UNIT 12 QBANK Flashcards
Different degrees of inflation can impact the economy differently. Which of the following best reflects this?
A) Mild inflation can thwart business investments and slow economic growth.
B) Mild inflation can encourage growth and stimulate the economy.
C) High inflation pushes prices to their highest levels, continuously pushing the economy higher.
D) High inflation spurs the economy forward by increasing the demand for goods.
B) Mild inflation can encourage growth and stimulate the economy.
Explanation
While mild inflation can encourage economic growth because gradually increasing prices tend to stimulate business investments, high inflation pushes prices up, reducing the U.S. dollar’s buying power. Ultimately, high inflation hurts the economy.
Downturns in the business cycle or economic contractions are characterized by all of the following except
A) falling inventories.
B) higher consumer debt.
C) rising numbers of bond defaults.
D) rising numbers of bankruptcies.
A) falling inventories.
Explanation
When the economy is contracting, inventories tend to rise (not fall) due to a decreasing demand for goods.
Which of the following groupings might indicate the economy is contracting?
A) Bond defaults are rising, inventories are rising, and GDP is falling.
B) Bond prices are falling, stock prices are rising, and GDP is rising.
C) Inventories are at record lows, stock prices are at record highs, and bankruptcies are falling.
D) Consumer borrowing is low, property values are high, and stock prices are falling.
A) Bond defaults are rising, inventories are rising, and GDP is falling.
Explanation
The only grouping where all factors point toward a contracting or downward economy is the one showing bond defaults rising, inventories rising, and GDP falling. Other signs of a contracting economy would be falling stock prices, rising bankruptcies and bond defaults, higher consumer debt (borrowing), and falling property values.
Which of the following refers to prolonged periods of slow or little economic growth, usually accompanied by high unemployment?
A) Deflation
B) Stagflation
C) Trough
D) Stagnation
D) Stagnation
Explanation
Economic stagnation refers to prolonged periods of slow or little economic growth, usually accompanied by high unemployment.
Which of the following are characteristics of the expansion phase of the business cycle?
A) Higher consumer debt
B) Increasing defaults
C) Rising inventories
D) Increase industrial production
D) Increase industrial production
Explanation
Higher consumer debt, rising inventories, and increasing defaults are characteristics of the decline phase of the business cycle.
During periods of economic decline and contraction, one would expect
A) production to rise.
B) gross domestic product (GDP) to decrease.
C) inventories to decrease.
D) consumer demand to increase.
B) gross domestic product (GDP) to decrease.
Explanation
During periods of economic decline and contraction, GDP, the measure of goods and services produced, decreases. This decrease is due to a lack of consumer demand for goods and services during economic declines, which leads to rising inventories and continued lessening in production.
Recent reports indicate that the gross domestic product (GDP) has been declining steadily over the past two quarters. This would suggest
A) a recession.
B) an inflationary period.
C) an economic expansion.
D) a depression.
A) a recession.
Explanation
A recession is defined as six consecutive months (two quarters) or more of economic decline. By contrast, a depression is six consecutive quarters of economic decline.
According to the U.S. Commerce Department, the economy is in a depression when a decline in real output of goods and services lasts
A) 6 months or more (2 quarters).
B) 18 months or more (6 quarters).
C) beyond 12 months (4 quarters).
D) 9 months or more (3 quarters).
B) 18 months or more (6 quarters).
Explanation
The U.S. Commerce Department defines a depression as a decline in real output of goods and services lasting 18 months or more (6 quarters).
Economists refer to longer, more severe contractions in the economy as
A) depletions.
B) depressions.
C) recessions.
D) declines.
B) depressions.
Explanation
Economists call mild, short-term contractions recessions while longer, more severe contractions are called depressions.
Which segment of the business cycle would one expect to find rising interest rates and higher wages?
A) Expansion
B) Trough
C) Contraction
D) Recession
A) Expansion
Explanation
Expansions in the business cycle are characterized by increasing consumer demand for goods and services and increasing industrial production. One would expect these increases to lead to rising interest rates as demands for loans for purchases increases and higher wages for workers as production increases.
According to the U.S. Commerce Department, the economy is in a recession when a decline in real output of goods and services lasts
A) 9 months or more.
B) 18 months or more.
C) beyond 12 months.
D) 6 months or more.
D) 6 months or more.
Explanation
The U.S. Commerce Department defines a recession as a decline in real output of goods and services for six months or more.
Economists call mild, short-term contractions
A) declines.
B) troughs.
C) depressions.
D) recessions.
D) recessions.
Explanation
Economists call mild, short-term contractions recessions. Longer, more severe contractions are depressions.
Just as markets can be influenced by many factors, so can the market price of a single company’s stock. While all of the following could impact a company’s stock price to some extent, which would be the least likely to have a direct and immediate impact?
A) Federal Reserve Board (FRB) policies
B) The company’s earnings
C) Political elections
D) Changes in the business cycle
C) Political elections
Explanation
The price of a company’s stock will be impacted directly by the company’s earnings and changes in the business cycle. Less directly impactful would be FRB policies to loosen or tighten credit, and least likely to have a direct impact would be the outcome of political elections. It should be noted, however, that the outcome of political elections can influence FRB policies over time and, therefore, where the economy stands in relation to the business cycle. Still, however, elections would have less of an immediate impact.
U.S. consumers are increasing their imports of foreign-made goods. On this data alone, one might expect gross domestic product (GDP) to
A) initially increase sharply and then decrease.
B) remain the same.
C) decrease.
D) increase.
C) decrease.
Explanation
GDP is the measure of good and services produced. If U.S. consumers are importing more foreign goods, it is likely that production of U.S. goods will fall off, leading to a decrease in the GDP.
The business cycle includes all of the following classifications except
A) waves.
B) trough.
C) peak.
D) expansion.
A) waves.
Explanation
Throughout modern history, periods of economic expansion have been followed by periods of contraction in a pattern referred to as the business cycle or economic cycle. Business cycles go through four stages; expansion, peak, contraction, and trough.
