Chapter 4

Question 1

Nigel has recently completed a certificate in financial accounting and has decided to leave his current employer. He will spend the next two months looking for a job that better suits his new skills. What type of unemployment would Nigel’s situation be classified as?
A. Frictional.
B. Cyclical.
C. Structural.
D. Nominal.

Answer 1

Frictional
Nigel’s look for new work would be considered part of frictional unemployment, which is the result of normal labour turnover from people entering and leaving the work force and from the ongoing creation and destruction of jobs. Even in the best of economic times, people are looking for work because they have finished school, quit, been laid off or been fired from their most recent job. This is a normal part of a healthy economy.

Question 2

If production capacity is growing, corporate profits are increasing, and job creation is steady, in which phase of the business cycle is the economy likely operating?
A. Recovery.
B. Peak.
C. Expansion.
D. Trough.

Answer 2

The economy is likely in the expansion phase of the business cycle. These are all signals of normal growth where the economy is steadily expanding.

Question 3

Select the pattern of economic signals that indicate that the economy is at the peak of the business cycle.
A. Capacity utilization is low and the unemployment rate is high.
B. Inflation is increasing, interest rates are increasing and business investment declines.
C. Inflation is stable, corporate profits are increasing and unemployment is decreasing.
D. Inventories are increasing, profits decline and employment decreases.

Answer 3

B. Inflation is increasing, interest rates are increasing and business investment declines.

At the peak of the business cycle, demand exceeds the capacity of the economy. There are pressures on prices, wages and interest rates. These pressures begin to dampen demand for investments, housing and consumer goods

Question 4

What type of indicator is money supply considered?
A. Lagging.
B. Coincident.
C. Leading.
D. Contrarian.

Answer 4

The progress of the business cycle can be tracked by observing certain economic indicators. Leading indicators tend to peak and trough before the overall economy. They are the most useful and widely used of the business cycle indicators since they anticipate change by indicating what businesses and consumers have actually begun to produce and spend. Among the most important leading data series are housing starts (which precede construction) and manufacturers’ new orders, especially for durables (which indicate expectations of higher levels of consumer purchases of such items as automobiles and appliances). Others include manufacturers’ new orders, which indicate expectations of higher levels of consumer purchases of such items as automobiles and appliances, commodity prices (which reflect rising or falling demand for raw materials), average hours worked per week (which result from changes in the level of output and anticipate changes in employment), stock prices (which suggest changing levels of profits) and money flows (which indicate available liquidity).