Explain The Theory Of Business Cycle Flashcards

thestudy of aggregate economic behavior is referred to as macroeconomics alternating periods of growth and contraction business cycles which of the following is a basic measure of macroeconomic performance output growth unemploymentinflation which is of the following is a downturn in the business cycle higher unemployment rates which of the following is true during the expansionary phase of the business cycle real GDP increases as the economy falls from the peak to the trough of the business cycle cyclical unemployment should increase and real GDP should decline the total value of goods and services produced within a nations boarders measured in constant prices refers to the real GDP a decline in an economy's level of output can lead to a lower standard of loving a decline in the real gdp for at least two consecutive quarters is referred to as recession which of the following is likely if an economy is in a recession or headed for 1"? a decrease in consumer confidencea decrease in the rate of inflationan increase in unemployment if the population of a country is 1000000 people its labor force consists of 800000 and 80000 people are unemployed the unemployment rate is unemployment rate unemployment rate= number of unemployed /size of labor force =80000/80000 = 10% a stock person who is laid off by a department store because retail stores across the country have decreased is_______________unemployed. cyclically full employment in the U.S. economy means the total employment rate has been reduced to zero inflation is defined as an increase in the average level of prices inflation functions as a redistribution mechanism because people have different abilities and incomes real income is real income adjusted for inflationis the amount of money income measured in constant dollars reflects the purchasing power of money the consumer price index a measure of changes in the average price of consumer goods which of the following are internal market forces innovation population spending behavior external shocks to the economy disruptions in trade war, natural disasters which of the following are policy levers government regulation, tax policy, availability of money which of the following concepts is consistent with classical theory self adjustment of the economy\flexible priceslack of goverment intervention the classical view of the economy is built on the concept flexible wages and pricesself adjustment says law sates that supply creates its own demand according to Keynes small disturbances in prices or output were likely to be magnified by the market government intervention in the economy is necessary at times the economy is fairly unstable any influences on macro outcomes must be transmitted through aggregate supply and demand the various quantities of output that all market participants are willing and able to buy at alternative levels in a given time period aggregate demand which of the following is not a reason for the downward slope of the aggregate demand curve the income effect the aggregate supply curve is upward sloping because a higher price means wider profit margins and more incentive to produce in macro equilibrium buyers and sellers intentions are compatible even if the economy is in macro equilibrium it is possible that the equilibrium output is not optimal which of the following is likely to occur if the U.S. government significantly increases spending o military weapons aggregate demand will increase or shift to the right if an economy is experiencing a recession the keynesian approach to achieving full employment is to employ expansionary fiscal policy including tax cuts and more government spending Keynes viewed the economy as inherently unstable and suggested that during a recession policy makers should cut taxes and or increase government spending which of the following ia an example of fiscal policy a change in the government spending on goods and services;a change in taxes that affects consumer spending;a change in taxes that affects investment spending monetary policy involves the use of money and interest rates to influence the macro economy a supply side policy approach to achieve both lower prices and full employment would be to decrease marginal tax rates and reduce government regulation fiscal policy involves the use of government spending and taxes inflation occurs when aggregate demand increases faster than output the four components of aggregate demand are consumption,investment, government spending, and net exports the largest component of aggregate demand for the U.S. economy is consumption expenditures on new plant and equipment plus changes inventories is known as investment net exports are negative if american exports less goods that they import which of the following will occur if aggregate demand is below full employment gdp recession the marginal propensity to consume the percentage of disposable income spent on consumption the multiplier is equal to 1/1-MPC if consumers spend 80 cents out of every dollar received multiplier =1/1-.80 =1/.2 =5 assume an MPC of .75. the change in total spending for the economy as a result of $20 billion new government spending injection would be multiplier=1/1-.75 =4total change in spending= 4x 20 billion =80 billion when we compare the total impact o aggregate demand of a 100 billion increase in government expenditures and a 100 billion decrease in taxes we find that the increase on governt expenditures will have a greater total impact on aggregate demand fiscal restraint is used to reduce inflationary pressures results in leftward shift of aggregate demand includes tx hikes and spending cuts m1 includes the most liquid forms of money;the narrowest definition of money supply;largely consists of transactions-account balances one of the main functions of the bank is creating money if the banking system has a required reserve ratio of 25% then the money multiplier is money multiplier=1/.25 = 4 when money serves as a mechanism for transforming current income into future purchases it is functioning as a store of value which of the following defines the money multip[lier 1/R the term fractional reserve refers to reserves being a fraction of total deposits a firms variable cost the level of output which of the following are constraints on the ability of the banking system to create new money willing borrowers;willing lenders;government regulation the alternate measures of the money supply such as m1 m2 etc are all intended to reflect variations in liquidity and accessibility of assets;whether deposits are domestic or international;how often depositors use the accounts in the case of wide spread unemployment in the economy fiscal policy would call for the government running s=a budget deficit the policy tools fiscal tax cuts changes in government spendingmonetary open market operations reserve requirements discount ratessupply side tax incentives for investment and saving deregulation education and training immigration trade policy automatic stabilizer federal expenditure or revenue item that automatically responds counter cyclically to changes in national income , unemployment benefits income taxes fiscal year the 12th month period used for accounting purposes : begins October 1 for federal government stagflation when the economy suffers from both inflation and unemployment at the same time modern Keynesian's acknowledge that monetary policy might help increases in the money supply may lower interest rates and give investment spending a boost monetarists believe the only response to a recession is patience supply siders -emphasize the need to improve production incentives.-urge cuts in marginal tax rates on investment and labor-find ways to reduce government regulation four obstacles to policy success goal conflicts ;measurement problems;design problems;implementation problems in designing policy policy makers must depend on economic forecasts that is informed guesses about what the economy will look like in the future