AP Macro AP Macro Business Cycles and Output Gaps 2

Question 1

Which of the following is a leading economic indicator used to predict future business cycle turning points?

Accepted Answer

New orders for consumer goods and materials

Answer

Average duration of unemployment

Answer

Change in manufacturing and trade inventories

Answer

Outstanding commercial and industrial loans

Question 2

The output gap is calculated as:

Accepted Answer

Actual GDP minus potential GDP

Answer

Actual GDP minus nominal GDP

Answer

Potential GDP divided by actual GDP

Answer

Nominal GDP minus the GDP deflator

Question 3

Automatic stabilizers help dampen business cycle fluctuations because they:

Accepted Answer

Automatically increase government spending or reduce taxes during a recession without legislative action

Answer

Require Congressional approval before taking effect

Answer

Raise interest rates when GDP exceeds potential

Answer

Reduce the money supply when inflation rises

Question 4

During a contraction phase of the business cycle, which of the following would you most likely observe?

Accepted Answer

Declining output, rising unemployment, and falling business profits

Answer

Rising investment spending and falling unemployment

Answer

Increasing consumer spending and rising stock prices

Answer

Surging exports and rising wage growth

Question 5

Which type of unemployment tends to rise the MOST during a recession?

Accepted Answer

Cyclical unemployment

Answer

Frictional unemployment

Answer

Structural unemployment

Answer

Seasonal unemployment

Question 6

The 'paradox of thrift' suggests that during a recession, if all households simultaneously increase saving:

Accepted Answer

Aggregate demand falls, potentially deepening the recession

Answer

National income rises because investment funds increase

Answer

The money supply expands as banks gain deposits

Answer

Interest rates rise, attracting foreign investment