1980s and 1990s.
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By 1937, when a new recession began in the midst of the Great Depression,
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GDP had almost recovered to its 1929 level, but unemployment was still above the 1929 level.
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The worst recessions after World War II occurred
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during 1973-1975 and 1981-1982.
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The longest economic expansion in the United States occurred during the
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1990s.
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Christina Romer’s criticism of the belief that business cycles had moderated since World War II depended on the fact that
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economists had left out important components of GDP, such as wholesale and retail distribution, transportation, and services, in their pre-World War II estimates.
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The NBER’s Business Cycle Dating Committee picks recession dates by looking at many variables, the four most important of which are industrial production, manufacturing and trade sales, nonfarm employment, and real personal income. These variables are known as
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coincident indicators.
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The recession of 2001 began in _____ and ended in _____.
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March; November
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According to research by Stock and Watson, the recent decline in volatility in many macroeconomic variables was a
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sudden drop that occurred around 1984.
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Stock and Watson found that monetary policy was responsible for about _____ % of the reduction in output volatility that occurred in the mid-1980s.
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20to30
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An economic variable that moves in the same direction as aggregate economic activity (up in expansions, down in contractions) is called
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procyclical.
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An economic variable that moves in the opposite direction as aggregate economic activity (down in expansions, up in contractions) is called
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countercyclical.
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An economic variable that doesn’t move in a consistent pattern with aggregate economic activity is called
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acyclical.
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A variable that tends to move in advance of aggregate economic activity is called
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a leading variable.
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A variable that tends to move at the same time as aggregate economic activity is called
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a coincident variable.
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A variable that tends to move later than aggregate economic activity is called
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a lagging variable.
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Diebold and Rudebusch showed that the composite index of leading indicators did not improve forecasts of industrial production because
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data on the components of the index are revised.
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Which of the following macroeconomic variables is procyclical and coincident with the business cycle?
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Industrial production
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Which of the following macroeconomic variables is procyclical and leads the business cycle?
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Residential investment
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Which of the following macroeconomic variables is acyclical?
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Real interest rates
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Which of the following macroeconomic variables is procyclical and lags the business cycle?
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Nominal interest rates
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Which of the following macroeconomic variables would you include in an index of leading economic indicators?
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Residential investment
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Which of the following macroeconomic variables would you exclude from an index of leading economic indicators?
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Industrial production
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Industries that are extremely sensitive to the business cycle are the
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capital goods and durable goods sectors.
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You want to invest in a firm whose profits show large fluctuations throughout the business cycle. Which of the following would you invest in?
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A corporation that depends heavily on business fixed investment
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Which of the following statements is true?
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Employment is procyclical and unemployment is countercyclical.
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Which of the following statements is true?
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Nominal interest rates are procyclical and real interest rates are acyclical.
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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?
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The fourth quarter of the year (October-December)
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Which of the following macroeconomic variables is the most seasonally procyclical?
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Expenditure on durable goods
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Which of the following macroeconomic variables doesn’t vary much over the seasons?
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The real wage
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What are the two main components of business cycle theories?
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A description of shocks and a model of how the economy responds to them
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Economists use the term shocks to mean
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typically unpredictable forces that have major impacts on the economy.
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Wars, new inventions, harvest failures, and changes in government policy are examples of
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shocks.
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The three main components of the aggregate demand-aggregate supply model include
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AD, SRAS, LRAS
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The AD, SRAS, and LRAS curves each show a relationship between which two economic variables?
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The aggregate price level and output
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When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, which of the following curves slopes downward?
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AD
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When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, which of the following curves is vertical?
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LRAS
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When plotted with the aggregate price level on the vertical axis and output on the horizontal axis, the long-run aggregate supply curve
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is vertical.
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A decrease in government spending on the park system would cause
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the aggregate demand curve to shift to the left.
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A decline in the stock market, which makes consumers poorer, would cause
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the aggregate demand curve to shift to the left.
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In the short run, an increase in export sales would cause output to _____ and the price level to _____.
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rise; stay constant
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In the long run, an increase in consumer spending would cause output to _____ and the price level to _____.
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stay constant; rise
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In the long run, an increase in government purchases of military equipment would cause output to _____ and the aggregate price level to _____.
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stay constant; rise
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According to classical macroeconomists, prices adjust _____ to shocks, so the government should _____.
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rapidly; do little
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According to Keynesian macroeconomists, prices adjust _____ to shocks, so the government should _____.
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slowly; fight recessions
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In the long run, an increase in productivity would cause output to _____ and the aggregate price level to _____.
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rise; fall
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In the long run, a reduction in labor supply would cause output to _____ and the aggregate price level to _____.
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fall; rise
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The key difference between classical and Keynesian macroeconomists is their differing beliefs about
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the speed at which prices adjust.

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