GDP The Business Cycle 4

Question 1

Which school of economic thought argues that business cycles are primarily caused by shifts in technology and productivity, not demand shocks?

Accepted Answer

Real Business Cycle theory

Answer

Real Business Cycle (RBC) theory holds that fluctuations stem from real supply-side shocks like technology changes, not monetary or demand factors.

Question 2

During a business cycle contraction, what typically happens to the yield curve?

Accepted Answer

It inverts as short-term rates exceed long-term rates

Answer

Yield curve inversion (short-term rates exceeding long-term rates) is a well-known leading indicator of recession, often appearing before contractions begin.

Question 3

Which concept explains why small fluctuations in consumer demand can cause much larger swings in business investment spending?

Accepted Answer

The accelerator principle

Answer

The accelerator principle states that investment depends on the change in output, so even modest demand growth can trigger disproportionately large investment increases.

Question 4

What does it mean when economists say the US economy has entered a 'technical recession'?

Accepted Answer

Real GDP has declined for two consecutive quarters

Answer

A technical recession is commonly defined as two consecutive quarters of negative real GDP growth, though the NBER uses a broader set of criteria for official recession dating.

Question 5

How do automatic stabilizers help moderate the business cycle without legislative action?

Accepted Answer

They increase government spending and reduce tax burdens during downturns, boosting demand

Answer

Automatic stabilizers like unemployment benefits and progressive income taxes inject spending during recessions and withdraw it during booms, dampening cyclical swings.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP The Business Cycle 4