Chapter 8 Mishkin (8)

5/19/2018 Chapter 8 Mishkin (8)

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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 epansion

B) a recurrenceC) a contraction

) all of the above!) none of the above

Ans"er# C


*) &n a business cycle' a period from pea( to trough may be referred to as ________.

A) a contraction

B) a recessionC) a depression

) all of the above!) none of the aboveAns"er#


+) &n a business cycle' a period from trough to pea( may be referred to as ________.

A) a contraction

B) an epansion

C) a recurrence) all of the above


Ans"er# B$opic# 8.1 Business Cycle Basics

1

Copyright , %-1% earson !ducation' &nc.


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/) A recession can manifest itself "ith ________.

A) a decrease in consumer spending

B) a decrease in industrial productionC) a lengthy period of falling 0

) all of the above

!) none of the aboveAns"er#


) !amining 2.3. business cycles over time reveals that they ________.

A) occur at regular intervals

B) are of uniform durationC) are of similar magnitude

) all of the above

!) none of the aboveAns"er# !


4) A procyclical variable ________.

A) moves up during epansions and do"n during contractions

B) moves up during contractions and do"n during epansions

C) moves in the opposite direction of aggregate economic activity) all of the above


Ans"er# A$opic# 8.1 Business Cycle Basics

8) A countercyclical variable ________.A) moves up during epansions 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


Ans"er# !


5) A leading countercyclical variable ________.

A) reaches a pea( before the pea( of the business cycleB) reaches a trough before the pea( of the business cycle

C) reaches a trough along "ith the trough of a business cycle


Ans"er# B


%



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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 cycleC) reaches a pea( or trough at the same time as the turning point of the business cycle

) all of the above

!) none of the aboveAns"er# A


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 cycleC) reaches a pea( or trough at the same time as the turning point of the business cycle

) all of the above

!) none of the aboveAns"er# B


1%) According to the graph above' the epansion that began in ecember 151+ had a duration of

________.

A) /1 monthsB) + years

C) * years

) ++ months!) %- months

Ans"er#


1*) According to the graph above' the last epansion 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#


*



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1+) 6eferring to the graph above' an economic variable that had pea(ed in ecember 1511'

7ovember 151+' and ebruary 1515 is li(ely a ________ variable.

A) leading countercyclicalB) leading procyclical

C) lagging countercyclical

) lagging procyclical!) none of the above

Ans"er# A


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 aboveAns"er# B$opic# 8.1 Business Cycle Basics

1) 6eferring to the graph above' an economic variable that had pea(ed in ecember 151%'

7ovember 151+' and ebruary 1518 is li(ely a ________ variable.A) leading countercyclical

B) leading procyclical

C) lagging countercyclical) lagging procyclical


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) eclusive use of real-timedata

C) revisions of the components of its monthly inde) all 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;


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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 andlagging variables do not merely appear on the stage after the causation is done. $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 shortrun economic fluctuations recur and so invitethe name cycle is that most economic variables are continually affected by and affecting

other variables@ today?s effect is tomorro"?s cause.


AAC3B# 6eflective $hin(ing

8.% Macroeconomic


6/20

+) 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 cycleC) they are a leading indicator

) all of the above


$opic# 8.% Macroeconomic


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5) Which of these economic variables is procyclical;

A) consumer spending

B) stoc( pricesC) the government bond spread

) all of the above




8/20

1+) $he interest rate on corporate bonds is ________.

A) countercyclical and coincident

B) procyclical and coincidentC) procyclical and lagging

) countercyclical and leading

!) acyclicalAns"er# A



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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 byshortterm fluctuations. Eo"ever' during the epansion 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 thecontraction 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 ero default ris(

on government bonds is unaffected by the business cycle' the varying interest rate on corporatebonds 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.



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+) rom 15+/ until 154*' the 2.3. economy eperienced ________.

A) rapid inflation

B) no ma:or recessions or depressionsC) minimal interaction "ith the global economy

) all of the above


$opic# 8.* A Brief Eistory of 2.3. Business Cycles


/) &n the 154-s' the 2.3. economy ________.

A) gre" at a faster pace than in the previous decade

B) eperienced lo" inflationC) eperienced increases in unemployment

) all of the above


Ans"er# C$opic# 8.* A Brief Eistory of 2.3. Business Cycles


) $he 0reat Moderation refers to ________.

A) sharp declines in asset pricesB) the long economic epansion of the 15-s

C) the mild economic recoveries of the 154-s and early 158-s

) the oil ta of the 154-s



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"thC) persistent deflation' despite rising unemployment

) the creation of the ederal 6eserve 3ystem


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


Ans"er#

$opic# 8.* A Brief Eistory of 2.3. Business CyclesAAC3B# 6eflective $hin(ing

1-



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5) $he 2.3. economy of the 154-s is typically referred to as ________.

A) $he 0reat epression

B) $he 0reat &nflationC) $he 0reat Moderation

) all of the above




1-) $he 2.3. economy of the late 15%-s and early 15*-s is typically referred to as ________.

A) $he 0reat epression

B) $he 0reat &nflationC) $he 0reat Moderation

) all of the above


Ans"er# A$opic# 8.* A Brief Eistory of 2.3. Business Cycles


11) $he 2.3. economy of the mid 158-s through %--4 is typically referred to as ________.

A) $he 0reat epressionB) $he 0reat &nflation

C) $he 0reat Moderation

) all of the above

!) none of the aboveAns"er# C

$opic# 8.* A Brief Eistory of 2.3. Business CyclesAAC3B# 6eflective $hin(ing

1%) uring the 2.3. 0reat Moderation'________.

A) the volatility in the inflation rate declined by /-FB) the volatility in the rate of gro"th of real output declined by **F

C) the economy stabilied from the higher uncertainty of the 154-s

) all of the above




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1*) uring the 0reat 6ecession of %--4%--5' the 2.3.________.

A) eperienced unprecedented declines in household "ealth

B) the unemployment rate more than doubled to :ust over 1-FC) eperienced the most severe economic do"nturn since the 0reat epression

) all of the above




1+) $he policies of the 2.3. ederal 6eserve probably helped to cause ________.

A) the long contraction of the 184-sB) the severe recession of the 185-s

C) the recession in 15181515


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" inflationC) brief' but severe' recessions

) all of the above



1) $he years from 15+/ to 154* are notable for ________.

A) the 0reat &nflation

B) the creation of the ederal 6eserve 3ystemC) fre>uently high unemployment

) all 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 eperienced a 0reat &nflation'

a 0reat Moderation' and a 0reat 6ecession. Eo" does this se>uence illustrate the concept of a

business cycle;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 ecessive inflation. An economystrengthened by its successful struggle against inflation is' perhaps' particularly vulnerable to

the opposite problem of recession. And' perhaps' moderation inspires a complacency andGor

ecessive 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.



8.+ $ime Eorions in Macroeconomics

1) 9ohn Maynard Heynes ________.

A) >uestioned the classical vie" that economies move >uic(ly to their long run e>uilibriumlevelsB) advocated focusing on short run fluctuations

C) carved out macroeconomics as a distinct field in the 15*-s

) all of the above


$opic# 8.+ $ime Eorions in Macroeconomics# 36 vs. I6


%) $he classical vie" believes that ________.

A) economies move slo"ly to their long run e>uilibrium levelsB) 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


Ans"er# C



*) Classical economists believe that ________.

A) it ta(es a long time for economic variables to reach e>uilibriumB) shortrun 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


Ans"er# C


1*



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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 stabilie economic fluctuationsC) that the long run is more important than shortrun fluctuations

) all of the above




/) According to theflexible price framework ________.

A) economic fluctuations determine longrun outcomes

B) a change in the money supply has no effect on real outputC) a change in inflation alters the amount of real investment

) all of the above


Ans"er# B$opic# 8.+ $ime Eorions in Macroeconomics# 36 vs. I6


) According to theflexible price framework ________.

A) an increase in inflation raises real savingsB) an increase in the money supply raises real output

C) an increase in inflation lo"ers real investment


Ans"er# !

$opic# 8.+ $ime Eorions in Macroeconomics# 36 vs. I6AAC3B# 6eflective $hin(ing

4) According to theflexible 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


Ans"er# $opic# 8.+ $ime Eorions in Macroeconomics# 36 vs. I6


1+



15/20

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 runC) believe that monetary policy affect aggregate output and the real interest rate

) all of the above




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 rateC) observe that prices are stic(y

) all of the above


Ans"er# C$opic# 8.+ $ime Eorions in Macroeconomics# 36 vs. I6


1-) Heynesian economists ________.

A) observe that prices are perfectly fleibleB) 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


$opic# 8.+ $ime Eorions in Macroeconomics# 36 vs. I6AAC3B# 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 longrun e>uilibrium

B) Heynesian@ the resulting inflation "ill have no effect on real output

C) classical@ stabiliing fluctuations contributes to longrun gro"th) classical@ it "ill ma(e prices more fleible


Ans"er# A$opic# 8.+ $ime Eorions in Macroeconomics# 36 vs. I6

1/



16/20

1%) rices that ad:ust slo"ly to their longrun e>uilibrium ________.

A) help the economy to avoid economic fluctuations

B) call for policies that focus on shortrun fluctuationsC) are conducive to maintaining lo" inflation

) all of the above




1*) An increase in the price level that leads to no epansion of economic activity ________.

A) is consistent "ith classical models

B) implies that there has been no change in the money supplyC) is a strictly shortrun phenomenon

) all of the above


Ans"er# A$opic# 8.+ $ime Eorions 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 interestrate "ill rise' so long as the price level is epected to continue to rise. $he real interest rate is

unaffected' as are real output' consumption' and investment.$opic# 8.+ $ime Eorions in Macroeconomics# 36 vs. I6AAC3B# 6eflective $hin(ing

1/) Eo" does slo" price ad:ustment' as assumed in Heynesian models' result in real economicvariables 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 epected inflation. But' the

>uantity of saving and investment "ill increase.$opic# 8.+ $ime Eorions in Macroeconomics# 36 vs. I6


1



17/20

1) 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 0reatepression' ma(ing Heynesian economics a lagging variable' and strongly countercyclical. $he

0reat &nflation of the 154-s is attributed' in part' to Heynesian overconfidence' reinforcing

countercyclicality. &nterest in Heynesian economics "as subdued during the 0reat Moderation'but has revived mar(edly during the 0reat 6ecession.



8./ rice 3tic(iness

1) &n a perfectly competitive mar(et ________.A) the goods purchased are assumed to be standardied products

B) prices ad:ust >uic(ly to e>uilibrium

C) buyers and sellers are price ta(ers


Ans"er# $opic# 8./ rice 3tic(iness


%) &n a perfectly competitive mar(et ________.

A) most goods and services are not standardied

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 aboveAns"er# C$opic# 8./ rice 3tic(iness


*) 2nder monopolistic competition ________.

A) many goods and services are not standardied

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




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18/20

+) 2nder monopolistic competition ________.

A) the goods purchased are assumed to be standardied products

B) it is good =or brand) differentiation that li(ely accounts for some price stic(inessC) buyers and sellers do not set prices and can only decide ho" much to buy and sell

) all of the above


$opic# 8./ rice 3tic(iness


/) 2nder monopolistic competition ________.

A) prices are fleible' because producers can change them as often as they "ishB) prices are fleible' because producers can never set a price other than the mar(et price

C) prices are fleible' because producers adopt Heynesian policies


Ans"er# !$opic# 8./ rice 3tic(inessAAC3B# 6eflective $hin(ing

) Menu costs ________.

A) are the cost a firm bears "hen it changes its pricesB) 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 menus too

often and ris( alienating customers) all of the above




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


Ans"er# B$opic# 8./ rice 3tic(iness


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19/20

8) Which of these is an eample 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 intendedC) 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 noticingAns"er# A



5) Menu costs are an important source of price stic(iness because ________.

A) printing menus is costly

B) putting items on sale reduces firms? revenueC) fre>uent price changes may lead to losing customers

) all of the above


Ans"er# C$opic# 8./ rice 3tic(iness


1-) 3taggered price setting ________.

A) leads to fre>uent price ad:ustmentsB) occurs "hen firms fail to consider the behavior of their competitors

C) is generally illegal


Ans"er# !

$opic# 8./ rice 3tic(inessAAC3B# 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


Ans"er# A


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20/20

1%) !mpirical evidence sho"s that prices are stic(y ________.

A) in all sectors of the economy

B) in hardly any sectors of the economyC) ecept in response to changes "ithin individual mar(ets

) all of the above

!) none of the aboveAns"er# C


1*) !mpirical evidence that changes in monetary policy do not cause rapid price ad:ustments

________.

A) is consistent "ith the Heynesian emphasis on shortrun economic fluctuations

B) suggests that policyma(ers need not "orry much about inflationC) remains limited and unconvincing

) is consistent "ith the classical dichotomy


Ans"er# A$opic# 8./ rice 3tic(iness


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 thelabor 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 short

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 costsabove their competitors?' or to lose employees by cutting "ages before competitors do so.


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

fleibility. $he logic of staggered price setting still applies' but rapid and deep common(no"ledge of mar(et conditions enables some de factosynchroniation of pricing decisions.



8. 6oad Map for Dur 3tudy of Business Cycles

1) $here are no >uestions for this section.

Ans"er#

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Chapter 8 Mishkin (8)