Chapter 1-Macro Economics...

Question 1

Macroeconomics distinguishes between the real economy and the…

a) …monetary economy.

b) …virtual economy.

c) …normative economy.

d) …underground economy.

Question 2

During business cycles the opposite of a trough is …

a) …an inflation

b) …a hyperinflation.

c) …a trend.

d) …a peak.

Question 3

According to the analysis of the British economist John Maynard Keynes,…

a) …markets coordinate supply and demand so that a policy of laissez-faire would prevent recessions.

b) …economic fluctuations were the cumulative result of mistakes made by businesses and households in an uncertain world.

c) …government demand could be used to smooth fluctuations in aggregate output and income.

d) …supply creates its own demand through the circular flow of economic activity.

Question 4

In order to influence spending on goods and services in the short-run, monetary policy is directed at directly influencing…

a) …unemployment rates.

b) …inflation rates.

c) …interest rates.

d) …economic growth rates.

Question 5

"Inflation is generally procyclical" means…

a) …"higher rates of inflation tend to precede periods of high economic growth."

b) …"the rate of inflation tends to rise in periods of high economic growth and fall in periods of low economic growth".

c) …"prices on average rise in an economic expansion but fall after a business cycle peak."

d) "…more inflation results in less capacity utilization."

Question 1

Macroeconomics distinguishes between the real economy and the…

answer:

a) …monetary economy.

Feedback:

Spending depends upon both the volumes of goods and services as well as their prices denominated in money.

Question 2

During business cycles the opposite of a trough is …

answer:

d) …a peak.

Feedback:

Together these are the cyclical turning points.

Question 3

According to the analysis of the British economist John Maynard Keynes,…

 answer:

c) …government demand could be used to smooth fluctuations in aggregate output and income.

Feedback:

Keynes saw the key to offsetting falls in private demand in expansionary fiscal policy (tax cuts or spending increases).

Question 4

In order to influence spending on goods and services in the short-run, monetary policy is directed at directly influencing…

 answer:

c) …interest rates.

Feedback:

Interest rates affect a household's decision how much to save and how much to consume. Hence they affect spending on goods and services. "Short-run" turns out to be an important qualifier.

Question 5

"Inflation is generally procyclical" means…

 answer:

b) …"the rate of inflation tends to rise in periods of high economic growth and fall in periods of low economic growth".

Feedback:

Note that according to the Burns-Mitchell diagram for price inflation, it actually lags the peak of the business cycle by a quarter. Note choice "c" confuses the price level with the rate of change of the price level (i.e. inflation). Deflation in the modern world does not generally occur after the peak of the business cycle, rather a slowing down of the rate of inflation can be expected