Week 6 Quiz

Economic activity reaches its highest level at the end of an expansion, and the next month it starts to fall. Which part of the business cycle is that turning month?

Select one.

• The trough
• The peak
• The recession
• The expansion

Two quarters in a row of falling real GDP is the official definition the Business Cycle Dating Committee uses to date U.S. recessions.

True or false.

• True
• False

In the illustrative output-gap economy, potential output is 1,000 billion dollars and actual output is 950 billion dollars. Which statement reports the gap correctly?

Select one.

• A recessionary gap of 50 billion dollars, or 5% of potential output
• An inflationary gap of 50 billion dollars, or 5% of potential output
• A recessionary gap of −50 billion dollars, with no percentage
• A recessionary gap of 50 billion dollars, or about 5.3% of actual output

In a boom year, the illustrative output-gap economy has potential output of 1,000 billion dollars and actual output of 1,040 billion dollars. Which statement reports the gap correctly?

Select one.

• A recessionary gap of 40 billion dollars, or 4% of potential output
• An inflationary gap of 4 billion dollars, or 40% of potential output
• An inflationary gap of 40 billion dollars, or 4% of potential output
• An inflationary gap of 1,040 billion dollars, or 104% of potential output

On an AD–AS diagram, the vertical long-run aggregate supply line stands at potential output. The crossing of aggregate demand and short-run aggregate supply sits to the left of that line. Where does the economy sit?

Select one.

• On its potential output, with no gap
• In an inflationary gap, producing beyond normal, full use
• Above potential, because the crossing is on the price-level axis
• In a recessionary gap, producing less than it could

After a sharp jump in oil prices, an economy's AD–AS crossing sits to the left of the long-run aggregate supply line, and the price level has risen. Which curve most likely moved, and in which direction?

Select one.

• Aggregate demand shifted to the left
• Short-run aggregate supply shifted to the left
• Long-run aggregate supply shifted to the right
• Aggregate demand shifted to the right

An economy sits in a recessionary gap and no new policy is used. As wage demands and expected inflation come down over time, what happens?

Select one.

• Aggregate demand shifts back to the right, and the price level rises
• Long-run aggregate supply shifts left to meet the crossing
• Short-run aggregate supply shifts to the right; output rises toward potential and the price level falls
• Short-run aggregate supply shifts to the left; output falls further and the price level rises

Select every factor the Business Cycle Dating Committee weighs when it decides whether a decline in activity is a recession.

Select every option that applies.

• Depth: how far economic activity falls
• Whether real GDP fell in two quarters in a row, and nothing else
• Diffusion: how widely the decline spreads across the economy
• The size of the government's budget deficit that year
• Duration: how long the decline lasts

The illustrative output-gap economy produces 950 billion dollars against a potential output of 1,000 billion dollars. What does that recessionary gap mean for unemployment?

Select one.

• Unemployment sits above its frictional-plus-structural level, so cyclical unemployment is above zero
• Only frictional unemployment rises, because workers are changing jobs
• Unemployment falls, because workers are stretched past normal, full use
• Structural unemployment disappears, because skills now match the jobs on offer

Cyclical unemployment is the extra joblessness that appears when spending across the economy falls in a recession, and it shrinks again as the economy expands back toward potential output.

True or false.

• True
• False