Reading 11: understanding business cycles Flashcards
In the early part of an economic expansion, inventory-sales ratios are most likely to:
increase because sales are unexpectedly low.
increase because businesses plan for expansion.
decrease because of unexpected increases in sales.
Early in an expansion, inventory-sales ratios typically decrease below their normal levels as accelerating sales draw down inventories of produced goods. (LOS 11.c)
The contraction phase of the business cycle is least likely accompanied by decreasing:
unemployment.
inflation pressure.
economic output.
An economic contraction is likely to feature increasing unemployment (i.e., decreasing employment), along with declining economic output and decreasing inflation pressure. (LOS 11.a)
According to which business cycle theory should expansionary monetary policy be used to fight a recession?
Keynesian school.
Monetarist school.
New Classical school.
Keynesian school economists recommend monetary or fiscal policy action to stimulate aggregate demand and restore full employment. Monetarists believe the rate of money supply growth should be kept stable and predictable. The New Classical school recommends against monetary or fiscal policy intervention because recessions reflect individuals’ and firms’ utility-maximizing response to real factors in the economy. (LOS 11.d)
Module Quiz 11.2
An economic indicator that has turning points which tend to occur after the turning points in the business cycle is classified as:
a lagging indicator.
a leading indicator.
a trailing indicator.
Lagging indicators have turning points that occur after business cycle turning points. (LOS 11.e)
The unemployment rate is defined as the number of unemployed as a percentage of:
the labor force.
the number of employed.
the working-age population.
The unemployment rate is the number of unemployed as a percentage of the labor force. (LOS 11.f)
A country’s year-end consumer price index over a 5-year period is as follows:
Year 1 106.5
Year 2 114.2
Year 3 119.9
Year 4 124.8
Year 5 128.1
The behavior of inflation as measured by this index is best described as:
deflation.
disinflation.
hyperinflation.
The yearly inflation rate is as follows:
Year 2 (114.2 – 106.5) / 106.5 = 7.2%
Year 3 (119.9 – 114.2) / 114.2 = 5.0%
Year 4 (124.8 – 119.9) / 119.9 = 4.1%
Year 5 (128.1 – 124.8) / 124.8 = 2.6%
The inflation rate is decreasing, but the price level is still increasing. This is best described as disinflation. (LOS 11.g)
Core inflation is best described as an inflation rate:
for producers’ raw materials.
the central bank views as acceptable.
that excludes certain volatile goods prices.
Core inflation is measured using a price index that excludes food and energy prices. (LOS 11.h)
Which of the following is least likely to reduce substitution bias in a consumer price index?
Use a chained index.
Use a Paasche index.
Adjust for the bias directly using hedonic pricing.
Adopting a chained price index method addresses substitution bias, as does using a Paasche index. Hedonic pricing adjusts for improvements in the quality of products over time, not substitution bias. (LOS 11.i)
In which of the following inflation scenarios does short-run aggregate supply decrease due to increasing wage demands?
Cost-push inflation.
Demand-pull inflation.
Both cost-push and demand-pull inflation.
Both inflation scenarios can involve a decrease in short-run aggregate supply due to increasing wage demands. In a wage-push scenario, which is a form of cost-push inflation, the decrease in aggregate supply causes real GDP to fall below full employment. In a demand-pull inflation scenario, an increase in aggregate demand causes real GDP to increase beyond full employment, which creates wage pressure that results in a decrease in short-run aggregate supply. (LOS 11.j)
