Macreconomics: Policy and Practice (Mishkin)

Chapter 8 Business Cycles: An Introduction

8.1 Business Cycle Basics
1) Arthur Burns and Wesley Mitchell first described business cycles as ________.
A) fluctuations in consumer preferences
B) fluctuations in the price of bicycles
C) fluctuations in aggregate economic activity
) all of the above
!) none of the above
Ans"er# C
$opic# 8.1 Business Cycle Basics
%) &n a business cycle' a period from pea( to trough may be referred to as ________.
A) an e)pansion
B) a recurrence
C) a contraction
) all of the above
!) none of the above
Ans"er# C
$opic# 8.1 Business Cycle Basics
*) &n a business cycle' a period from pea( to trough may be referred to as ________.
A) a contraction
B) a recession
C) a depression
) all of the above
!) none of the above
Ans"er#
$opic# 8.1 Business Cycle Basics
+) &n a business cycle' a period from trough to pea( may be referred to as ________.
A) a contraction
B) an e)pansion
C) a recurrence
) all of the above
!) none of the above
Ans"er# B
$opic# 8.1 Business Cycle Basics
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/) A recession can manifest itself "ith ________.
A) a decrease in consumer spending
B) a decrease in industrial production
C) a lengthy period of falling 0.
) all of the above
!) none of the above
Ans"er#
$opic# 8.1 Business Cycle Basics
1) !)amining 2.3. business cycles over time reveals that they ________.
A) occur at regular intervals
B) are of uniform duration
C) are of similar magnitude
) all of the above
!) none of the above
Ans"er# !
$opic# 8.1 Business Cycle Basics
4) A procyclical variable ________.
A) moves up during e)pansions and do"n during contractions
B) moves up during contractions and do"n during e)pansions
C) moves in the opposite direction of aggregate economic activity
) all of the above
!) none of the above
Ans"er# A
$opic# 8.1 Business Cycle Basics
8) A countercyclical variable ________.
A) moves up during e)pansions and do"n during contractions
B) is another term for an acyclical variable
C) moves in the same direction as aggregate economic activity
) all of the above
!) none of the above
Ans"er# !
$opic# 8.1 Business Cycle Basics
5) A leading countercyclical variable ________.
A) reaches a pea( before the pea( of the business cycle
B) reaches a trough before the pea( of the business cycle
C) reaches a trough along "ith the trough of a business cycle
) all of the above
!) none of the above
Ans"er# B
$opic# 8.1 Business Cycle Basics
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1-) A leading variable ________.
A) reaches a pea( or trough before the turning point of the business cycle
B) reaches a pea( or trough after the turning point of the business cycle
C) reaches a pea( or trough at the same time as the turning point of the business cycle
) all of the above
!) none of the above
Ans"er# A
$opic# 8.1 Business Cycle Basics
11) A lagging variable ________.
A) reaches a pea( or trough before the turning point of the business cycle
B) reaches a pea( or trough after the turning point of the business cycle
C) reaches a pea( or trough at the same time as the turning point of the business cycle
) all of the above
!) none of the above
Ans"er# B
$opic# 8.1 Business Cycle Basics
1%) According to the graph above' the e)pansion that began in ecember 151+ had a duration of
________.
A) /1 months
B) + years
C) * years
) ++ months
!) %- months
Ans"er#
$opic# 8.1 Business Cycle Basics
1*) According to the graph above' the last e)pansion to occur before the outbrea( of World War &
in 151+ had a duration of ________.
A) %* months
B) ++ months
C) * years
) 1% months
!) %- months
Ans"er#
$opic# 8.1 Business Cycle Basics
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1+) 6eferring to the graph above' an economic variable that had pea(ed in ecember 1511'
7ovember 151+' and 8ebruary 1515 is li(ely a ________ variable.
A) leading countercyclical
B) leading procyclical
C) lagging countercyclical
) lagging procyclical
!) none of the above
Ans"er# A
$opic# 8.1 Business Cycle Basics
1/) 6eferring to the graph above' an economic variable that had pea(ed in ecember 151%' and
9uly 1518 is li(ely a ________ variable.
A) leading countercyclical
B) leading procyclical
C) lagging countercyclical
) lagging procyclical
!) none of the above
Ans"er# B
$opic# 8.1 Business Cycle Basics
11) 6eferring to the graph above' an economic variable that had pea(ed in ecember 151%'
7ovember 151+' and 8ebruary 1518 is li(ely a ________ variable.
A) leading countercyclical
B) leading procyclical
C) lagging countercyclical
) lagging procyclical
!) none of the above
Ans"er# !
$opic# 8.1 Business Cycle Basics
14) $he Conference Board does a good :ob predicting recessions for reasons that include
________.
A) a focus on fe"er than five leading variables
B) e)clusive use of real-time data
C) revisions of the components of its monthly inde)
) all of the above
!) none of the above
Ans"er# C
$opic# 8.1 Business Cycle Basics
18) Many economic variables are classified according to their relation to the business cycle.
What are the principal categories; <ariables in "hich category=ies) are of greatest help in
forecasting changes in the economy;
Ans"er# !conomic variables may be procyclical' countercyclical' or acyclical. Cutting across
the first t"o of these categories' a variable may be leading' lagging' or coincident. $he best
variables for forecasting are in the leading category' thus either procyclical or countercyclical.
$opic# 8.1 Business Cycle Basics
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15) $o understand "hat causes the business cycle' leading variables alone are of interest.
Coincident and lagging variables merely display the conse>uences of changes in the economy.
6espond.
Ans"er# $he comment confuses correlation "ith causation. A leading variable is not necessarily
causing the economy?s moving through the cycle. &t might' instead' be a result of some
underlying process@ a result that happens to become evident relatively early. Coincident and
lagging variables do not merely appear on the stage after the causation is Adone.A $hey may point
to po"erful processes that happen to become fully evident only after other variables have
responded to their effects. $he reason that shortBrun economic fluctuations recur BB and so invite
the name AcycleA BB is that most economic variables are continually affected by and affecting
other variables@ today?s AeffectA is tomorro"?s Acause.A
$opic# 8.1 Business Cycle Basics
AAC3B# 6eflective $hin(ing
8.% Macroeconomic <ariables and the Business Cycle
1) 0. is a good pro)y for the business cycle itself since ________.
A) its real consumption spending component is procyclical and coincident
B) its real investment spending component is procyclical and coincident
C) it typically goes up in a boom and do"n in a recession
) all of the above
!) none of the above
Ans"er#
$opic# 8.% Macroeconomic <ariables and the Business Cycle
%) A characteristic of the unemployment rate is that ________.
A) it typically goes up in a recession
B) it typically goes do"n in a boom
C) it is not clear "hether it is a leading or a lagging indicator
) all of the above
!) none of the above
Ans"er#
$opic# 8.% Macroeconomic <ariables and the Business Cycle
*) A characteristic of the inflation rate is that ________.
A) it typically goes do"n in a boom
B) it typically goes up in a recession
C) it is a lagging indicator
) all of the above
!) none of the above
Ans"er# C
$opic# 8.% Macroeconomic <ariables and the Business Cycle
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+) A characteristic of stoc( prices is that ________.
A) they tend to go up on the ups"ing of the cycle
B) they tend to go do"n on the do"ns"ing of the cycle
C) they are a leading indicator
) all of the above
!) none of the above
Ans"er#
$opic# 8.% Macroeconomic <ariables and the Business Cycle
/) $he interest rates paid on $reasury bills ________.
A) go do"n in booms
B) go up in recessions
C) are a coincident indicator
) all of the above
!) none of the above
Ans"er# !
$opic# 8.% Macroeconomic <ariables and the Business Cycle
1) &nterest rates spreads bet"een longBterm and shortBterm $reasury bills ________.
A) are countercyclical
B) are good predictors of recessions
C) are a lagging indicator
) all of the above
!) none of the above
Ans"er# B
$opic# 8.% Macroeconomic <ariables and the Business Cycle
4) &nterest rates spreads bet"een longBterm and shortBterm $reasury bills ________.
A) are procyclical
B) are not a good predictor of recessions
C) are a lagging indicator
) all of the above
!) none of the above
Ans"er# A
$opic# 8.% Macroeconomic <ariables and the Business Cycle
8) &nterest rates spreads bet"een corporate and government bonds ________.
A) are procyclical
B) have the same characteristics as the government interest rate spreads
C) are countercyclical
) all of the above
!) none of the above
Ans"er# C
$opic# 8.% Macroeconomic <ariables and the Business Cycle
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5) Which of these economic variables is procyclical;
A) consumer spending
B) stoc( prices
C) the government bond spread
) all of the above
!) none of the above
Ans"er#
$opic# 8.% Macroeconomic <ariables and the Business Cycle
1-) Which of these economic variables is procyclical and coincident;
A) consumer spending
B) stoc( prices
C) the government bond spread
) all of the above
!) none of the above
Ans"er# A
$opic# 8.% Macroeconomic <ariables and the Business Cycle
11) Which of these economic variables is procyclical;
A) inflation
B) unemployment
C) the credit spread
) all of the above
!) none of the above
Ans"er# A
$opic# 8.% Macroeconomic <ariables and the Business Cycle
1%) Which of these economic variables is procyclical;
A) unemployment
B) the credit spread
C) investment spending
) all of the above
!) none of the above
Ans"er# C
$opic# 8.% Macroeconomic <ariables and the Business Cycle
1*) Which of these economic variables is countercyclical;
A) investment spending
B) unemployment
C) demand for foreign products
) all of the above
!) none of the above
Ans"er# B
$opic# 8.% Macroeconomic <ariables and the Business Cycle
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1+) $he interest rate on corporate bonds is ________.
A) countercyclical and coincident
B) procyclical and coincident
C) procyclical and lagging
) countercyclical and leading
!) acyclical
Ans"er# A
$opic# 8.% Macroeconomic <ariables and the Business Cycle
1/) !conomic globaliCation has seen ________.
A) business cycles in the rest of the "orld synchroniCe "ith those of the 2.3.
B) financial mar(ets become more integrated over time
C) financial disruptions spread more easily among countries
) all of the above
!) none of the above
Ans"er#
$opic# 8.% Macroeconomic <ariables and the Business Cycle
AAC3B# 6eflective $hin(ing
11) !conomic globaliCation has seen ________.
A) a decoupling of the business cycle among many countries
B) financial mar(ets become more integrated over time
C) ho" international financial disruptions can be more easily contained
) all of the above
!) none of the above
Ans"er# B
$opic# 8.% Macroeconomic <ariables and the Business Cycle
AAC3B# 6eflective $hin(ing
14) &f events in a single country cause its economic activity to move up or do"n through a
business cycle' "hat difference=s) might it ma(e that the economy is closely integrated "ith
other economies in the "orld;
Ans"er# Dne conse>uence of global integration is that goods and saving can flo" to "here they
seem to offer the highest return' ad:usted for ris(. An economy "ith' say' political instability is
li(ely to see a substantial outflo" of saving' "hile imports might flo" in "here domestic output
has been disrupted. $hus' other economies might benefit from the first economy?s misfortune. Dr'
the decrease in income in one economy might hurt its trading partners by depressing demand for
their e)ports. 3imilarly' financial disruption in one economy might spread to related economies.
&n either case' once economic conditions seem to be improving in a globallyBconnected economy'
the e)pansion is li(ely to be strengthened by saving inflo"s and ready availability of mar(ets for
both imports and e)ports. &n sum' the correlation of gro"th rates in lin(ed economies may be
strengthened or "ea(ened "hen one economy is faltering. When one economy is booming' the
effect is to strengthen the correlation.
$opic# 8.% Macroeconomic <ariables and the Business Cycle
AAC3B# 6eflective $hin(ing
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18) Why is the credit spread countercyclical and coincident;
Ans"er# $he credit spread is the interest rate on corporate bonds minus the interest rate on
government bonds. 3ince the bonds are long term in each case' they are not affected directly by
shortBterm fluctuations. Eo"ever' during the e)pansion phase of the business cycle' corporate
profits and other indicators of financial strength at many businesses imply a lo" ris( of default
on corporate bonds' so their cost of borro"ing =interest rate on the bond) declines. uring the
contraction phase of the cycle' the ris( of corporate default is higher for many businesses' so
borro"ing is more costly =higher interest rate on the bond). 3ince the perceived Cero default ris(
on government bonds is unaffected by the business cycle' the varying interest rate on corporate
bonds causes the spread to move countercyclically. $he change in the spread is coincident to the
business cycle' because it reflects the impact of current economic conditions on business
financials.
$opic# 8.% Macroeconomic <ariables and the Business Cycle
AAC3B# 6eflective $hin(ing
8.* A Brief Eistory of 2.3. Business Cycles
1) What did the 2.3. business cycles in the early 185-s and early 15*-s have in common;
A) rapid industrialiCation
B) persistently high inflation
C) high consumer confidence
) all of the above
!) none of the above
Ans"er# !
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
%) What did the 2.3. business cycles in the early 185-s and early 15*-s have in common;
A) the spread of ban( failures
B) severe recessions
C) high unemployment and lo" inflation' even deflation
) all of the above
!) none of the above
Ans"er#
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
*) What does the 2.3. business cycle e)perience suggest about periods of "ar;
A) the economy tends to boom during the period of "ar
B) after the "ar is over' the economy typically e)periences a do"nturn
C) they are associated "ith good economic times
) all of the above
!) none of the above
Ans"er#
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
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+) 8rom 15+/ until 154*' the 2.3. economy e)perienced ________.
A) rapid inflation
B) no ma:or recessions or depressions
C) minimal interaction "ith the global economy
) all of the above
!) none of the above
Ans"er# B
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
/) &n the 154-s' the 2.3. economy ________.
A) gre" at a faster pace than in the previous decade
B) e)perienced lo" inflation
C) e)perienced increases in unemployment
) all of the above
!) none of the above
Ans"er# C
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
1) $he A0reat ModerationA refers to ________.
A) sharp declines in asset prices
B) the long economic e)pansion of the 151-s
C) the mild economic recoveries of the 154-s and early 158-s
) the Aoil ta)A of the 154-s
!) none of the above
Ans"er# !
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
4) $he years from 15** to 15*4 are notable for ________.
A) high unemployment' despite rapid gro"th of real output
B) lo" unemployment' despite sluggish output gro"th
C) persistent deflation' despite rising unemployment
) the creation of the 8ederal 6eserve 3ystem
!) none of the above
Ans"er# A
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
8) uring the 154-s in the 2.3.________.
A) the inflation rate pea(ed at over 1+F
B) oil prices >uadrupled
C) the unemployment rate rose above 8F
) all of the above
!) none of the above
Ans"er#
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
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5) $he 2.3. economy of the 154-s is typically referred to as ________.
A) A$he 0reat epressionA
B) A$he 0reat &nflationA
C) A$he 0reat ModerationA
) all of the above
!) none of the above
Ans"er# B
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
1-) $he 2.3. economy of the late 15%-s and early 15*-s is typically referred to as ________.
A) A$he 0reat epressionA
B) A$he 0reat &nflationA
C) A$he 0reat ModerationA
) all of the above
!) none of the above
Ans"er# A
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
11) $he 2.3. economy of the mid 158-s through %--4 is typically referred to as ________.
A) A$he 0reat epressionA
B) A$he 0reat &nflationA
C) A$he 0reat ModerationA
) all of the above
!) none of the above
Ans"er# C
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
1%) uring the 2.3. 0reat Moderation'________.
A) the volatility in the inflation rate declined by /-F
B) the volatility in the rate of gro"th of real output declined by **F
C) the economy stabiliCed from the higher uncertainty of the 154-s
) all of the above
!) none of the above
Ans"er#
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
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1*) uring the 0reat 6ecession of %--4B%--5' the 2.3.________.
A) e)perienced unprecedented declines in household "ealth
B) the unemployment rate more than doubled to :ust over 1-F
C) e)perienced the most severe economic do"nturn since the 0reat epression
) all of the above
!) none of the above
Ans"er#
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
1+) $he policies of the 2.3. 8ederal 6eserve probably helped to cause ________.
A) the long contraction of the 184-s
B) the severe recession of the 185-s
C) the recession in 1518B1515
) all of the above
!) none of the above
Ans"er# C
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
1/) $he years from 15+/ to 154* are notable for ________.
A) a 0reat Moderation
B) generally lo" inflation
C) brief' but severe' recessions
) all of the above
!) none of the above
Ans"er# B
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
11) $he years from 15+/ to 154* are notable for ________.
A) the 0reat &nflation
B) the creation of the 8ederal 6eserve 3ystem
C) fre>uently high unemployment
) all of the above
!) none of the above
Ans"er# !
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
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14) uring the period from 154- to the present' the 2.3. economy e)perienced a 0reat &nflation'
a 0reat Moderation' and a 0reat 6ecession. Eo" does this se>uence illustrate the concept of a
Abusiness cycleA;
Ans"er# $he se>uence runs from bad economic conditions to much better conditions to bad
again. $he 0reat Moderation is' in part' the recovery from the preceding bad' and' perhaps' the
result of deliberate responses intended to end and to prevent e)cessive inflation. An economy
AstrengthenedA by its successful struggle against inflation is' perhaps' particularly vulnerable to
the opposite problem of recession. And' perhaps' AmoderationA inspires a complacency andGor
e)cessive confidence that leads to recession. &n any case' the 0reat 6ecession is' in part'
confirmation that all good things =li(e all bad things) must come to an end.
$opic# 8.* A Brief Eistory of 2.3. Business Cycles
AAC3B# 6eflective $hin(ing
8.+ $ime EoriCons in Macroeconomics
1) 9ohn Maynard Heynes ________.
A) >uestioned the classical vie" that economies move >uic(ly to their long run e>uilibrium
levels
B) advocated focusing on short run fluctuations
C) carved out macroeconomics as a distinct field in the 15*-s
) all of the above
!) none of the above
Ans"er#
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
%) $he classical vie" believes that ________.
A) economies move slo"ly to their long run e>uilibrium levels
B) a rise in the >uantity of money leads to increases in saving and investment
C) a rise in the >uantity of money has no impact on economic activity
) all of the above
!) none of the above
Ans"er# C
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
*) Classical economists believe that ________.
A) it ta(es a long time for economic variables to reach e>uilibrium
B) shortBrun fluctuations are too infre>uent and mild to be of much interest
C) real variables li(e output and investment are not determined by nominal variables
) all of the above
!) none of the above
Ans"er# C
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
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+) Heynesians believe ________.
A) that economies move >uic(ly to their long run e>uilibrium levels
B) that the government should pursue active policies to stabiliCe economic fluctuations
C) that the long run is more important than shortBrun fluctuations
) all of the above
!) none of the above
Ans"er# B
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
/) According to the flexible price framework ________.
A) economic fluctuations determine longBrun outcomes
B) a change in the money supply has no effect on real output
C) a change in inflation alters the amount of real investment
) all of the above
!) none of the above
Ans"er# B
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
1) According to the flexible price framework ________.
A) an increase in inflation raises real savings
B) an increase in the money supply raises real output
C) an increase in inflation lo"ers real investment
) all of the above
!) none of the above
Ans"er# !
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
4) According to the flexible price framework ________.
A) aggregate output is determined by the production function "ith given levels of capital and
labor
B) the interest rate is solely determined by the interaction of savings and investment
C) nominal and real variables are completely independent
) all of the above
!) none of the above
Ans"er#
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
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8) Heynesian economists ________.
A) observe that prices respond slo"ly to changes in supply and demand
B) believe that the classical dichotomy does not hold in the short run
C) believe that monetary policy affect aggregate output and the real interest rate
) all of the above
!) none of the above
Ans"er#
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
5) Heynesian economists ________.
A) believe that the classical dichotomy does not hold in the long run
B) believe that only the interaction bet"een savings and investment affects the real interest rate
C) observe that prices are Astic(yA
) all of the above
!) none of the above
Ans"er# C
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
1-) Heynesian economists ________.
A) observe that prices are perfectly fle)ible
B) believe that the classical dichotomy never holds
C) believe that only the interaction bet"een savings and investment affects the real interest rate
) all of the above
!) none of the above
Ans"er# !
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
11) 6apid gro"th of the money supply might seem appropriate to ________ economists' because
________.
A) Heynesian@ it can hasten the economy?s return to a longBrun e>uilibrium
B) Heynesian@ the resulting inflation "ill have no effect on real output
C) classical@ stabiliCing fluctuations contributes to longBrun gro"th
) classical@ it "ill ma(e prices more fle)ible
!) none of the above
Ans"er# A
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
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1%) .rices that ad:ust slo"ly to their longBrun e>uilibrium ________.
A) help the economy to avoid economic fluctuations
B) call for policies that focus on shortBrun fluctuations
C) are conducive to maintaining lo" inflation
) all of the above
!) none of the above
Ans"er# B
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
1*) An increase in the price level that leads to no e)pansion of economic activity ________.
A) is consistent "ith classical models
B) implies that there has been no change in the money supply
C) is a strictly shortBrun phenomenon
) all of the above
!) none of the above
Ans"er# A
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
1+) Eo" does rapid price ad:ustment' as assumed in classical models' result in separation of real
from nominal variables =the classical dichotomy);
Ans"er# &f an increase in the money supply enables consumers and businesses to spend more'
there is up"ard pressure on e>uilibrium prices. .roducers "ill raise prices. $hey might consider
increasing output' as "ell' but "ill reconsider "hen they see that labor and other inputs have
increased in price. $here "ill be no increase in saving' because the increase in the money supply
is needed to fund the same volume of transactions at the higher price level. $he nominal interest
rate "ill rise' so long as the price level is e)pected to continue to rise. $he real interest rate is
unaffected' as are real output' consumption' and investment.
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
1/) Eo" does slo" price ad:ustment' as assumed in Heynesian models' result in real economic
variables being affected by nominal variables;
Ans"er# &f an increase in the money supply enables consumers and businesses to spend more'
producers "ill respond by raising output. $o do so' they "ill increase their purchases of labor
and other inputs' and increase investment. .rices and "ages "ill rise' but not so much or so
>uic(ly as to prevent the increase in real output and investment. $he real interest rate may
change' or not' depending on the changes in saving' investment' and e)pected inflation. But' the
>uantity of saving and investment "ill increase.
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
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11) escribe ho" Heynesian economics is a cyclical phenomenon. &s it leading' lagging' or
coincident; .rocyclical or countercyclical;
Ans"er# 9ohn Maynard Heynes presented his ideas during' and in response to' the 0reat
epression' ma(ing Heynesian economics a lagging variable' and strongly countercyclical. $he
0reat &nflation of the 154-s is attributed' in part' to Heynesian overBconfidence' reinforcing
countercyclicality. &nterest in Heynesian economics "as subdued during the 0reat Moderation'
but has revived mar(edly during the 0reat 6ecession.
$opic# 8.+ $ime EoriCons in Macroeconomics# 36 vs. I6
AAC3B# 6eflective $hin(ing
8./ .rice 3tic(iness
1) &n a perfectly competitive mar(et ________.
A) the goods purchased are assumed to be standardiCed products
B) prices ad:ust >uic(ly to e>uilibrium
C) buyers and sellers are price ta(ers
) all of the above
!) none of the above
Ans"er#
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
%) &n a perfectly competitive mar(et ________.
A) most goods and services are not standardiCed
B) prices ad:ust slo"ly to e>uilibrium
C) buyers and sellers do not set prices and can only decide ho" much to buy and sell
) all of the above
!) none of the above
Ans"er# C
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
*) 2nder monopolistic competition ________.
A) many goods and services are not standardiCed
B) prices ad:ust slo"ly to e>uilibrium
C) even if there is substantial competition in the mar(et' some firms can set prices
) all of the above
!) none of the above
Ans"er#
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
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+) 2nder monopolistic competition ________.
A) the goods purchased are assumed to be standardiCed products
B) it is good =or brand) differentiation that li(ely accounts for some price stic(iness
C) buyers and sellers do not set prices and can only decide ho" much to buy and sell
) all of the above
!) none of the above
Ans"er# B
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
/) 2nder monopolistic competition ________.
A) prices are fle)ible' because producers can change them as often as they "ish
B) prices are fle)ible' because producers can never set a price other than the mar(et price
C) prices are fle)ible' because producers adopt Heynesian policies
) all of the above
!) none of the above
Ans"er# !
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
1) Menu costs ________.
A) are the cost a firm bears "hen it changes its prices
B) are one source of price stic(iness because changing prices involves many hidden costs
C) are one source of price stic(iness because firms may not "ant to change their AmenusA too
often and ris( alienating customers
) all of the above
!) none of the above
Ans"er#
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
4) 6ational inattention refers to ________.
A) the ris( a firm runs "hen they do not pay attention to their customers
B) firms ma(ing infre>uent price decisions because of the time and effort those decision re>uire
C) the cost to the firm of losing sales from alienating customers
) all of the above
!) none of the above
Ans"er# B
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
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8) Which of these is an e)ample of rational inattention;
A) submitting a paper "ith a fe" typos' (no"ing that they "on?t affect the grade
B) sleeping in later than you had intended
C) a firm delaying price changes to avoid losing customers
) a firm being unsure of its competitors? prices
!) a firm changing prices so often its customers stop noticing
Ans"er# A
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
5) Menu costs are an important source of price stic(iness because ________.
A) printing menus is costly
B) putting items Aon saleA reduces firms? revenue
C) fre>uent price changes may lead to losing customers
) all of the above
!) none of the above
Ans"er# C
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
1-) 3taggered price setting ________.
A) leads to fre>uent price ad:ustments
B) occurs "hen firms fail to consider the behavior of their competitors
C) is generally illegal
) all of the above
!) none of the above
Ans"er# !
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
11) 3taggered price setting ________.
A) refers to the lac( of coordination by firms in changing prices
B) reduces price stic(iness
C) has been proven to occur in all sectors of the economy
) all of the above
!) none of the above
Ans"er# A
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
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1%) !mpirical evidence sho"s that prices are stic(y ________.
A) in all sectors of the economy
B) in hardly any sectors of the economy
C) e)cept in response to changes "ithin individual mar(ets
) all of the above
!) none of the above
Ans"er# C
$opic# 8./ .rice 3tic(iness
1*) !mpirical evidence that changes in monetary policy do not cause rapid price ad:ustments
________.
A) is consistent "ith the Heynesian emphasis on shortBrun economic fluctuations
B) suggests that policyma(ers need not "orry much about inflation
C) remains limited and unconvincing
) is consistent "ith the classical dichotomy
!) none of the above
Ans"er# A
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
1+) Apply the concepts of menu costs and staggered price setting to the labor mar(et.
Ans"er# Wages are li(ely to be stic(y' if it is costly for employers to monitor changes in the
labor mar(et' and if fre>uent "age ad:ustments have adverse effects on employee behavior. 3ince
"or(ers do not change :obs fre>uently in pursuit of the highest "age' there is little if any shortB
term penalty for "age persistence' nor re"ard for prompt "age ad:ustment. !ven "hen it seems
clear that "age ad:ustments are "arranted' employers might hesitate to raise their labor costs
above their competitors?' or to lose employees by cutting "ages before competitors do so.
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
1/) o you thin( that prices are more or less stic(y today than /- years ago; Why;
Ans"er# Iess stic(y. &nformation technology and rapid introduction of competing substitutes for
goods and services enables consumers to be more price sensitive and for producers to
avoidGmitigate menu costs. Wor(ers' too' are more price sensitive and accepting of labor mar(et
fle)ibility. $he logic of staggered price setting still applies' but rapid and deep common
(no"ledge of mar(et conditions enables some de facto synchroniCation of pricing decisions.
$opic# 8./ .rice 3tic(iness
AAC3B# 6eflective $hin(ing
8.1 6oad Map for Dur 3tudy of Business Cycles
1) $here are no >uestions for this section.
Ans"er#
%-
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