Which one of the following most accurately describes the normal sequence of a business cycle?
Answer(s): B
Choice "b" is correct. The sequence of a typical business cycle includes an expansionary phase, a peak of economic activity, a contractionary phase, and a trough of economic activity. Choice "a" is incorrect. A peak does not follow a trough. Choice "c" is incorrect. A trough does not follow an expansion. Choice "d" is incorrect. A contraction does not follow a trough.
Within the framework of the aggregate demand/aggregate supply model, an increase in short run aggregate supply will cause:
Answer(s): A
Choice "a" is correct. A shift right in short run aggregate supply causes output to increase and the price level to fall.Choice "b" is incorrect. Real output would rise, not fall. Choice "c" is incorrect. The price level would fall, not rise. Choice "d" is incorrect. Real output would rise, not fall.
Which one of the following is most likely to accompany a reduction in aggregate demand?
Choice "b" is correct. As aggregate demand falls, the unemployment rate rises so employment would decrease.Choice "a" is incorrect. The price level would fall, not rise.Choice "c" is incorrect. Real GDP would fall, not rise.Choice "d" is incorrect. The unemployment rate would rise, not fall.
If an economy is currently experiencing both full employment and price stability, a major tax reduction will probably cause:
Choice "b" is correct. A tax cut shifts the aggregate demand curve to the right causing the price level and therefore the inflation rate to rise.Choice "a" is incorrect. The unemployment rate would fall, not rise. Choice "c" is incorrect. The price level would rise, not remain unchanged. Choice "d" is incorrect. Consumption would rise as disposable income rises, not fall.
If the U.S. dollar increases in value relative to the other major currencies, aggregate demand should:
Choice "b" is correct. If the dollar gains in value, net exports will suffer as U.S. goods become more expensive overseas; hence aggregate demand will decrease. The supply of foreign goods domestically should increase as imports become cheaper.Choice "a" is incorrect. Demand should decrease, not increase.Choice "c" is incorrect. Irrelevant to the question.Choice "d" is incorrect. Demand should decrease, not remain the same.
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