ECN 211 ASU EXAM 3 WITH
COMPREHENSIVE 300-QUESTION
REVIEW GUIDE | ARIZONA STATE
UNIVERSITY (ASU) – 2026/2027
ACADEMIC YEAR – VERIFIED
QUESTIONS AND ANSWERS
1. Q: What is a recession?
A: A period of mildly falling incomes and rising unemployment, often defined
as two consecutive quarters of negative GDP growth .
2. Q: What is a depression?
A: A severe and prolonged period of falling incomes and high unemployment,
such as the Great Depression .
3. Q: What is the business cycle?
A: The short-run fluctuations of an economy between periods of economic
expansion and economic contraction (recession) .
4. Q: What are the characteristics of a "good" or expanding economy?
A: Lots of job openings, firms raising wages, rising asset values, and
consumers borrowing and spending freely .
, 5. Q: What are the characteristics of a "bad" or contracting economy?
A: Scarce new job openings, firms not hiring, falling asset prices, and
consumers trying to save money .
6. Q: What are economic fluctuations?
A: They are irregular and unpredictable movements in income, spending, and
production that tend to move in the same direction .
7. Q: What is the relationship between output and unemployment during a
business cycle?
A: When real GDP declines (output falls), the unemployment rate rises
because firms lay off workers .
8. Q: What generally causes economies to fluctuate?
A: A change in aggregate supply or aggregate demand .
9. Q: What is a demand-side recession?
A: A recession caused by a decrease in the willingness of consumers and firms
to spend, leading to a fall in GDP .
10. Q: What is a supply-side recession?
A: A rare recession caused by large-scale negative events like natural
disasters, plagues, wars, or oil shocks that disrupt production .
Theories and Frictions (Questions 11-15)
, 11. Q: What is Say's Law?
A: The idea that "supply creates its own demand"; the act of producing goods
and services generates the income needed to buy them .
12. Q: What was Keynes' theory on recessions?
A: Recessions are caused by a lack of aggregate demand, as businesses and
consumers hoard cash instead of spending, leading to a fall in income .
13. Q: What is the "Paradox of Thrift"?
A: The idea that if everyone tries to save more at the same time, total income
will fall, which can actually lead to a decrease in total savings .
14. Q: What are "frictions" that prevent prices from adjusting quickly to
restore full employment?
A: 1) Sector switching takes time and resources, 2) The liquidity trap (interest
rates can't go below zero), 3) The deflationary cycle, and 4) Sticky prices and
wages .
15. Q: What is the "Classical Dichotomy"?
A: The theoretical separation of economic variables into real and nominal
variables, suggesting that changes in the money supply only affect nominal
variables in the long run .
Aggregate Demand (Questions 16-25)
, 16. Q: What is the Aggregate Demand (AD) curve?
A: A curve that shows the total quantity of goods and services that
households, firms, the government, and foreigners are willing to buy at each
price level .
17. Q: What is the shape of the AD curve and why?
A: It is downward-sloping, primarily due to the wealth effect, the interest-rate
effect, and the exchange-rate effect .
18. Q: What is the Wealth Effect?
A: A lower price level increases the real value of money, making consumers
feel wealthier and leading them to spend more .
19. Q: What is the Interest-Rate Effect?
A: A lower price level reduces the demand for money, lowering interest rates,
which encourages investment spending by firms and consumers .
20. Q: What is the Exchange-Rate Effect?
A: A lower price level leads to lower interest rates, causing a depreciation of
the currency, which boosts net exports .
21. Q: What causes the AD curve to shift?
A: Changes in consumption (C), investment (I), government spending (G), or
net exports (NX) .
22. Q: What factors shift the AD curve to the right?
A: An increase in consumption, investment, government spending, or net
exports .
COMPREHENSIVE 300-QUESTION
REVIEW GUIDE | ARIZONA STATE
UNIVERSITY (ASU) – 2026/2027
ACADEMIC YEAR – VERIFIED
QUESTIONS AND ANSWERS
1. Q: What is a recession?
A: A period of mildly falling incomes and rising unemployment, often defined
as two consecutive quarters of negative GDP growth .
2. Q: What is a depression?
A: A severe and prolonged period of falling incomes and high unemployment,
such as the Great Depression .
3. Q: What is the business cycle?
A: The short-run fluctuations of an economy between periods of economic
expansion and economic contraction (recession) .
4. Q: What are the characteristics of a "good" or expanding economy?
A: Lots of job openings, firms raising wages, rising asset values, and
consumers borrowing and spending freely .
, 5. Q: What are the characteristics of a "bad" or contracting economy?
A: Scarce new job openings, firms not hiring, falling asset prices, and
consumers trying to save money .
6. Q: What are economic fluctuations?
A: They are irregular and unpredictable movements in income, spending, and
production that tend to move in the same direction .
7. Q: What is the relationship between output and unemployment during a
business cycle?
A: When real GDP declines (output falls), the unemployment rate rises
because firms lay off workers .
8. Q: What generally causes economies to fluctuate?
A: A change in aggregate supply or aggregate demand .
9. Q: What is a demand-side recession?
A: A recession caused by a decrease in the willingness of consumers and firms
to spend, leading to a fall in GDP .
10. Q: What is a supply-side recession?
A: A rare recession caused by large-scale negative events like natural
disasters, plagues, wars, or oil shocks that disrupt production .
Theories and Frictions (Questions 11-15)
, 11. Q: What is Say's Law?
A: The idea that "supply creates its own demand"; the act of producing goods
and services generates the income needed to buy them .
12. Q: What was Keynes' theory on recessions?
A: Recessions are caused by a lack of aggregate demand, as businesses and
consumers hoard cash instead of spending, leading to a fall in income .
13. Q: What is the "Paradox of Thrift"?
A: The idea that if everyone tries to save more at the same time, total income
will fall, which can actually lead to a decrease in total savings .
14. Q: What are "frictions" that prevent prices from adjusting quickly to
restore full employment?
A: 1) Sector switching takes time and resources, 2) The liquidity trap (interest
rates can't go below zero), 3) The deflationary cycle, and 4) Sticky prices and
wages .
15. Q: What is the "Classical Dichotomy"?
A: The theoretical separation of economic variables into real and nominal
variables, suggesting that changes in the money supply only affect nominal
variables in the long run .
Aggregate Demand (Questions 16-25)
, 16. Q: What is the Aggregate Demand (AD) curve?
A: A curve that shows the total quantity of goods and services that
households, firms, the government, and foreigners are willing to buy at each
price level .
17. Q: What is the shape of the AD curve and why?
A: It is downward-sloping, primarily due to the wealth effect, the interest-rate
effect, and the exchange-rate effect .
18. Q: What is the Wealth Effect?
A: A lower price level increases the real value of money, making consumers
feel wealthier and leading them to spend more .
19. Q: What is the Interest-Rate Effect?
A: A lower price level reduces the demand for money, lowering interest rates,
which encourages investment spending by firms and consumers .
20. Q: What is the Exchange-Rate Effect?
A: A lower price level leads to lower interest rates, causing a depreciation of
the currency, which boosts net exports .
21. Q: What causes the AD curve to shift?
A: Changes in consumption (C), investment (I), government spending (G), or
net exports (NX) .
22. Q: What factors shift the AD curve to the right?
A: An increase in consumption, investment, government spending, or net
exports .
