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

New orders for consumer goods and materials signal future production activity and are classified as a leading indicator.

Question 2

The output gap is calculated as:

Accepted Answer

Actual GDP minus potential GDP

Answer

The output gap = Actual GDP − Potential GDP; a negative value indicates a recessionary gap and a positive value an inflationary gap.

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

Automatic stabilizers like unemployment benefits and progressive taxes kick in automatically, supporting aggregate demand in downturns without requiring new legislation.

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

Contractions are characterized by falling real GDP, rising unemployment, and shrinking corporate profits as demand weakens.

Question 5

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

Accepted Answer

Cyclical unemployment

Answer

Cyclical unemployment is directly caused by insufficient aggregate demand during recessions and is the primary form that increases in downturns.

AP Practice Test

AP Practice Test

AP Macro AP Macro Business Cycles and Output Gaps 2