GDP The Business Cycle 3

Question 1

How does the business cycle typically affect federal government budget deficits in the US without any deliberate policy changes?

Accepted Answer

Deficits grow during recessions as tax revenues fall and automatic stabilizers increase spending

Answer

Automatic stabilizers like unemployment insurance and progressive taxes cause deficits to expand during recessions and shrink during expansions without new legislation.

Question 2

Which of the following best describes the concept of 'output gap' in relation to the business cycle?

Accepted Answer

The difference between actual GDP and potential GDP

Answer

The output gap measures how far actual GDP is from potential (full-capacity) GDP; a negative gap indicates slack during contractions, a positive gap during overheating expansions.

Question 3

What typically happens to business inventories at the beginning of an unexpected economic contraction?

Accepted Answer

Inventories rise as sales fall short of production plans

Answer

When demand unexpectedly drops, goods accumulate unsold, causing inventory levels to rise before firms can reduce production.

Question 4

The 'multiplier effect' in the business cycle refers to which phenomenon?

Accepted Answer

Each dollar of investment generates more than one dollar of total income in the economy

Answer

The multiplier effect occurs because an initial injection of spending circulates through the economy, generating additional rounds of income and spending greater than the original amount.

Question 5

Which of the following is a lagging economic indicator that confirms business cycle turning points after they occur?

Accepted Answer

Average prime rate charged by banks

Answer

The average prime rate is a lagging indicator because banks adjust lending rates only after economic conditions have already changed, confirming rather than predicting cycle turns.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP The Business Cycle 3