11: Business Cycles

Question 1

Unemployment rate=

Answer 1

unemployed / labor force

Question 2

Labor force=

Answer 2

Employed + Unemployed

Question 3

Competitive market that produces less output, and the sum of consumer and producer surplus is reduced:

Answer 3

Monopoly

Question 4

A firm’s initial response to an emerging economic contraction is:

Answer 4

Reduce output, by using less capital and labor

(i.e. reducing overtime hours)

Question 5

The unemployment rate:

Answer 5

lagging indicator

Question 6

Building permits:

Answer 6

leading indicator

Builders are seeking permits in anticipation of an economic expansion

Question 7

An increase in the policy rate will impact banks by:

Answer 7

Immediate increase in commerical bank’s base rates;
Reduced credit availability

An increase in the policy rate (federal funds rate) will likely raise the potential penalty that banks will have to pay if they run short of liquidity and thereby reduces their willingness to lend.

Question 8

Neutral interest rate=

Answer 8

real trend growth rate + inflation rate (expected or target)

Neutral > policy rate (fed funds rate) = Expansionary
Neutral <policy rate = contractionary