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CHAPTER 10—ECONOMIC FLUCTUATIONS
MULTIPLE CHOICE
1. Since 1960, real GDP has fluctuated to some extent; however, there has been virtually no overall
growth when the entire time span is considered.
a. True
b. False
ANS: B PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Knowledge
3. Which of the following statements best describes the U.S. economy since 1960?
a. Potential output has risen steadily, but actual output has fluctuated above and below
full-employment output.
b. Actual output has risen steadily, but potential output has fluctuated above and below
actual output.
c. Potential output and actual output have both not risen steadily.
d. Potential output and actual output have both fluctuated above and below what the classical
model predicts.
e. Potential output has remained constant but actual output has risen.
ANS: A PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Knowledge
7. A period during which GDP exceeds its potential level is best known as a(n)
a. expansion
b. contraction
c. boom
d. recession
e. depression
ANS: C PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Knowledge
12. You are reading a newspaper article that refers to expansions and contractions in the economy. The
references are to changes in
a. wage rates
b. inflation rates
c. movements in exchange rates
d. real GDP
e. investment expectations
ANS: D PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
16. What would a leftward shift of the labor demand curve indicate?
a. Firms want to hire more workers than before at any given wage than before.
b. Firms want to pay a higher wage than before at any given level of employment.
c. Households want to supply fewer hours of work than before at any given wage rate.
d. Firms want to hire fewer workers than before at any given wage rate.
e. Households want to supply more hours of work than before at any given wage rate.
ANS: D PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
18. A weakness in the classical economic claim that a recession is caused by a decrease in labor demand
curve is
a. that labor demand never changes
b. that labor demand increases during a recession
c. that labor supply decreases during a recession
d. the confusion between a shift of the labor demand curve and a movement along that curve
e. the impossibility in the classical model of total spending ever being deficient
ANS: E PTS: 1 DIF: Difficulty: Challenging
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
20. If workers become more productive, which of the following would happen in the labor market?
a. Labor supply would increase.
b. Labor supply would decrease.
c. Labor demand would increase and labor supply would decrease.
d. Labor demand would decrease and so would labor supply.
e. Labor demand would increase.
ANS: E PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
21. If workers become less productive, which of the following would happen in the labor market?
a. Labor supply would decrease.
b. Labor supply would increase.
c. Labor demand would decrease and labor supply would increase.
d. Labor demand would increase and so would labor supply.
e. Labor demand would decrease.
ANS: E PTS: 1 DIF: Difficulty: Moderate
24. Why is it unlikely that expansions could be explained by a decrease in labor demand in the classical
model?
a. It would be hard to say why productivity decreases.
b. Productivity increases are too fast and variable to explain expansions.
c. Productivity tends to improve at a constant and steady rate.
d. Only unexplained spending changes can lead to changes in output and employment, not
the other way around.
e. Productivity improvements are rather slow.
ANS: E PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
25. Suppose a major computer virus struck the nation's computers and all hard drives were erased. What
would happen in the labor market?
a. The real wage would increase and so would employment.
b. The real wage would not change, but employment would decrease.
c. The real wage would increase and employment would decrease.
d. The real wage would decrease and so would employment.
e. The real wage would decrease and employment would increase.
ANS: D PTS: 1 DIF: Difficulty: Moderate
26. If a new computer program was developed that dramatically improved productivity in most firms,
what would happen in the labor market?
a. The real wage would not change but employment would decrease.
b. The real wage would increase and employment would decrease.
c. The real wage would decrease and so would employment.
d. The real wage would decrease and employment would increase.
e. The real wage would increase and so would employment.
ANS: E PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
28. One difficulty with any explanation of economic fluctuations based on a shift in labor supply is that
a. workers' preferences tend to change very quickly
b. labor supply shifts all the time without causing recessions or expansions
c. labor supply is difficult to measure
d. workers' preferences tend to change very slowly
e. the unemployment rate changes during economic fluctuations
ANS: D PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
29. A logical explanation for recessions might be that households have suddenly altered their
willingness to work. A problem with this explanation is
a. it is inconsistent with patterns of job searches during recessions
b. the demand for labor rarely shifts
c. the large number of women who entered the labor force in the last four decades
d. it is inconsistent with the classical model
e. the work ethic that is responsible for the decline in American vacations.
ANS: A PTS: 1 DIF: Difficulty: Challenging
30. The classical assumption that labor markets clear makes it difficult for that model to explain
recessions.
a. True
b. False
ANS: A PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
31. The classical model is one of the best that economists have for capturing the rapidly changing nature
of the supply and demand for labor and ultimately for explaining recessions.
a. True
b. False
ANS: B PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
32. The classical model does not do a good job of explaining short-run fluctuations in the level of
economic activity.
a. True
b. False
ANS: A PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
33. Suppose a report on the internet indicates that job prospects for graduates are bright because full
employment is achieved automatically. Economists are likely to
a. be disappointed in the degree of economic understanding possessed by the author of the
report
b. be excited about the earning potential of new entrants into the labor market
c. be anxious about inflationary indicators
d. anticipate a recession
e. encourage a tax cut to stimulate the economy
ANS: A PTS: 1 DIF: Difficulty: Challenging
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
36. Which of the following assumptions of the classical model is the best reason we cannot use it to
explain short-run economic fluctuations?
a. Markets never clear in the long run.
b. The labor market clears.
c. Prices remain constant and supply and demand adjust.
d. It does not show how an economy recovers from a recession.
e. Government intervention is essential to get markets to clear.
ANS: B PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
37. In order for the classical model to explain expansions and recessions, which of the following
would have to be true?
a. Labor supply could not change.
b. The labor market equilibrium would have to change suddenly and significantly.
c. Labor demand could not change.
d. The labor market equilibrium would have to change slowly.
e. The labor market equilibrium could not move.
ANS: B PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
40. Since a long run consists of many short runs, the classical model is
a. incorrect every time we look at output data
b. accurate during the short run
c. paradoxically quite accurate in the long run; however, it is not very accurate in the short
run
d. our best guide to fluctuations in the economy
e. paradoxically quite accurate in the short run; however, it is not very accurate in the long
run
ANS: C PTS: 1 DIF: Difficulty: Challenging
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Comprehension
41. The classical model explains away unemployment as a long-run problem by assuming that
a. coordination in labor markets will occur within an acceptable period of time
b. the economy consists of multiple, coordinated sectors
c. it causes firms to cut back on their long-run production plans
d. what is a problem during one period will seem more like an opportunity for economic
growth during another period
e. higher saving will stimulate increased investment
ANS: A PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Comprehension
44. The process of moving from disequilibrium to equilibrium in labor markets creates special problems
because
a. we are all workers threatened by recession
b. we cannot spend money we have not earned
c. the process is very short
d. the process is especially lengthy
e. negative shocks create economic expansions
ANS: D PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Comprehension
45. A spending shock typically involves a dramatic reduction in spending in virtually all sectors of the
economy simultaneously.
a. True
b. False
ANS: B PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Knowledge
46. The reason a shock to one sector can spread to the whole economy is that
a. a decrease in production in one sector leads to an overall decrease in spending
b. firms will need to help bail out other firms that are having troubles
c. an increase in production in one sector will lead to an overall decrease in spending
d. most shocks are not sector-specific but economy-wide
e. workers laid off in the one sector will purchase more goods in another sector
ANS: A PTS: 1 DIF: Difficulty: Moderate
52. Which of the following shocks have caused most of the recessions since 1950?
a. Both c and e
b. Increased government spending
c. Oil price increases
d. The beginning of a war
e. Changes in Federal Reserve Policy
ANS: A PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Knowledge
53. Assume the economy is at full employment. Which of the following would you expect if oil prices
suddenly decreased?
a. A recession
b. A decrease in employment below its full-employment level
c. An economic contraction
d. A technological breakthrough
e. An increase in employment above its full-employment level
ANS: E PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Comprehension
55. Of the recessions and expansions from 1950 to 1990, the common events were
a. reactions to war and oil prices
b. tax increases and tax cuts
c. changes in exports
d. Decreases in welfare spending
e. Increases and decreases in health care spending
56. The expansion of 2002 and beyond was due, at least in part to
a. interest rate increases.
b. increases in housing wealth.
c. increases in investment spending.
d. large reductions in federal spending.
e. increases in taxes.
ANS: B PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Knowledge
58. Over time the full-employment level of output in the United States has risen steadily.
a. True
b. False
ANS: A PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Knowledge
62. The classical model predicts the real GDP will always be
a. rising.
b. falling.
c. equal to its full-employment level.
d. constant.
e. equal to its full-taxation level.
ANS: C PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Knowledge
65. What would a rightward shift of the labor demand curve indicate?
a. Firms want to hire more workers than before at any given wage rate.
b. Households want to supply more hours of work than before at any given wage rate.
c. Firms want to pay a lower wage rate than before at any given level of employment.
d. Households want to supply fewer hours of work than before at any given wage rate.
e. Firms want to hire less workers than before at any given wage rate.
ANS: A PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
66. Which of the following could explain a leftward shift of the labor demand curve?
a. Firms are unable to sell all the output they produce.
b. Workers have become less productive.
c. Workers have become more productive.
d. Both (a) and (b) are correct.
e. The demand curve for the product that firms sell shifts to the right.
ANS: D PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
68. Why is a rightward shift of the labor supply curve difficult to rationalize in the classical model?
a. The labor supply curve is based on firms’ preferences.
b. Labor supply is very difficult to measure.
c. The labor supply curve is almost never a known entity.
d. Workers’ preferences and therefore labor supply tend to change very slowly.
e. Workers’ preferences and therefore labor supply tend to change very quickly.
69. The assumption that labor markets clear makes it very easy for the classical model to explain
recessions.
a. True
b. False
ANS: B PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
70. The assumption that labor markets clear makes it very easy for the classical model to explain
expansions.
a. True
b. False
ANS: B PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
71. The classical model does a good job of explaining short-run fluctuations in the level of economic
activity.
a. True
b. False
ANS: B PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
72. The classical model does a poor job of explaining the __________ because it assumes that the
__________ always clears.
a. long run; labor market.
b. long run; financial market.
c. short run; labor market.
d. short run; financial market.
e. short run; housing market.
ANS: C PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Comprehension
75. Suppose Mike and Renee are the only two people in a very simple economy and that they produce and
exchange two goods, soda and pretzels. Which of the following might cause a recession in this
simple economy?
a. Mike gets the idea that Renee wants more soda, which Mike produces.
b. Renee gets the idea that Mike wants more pretzels, which she produces.
c. Mike gets the idea that Renee wants less soda, which he produces.
d. Renee gets the idea that Mike wants less soda, which he produces.
e. The production of pretzels being equal to the production of soda.
ANS: C PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Comprehension
76. Which of the following is a common reaction to a decrease in the interest rate?
a. An increase in oil prices.
b. A decrease in stock market prices.
c. An increase in spending on new homes.
d. An increase in military spending.
e. An increase in federal highway spending.
ANS: C PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Comprehension
79. What do all expansions and recessions since 1950 have in common?
a. Changes in oil prices.
b. Changes in interest rates.
c. Changes in spending.
d. Changes in productivity.
e. None of the above.
ANS: C PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Comprehension
80. Say’s law will prevent recessions only if a critical assumption of the classical model holds: That the
interest rate adjusts until saving is equal to business and government borrowing.
a. True
b. False
ANS: A PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Comprehension
81. During the Great Depression of the 1930s, it took the economy only a couple of years to return to full
employment.
a. True
b. False
ANS: B PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: Can the Classical Model Explain Economic Fluctuations?
KEY: Bloom's: Knowledge
84. Half of American recessions since the early 1950s have been caused at least in part by rapid increases
in oil prices.
a. True
b. False
ANS: A PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Knowledge
85. The 2001-2007 economic expansion began when a change in Federal Reserve policy and other global
conditions caused interest rates to drop and stay low.
a. True
b. False
ANS: A PTS: 1 DIF: Difficulty: Moderate
NAT: BUSPROG: Analytic
STA: DISC: Understanding and Applying Economic Models
TOP: What Triggers Economic Fluctuations? KEY: Bloom's: Knowledge