ANALYZED ECONOMIC – 1002 FINAL EXAM

ANALYZED ECONOMIC – 1002 FINAL EXAM The _________ refers to the continually reoccurring periods of expansion and contraction of real GDP - CORRECT ANSWER -business cycle The Business Cycle Reference Dates reported by the NBER keep track of when _________________ in the united states begin and end - CORRECT ANSWER -recessions A _______________ is a very severe and long-lasting recession - CORRECT ANSWER -depression An employed worker is part of the economy's ___________________ - CORRECT ANSWER -labor force Recessions are associated with falling real GDP and a rising ___________ - CORRECT ANSWER - unemployment rate When a firm is forced into __________________ it must shut down and sell its output and other assets at distressed prices - CORRECT ANSWER -liquidate According to Fisher's _____________________ Theory deflation occurs during severe economic downturns and increases the real value of debt - CORRECT ANSWER -Debt-Deflation A policy of increasing the money supply to prevent deflation during a sever economic downturn is called a ___________________ policy - CORRECT ANSWER -reflation The Keynesian _________________________ gives aggregate consumption as a linear function of aggregate output - CORRECT ANSWER -consumption function If consumption increases by 0.65 whenever output increases by 1 then the _______________________ equals 0.65 - CORRECT ANSWER -marginal propensity to consume (MPC) If an increase in government spending results in an even larger increase in output then the _____________________ is greater than 1 - CORRECT ANSWER -spending multiplier When the MPC has a small value close to 0 then the __________________ will also have a small value close to 1 - CORRECT ANSWER -spending multiplier A government following a Keynesian policy of increasing spending during a recession is hoping to ______________ the economy - CORRECT ANSWER -stimulate Fiscal spending stimulus is more likely to be effective if it is __________________ rather than paid for with an increase in taxes - CORRECT ANSWER -deficit financed If government borrowing leads to higher interest rates and lower C and I then the _________________________ is strong - CORRECT ANSWER -crowding out effect The goal of _____________________ is to use fiscal policy to target the full employment level of output - CORRECT ANSWER -stabilization policy When real GDP is less than the full employment output level there is an ____________________ - CORRECT ANSWER -output gap The U.S. economy has experienced economic growth for some time now, so we must be due for a recession some time in the near future (T/F) - CORRECT ANSWER -False. In the past there have been long periods of economic expansion, as well as short periods. Historically, recession have not occurred right at regular intervals. Classical economist like Irving Fisher focused more on labor productivity. They were not concerned with CPI or how it changed overtime (T/F) - CORRECT ANSWER -False. Irving Fisher was especially concerned with the effects of inflation and deflation. Very severe economic depressions are typically associated with inflation (T/F) - CORRECT ANSWER - False. Very severe economic downturns, such as the Great Depression of the 1930s, and the Great Recession of have been associated with deflation or very low inflation rates. Friedrich Hayek thought that the Great Depression of the 1930's could have been avoided if central banks had not kept interest rates lower than their free market levels. (T/F) - CORRECT ANSWER -True. Hayek argued that interest rates were kept artificially low in the 1920s, which led to over-indebtedness, followed by the economic contraction of the 1930s. Keynes argued that during economic depressions new government spending could replace declining private sector investment and raise the national output (T/F) - CORRECT ANSWER -True. Keynes argued that new government spending could act as a fiscal stimulus during downturns, when private sector investment is low If unemployed workers drop out of the labor force then, all else equal, the unemployment rate will go down (T/F) - CORRECT ANSWER -True. Holding everything else equal, if unemployed workers stop looking for work they will no longer be considered part of the labor force and the fraction of the labor force without a job (the unemployment rate) will decrease If the government spending multiplier is 1 then a $1 increase in government spending (deficit-financed) will lead to no increase in output (T/F) - CORRECT ANSWER -False. If the spending multiplier is 1 then $1 increase in government spending leads to a $1 increase in output Stimulus spending can provide a kind of social insurance against business cycle risk. (T/F) - CORRECT ANSWER -True. A policy of fiscal stabilization would entail increases in government spending to stimulate the economy during a recession Irving Fisher did not think that the Fed Should have intervened in the economy during the Great Depression. He thought the economy should be left to self-correct. (T/F) - CORRECT ANSWER -False.