King: Economics Chapter 24 Instructions Answer the following questions and then press 'Submit' to get your score. Question 1 Which of the following statements is false? a) Trend GDP shows what the path of potential GDP would be if it grew steadily. b) A trough occurs at the end of a period of contraction. c) Trend GDP may be below potential GDP in some quarters and above in others. d) Trend GDP may be below actual GDP in some quarters and above in others. Question 2 When is a country said to move into a recession? a) If actual output falls below the potential level of output. b) If actual output falls below the trend level of output. c) If actual output falls. d) If actual output falls for two consecutive quarters of a year. Question 3 Which of the following statements about classical economists in the 19th century is false? a) They used the term trade cycles, not business cycles. b) They knew cycles existed because of fluctuations in measured real GDP. c) They believed the typical cycle lasted between seven and eleven years. d) They suggested that one cause of cycles was the activity of sunspots on the sun. Question 4 On which of the following do Keynesians and monetarists agree? a) The most important cause of demand shocks is changes in the money stock. b) The demand for money is interest elastic. c) Output departs at times from potential output because of demand shocks. d) When there is a recessionary gap, flexible wages will return the labour market to equilibrium fairly quickly. Question 5 Which of the following statements about the accelerator model of cycles is false? a) The model believes firms have an optimum ratio of capital to output. b) The model suggests that cycles could be damped or anti-damped rather than regular. c) To get repeated cycles, the model needs repeated shocks to investment. d) The model assumes that firms expect their output in the next period to be the same as it was it the previous period. Question 6 In this question, ignore new classical economists who propose real business cycle theory. Which of the following statements is false? a) On the new Keynesian view, a single unexpected demand shock could take output below the potential level. b) On the new Keynesian view, it needs repeated unexpected demand shocks to take output below the potential level for long periods. c) On the new classical view, it needs an unexpected demand shock to take output below the potential level. d) On the new classical view, it needs repeated unexpected demand shocks to take output below the potential level for long periods. Question 7 Which of the following is not part of the real business cycle explanation of business cycles? a) Wage flexibility keeps output close to its potential level. b) Output fluctuates because of fluctuations in aggregate supply. c) Aggregate supply fluctuates because of fluctuations in the demand for labour. d) Labour demand might fall if technology increases faster than expected. Question 8 Which of the following statements about real business cycle theory is false? a) It believes the supply of labour is inelastic. b) It requires a run of positive or negative technology shocks to explain why peaks and troughs may last for protracted periods. c) It believes that unemployment is a result of people's choices and need not concern the government. d) Few economists regard it as offering the main explanation of business cycles. Question 9 Which of the following statement about the automatic stabilizer created by government taxes and spending is false? a) The stabilizer arises because if an economy moves into a recessionary gap, tax revenues fall and transfers rise, while if it moves into an inflationary gap, tax revenues rise and transfers fall. b) The stabilizer means that if the government balances its budget when output is at its potential level, then it will have a deficit in a recessionary gap and a surplus in an inflationary gap. c) If output moves away from its potential level, the stabilizer ensures that it will eventually return to it. d) The stabilizer would be stronger if the government imposed higher taxes on people with high incomes and paid higher transfers to the unemployed. Question 10 What are the implications of the automatic stabilizer created by government taxes and spending on the effects of shocks in long-run aggregate supply?. a) It makes output changes smaller than they would otherwise be, but prices changes larger than they would otherwise be. b) It makes output changes the same as they would otherwise be, but prices changes larger than they would otherwise be. c) It makes both output changes and price changes smaller than they would otherwise be. d) It makes output changes the same as they would otherwise be, but prices changes smaller than they would otherwise be.