CBE Business Cycles and Economic Indicators 3

Question 1

According to Real Business Cycle (RBC) theory, economic fluctuations are primarily caused by:

Accepted Answer

Technology shocks and other real (supply-side) factors

Answer

RBC theory holds that business cycles result from real shocks to the economy, particularly technology shocks, rather than monetary or demand-side disturbances.

Question 2

The 'accelerator principle' in business cycle theory states that:

Accepted Answer

Investment spending changes are proportional to the rate of change in output (not its level)

Answer

The accelerator principle links net investment to changes in output: when output grows faster, firms invest more in capital; when growth slows, investment falls sharply.

Question 3

During which phase of the business cycle would a business economist most likely recommend expansionary countercyclical fiscal policy such as increased government spending?

Accepted Answer

Trough/Recession — when output and employment are falling

Answer

Countercyclical fiscal policy calls for stimulus (increased spending or tax cuts) during recessions to offset falling private demand and support employment.

Question 4

The Kondratiev wave (K-wave) is a long economic cycle with an approximate duration of:

Accepted Answer

45–60 years

Answer

Kondratiev waves are long-wave cycles lasting approximately 45–60 years, driven by major technological revolutions and capital investment waves.

Question 5

To assess the severity of a recession, a business economist would most appropriately measure:

Accepted Answer

The peak-to-trough decline in real GDP combined with the duration of the downturn

Answer

Severity is best captured by combining the magnitude of real GDP decline (peak-to-trough) with the duration, giving a comprehensive picture of economic damage.

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Business Cycles and Economic Indicators 3