GDP The Business Cycle 5

Question 1

Which of the following describes 'stagflation,' and during which type of business cycle shock does it typically occur?

Accepted Answer

High inflation combined with high unemployment; typically caused by adverse supply shocks

Answer

Stagflation combines high inflation and high unemployment, defying the usual Phillips Curve trade-off, and typically results from supply-side shocks like oil price spikes.

Question 2

How does the Federal Reserve typically respond during the contraction phase of the business cycle?

Accepted Answer

It lowers the federal funds rate to stimulate borrowing and spending

Answer

During contractions, the Fed lowers its policy rate to reduce borrowing costs, encourage investment and consumption, and stimulate recovery.

Question 3

What is the 'paradox of thrift' and how does it relate to the business cycle?

Accepted Answer

Saving more is always good for individuals but can deepen recessions if everyone saves simultaneously

Answer

The paradox of thrift, identified by Keynes, holds that while individual saving is rational, if all households save simultaneously during a downturn, aggregate demand collapses and the recession worsens.

Question 4

Which of the following would be considered a 'coincident' economic indicator, moving roughly in sync with the business cycle?

Accepted Answer

Employees on nonagricultural payrolls

Answer

Nonfarm payrolls is a coincident indicator that rises and falls alongside the business cycle, reflecting current economic conditions.

Question 5

During an economic expansion, why might the Federal Reserve raise interest rates even while GDP is still growing?

Accepted Answer

To slow growth and prevent the economy from overheating with excessive inflation

Answer

Pre-emptive rate hikes during expansions aim to cool an overheating economy, prevent demand-pull inflation from accelerating, and extend the cycle by avoiding an abrupt peak.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP The Business Cycle 5