Economics 【Reading 18】Sample business, 2012, during

prashantsahni

The expansion phase of a business cycle is least likely characterized by:

A) increasing inflationary pressures.

B) increasing unemployment.

C) a positive rate of economic growth.

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Unemployment is typically decreasing during the expansion phase of a business cycle.

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During an economic contraction:

A) inflation pressures are typically decreasing.

B) the unemployment rate typically decreases.

C) real GDP growth is greater than its sustainable long-term rate.

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An economic contraction (recession) is typically characterized by decreasing inflationary pressures, increasing unemployment, and low or negative real GDP growth.

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A peak in the business cycle is most likely associated with:

A) decreasing inflation pressure.

B) the highest level of economic output during the cycle.

C) payroll employment turning from positive to negative.

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The peak phase of a business cycle represents the highest level of economic output (real GDP) reached during that cycle. Inflation pressure that built during the expansion may continue into the early part of the contraction that follows the peak. Employment typically does not begin to decline until sometime after the peak.

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An economy has been producing at its full-employment level of output and the price level has been stable. Businesses then begin experiencing unintended decreases in their inventory levels. What does this most likely imply about the short-run outlook for economic growth and inflation?

Economic growth

Inflation

A) Increasing Increasing

B) Increasing Decreasing

C) Decreasing Increasing

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Starting from conditions of long-run equilibrium, unintended decreases in inventory levels suggest that aggregate demand has increased. Producers will respond in the short run by increasing output and prices, so economic growth and inflation will increase.

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As an economic expansion approaches its peak, the economy is most likely to show:

A) a decrease in inventory levels.

B) accelerating sales growth.

C) an increase in the inventory-to-sales ratio.

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As the economy approaches its peak, sales growth begins to slow, unsold inventories begin to accumulate, and the inventory-to-sales ratio increases.

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A firm’s most likely initial response to a cyclical increase in the inventory-to-sales ratio is to adjust their utilization of labor by:

A) reducing overtime.

B) adding new workers.

C) laying off employees.

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As a cyclical indicator, an increase in the inventory-to-sales ratio is a sign of slowing economic growth. When decreasing their utilization of labor in response to a slowing economy, firms typically first reduce overtime. Firms tend to be slow to lay off workers until it is clear that an economic contraction is underway.

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At a recent symposium, “The Great Economic Debate of the Decade” several panelists were asked to state their opinions on aggregate demand and aggregate supply.
Panelist 1 stated that he believed shifts in both aggregate demand and aggregate supply were driven primarily by changes in technology over time.
Panelist 2 stated that she believed the focus of economic policy should be to directly increase aggregate demand by increasing the money supply or through fiscal policy.
The views of Panelist 1 and Panelist 2 would best be described as which economic school of thought?

Panelist 1

Panelist 2

A) Neoclassical Keynesian

B) New Classical Monetarist

C) Keynesian New Keynesian

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The neoclassical economists believe that shifts in both aggregate demand and aggregate supply are primarily driven by changes in technology over time. Keynesian economists believe that aggregate demand can be increased through monetary policy (increasing the money supply) or through fiscal policy (increasing government spending, decreasing taxes, or both). They do not focus on aggregate supply. Monetarists believe that the main factor leading to business cycles and deviations from full-employment equilibrium is monetary policy.

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Which of the following statements is most accurate regarding monetarists? Monetarists believe that:

A) discretionary monetary policy is the best way to moderate fluctuations in prices and output.

B) steady, predictable money growth is the best monetary policy.

C) fiscal policy is the most powerful of all government tools used to affect prices and output.

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Monetarists believe that the Fed’s tools are powerful and should not be used to moderate fluctuations in prices and outputs. Thus, steady, predictable growth is the best monetary policy. They believe in the power of the money supply, not fiscal policy, to affect prices and outputs.

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Which of the following most accurately describes the Monetarist school of macroeconomic thought in relation to aggregate demand and aggregate supply? Monetarists believe that the money supply should be:

A) increased by a predictable rate annually.

B) reduced during inflationary periods and increased during recessionary periods.

C) increased during inflationary periods and reduced during recessionary periods.

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Monetarists believe that to keep aggregate demand stable and growing, the central bank should follow a policy of steady and predictable increases in the money supply. Furthermore, monetarists believe that recessions are caused by inappropriate decreases in the money supply and that recessions can be persistent because money wage rates are downward sticky.

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According to Austrian school theory, business cycles are caused by:

A) long-run structural changes in real economic variables.

B) excessive optimism or pessimism among business managers.

C) government intervention in the economy.

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In Austrian school business cycle theory, cycles are caused by government intervention that reduces interest rates below what they would be without government intervention, which leads to an artificial economic boom that must eventually collapse because the economy lacks the physical capital to support it.