Core Economics 3e

Business Cycles and GDP

Multiple Choice Questions

After watching the Business Cycles and GDP video lecture, consider the question(s) below. Then “submit” your response.

Question

1. A recession occurs when:

the total level of economic output falls for several months.

unemployment increases.

incomes are increasing.

manufacturing output declines.

Question

2. The _____ of a business cycle occurs when economic output begins to grow after the trough.

peak

recovery

recession

depression

Question

3. The components of the business cycle are:

peak, trough, bottom, and height.

start, end, beginning, and middle.

consumption, investment, government expenditures, and net exports.

peak, recession, trough, and recovery.

Question

4. The goals of macroeconomic policy are to:

eliminate short-term fluctuations in the economy and sustain high economic growth.

minimize the effects of recessions and ensure that the economy grows over time.

ensure that the economy doesn’t become depressed and wages remain high.

increase employment and grow incomes.

Question

5. GDP (gross domestic product) is the:

sum of all manufacturing activity and personal consumption taking place in a given year.

market value of all domestic production and total employee earnings for a given year.

total market value of all final goods and services produced in the economy in a given year.

total market value of all nongovernmental goods and services produced in the economy in a given year.

Question

6. The components of GDP as measured by the expenditures approach are:

employee compensation, gross private domestic investment, government spending, and net exports.

employee compensation, proprietors’ income, corporate profits, rental income, and net interest.

profits, personal consumption expenditures, domestic investment, and government purchases.

personal consumption expenditures, gross private domestic investment, government purchases, and net exports.

Question

7. What items are included in the calculation of GDP using the income approach?

employee compensation, gross private domestic investment, government spending, and net exports.

employee compensation, proprietors’ income, corporate profits, rental income, and net interest.

profits, personal consumption expenditures, domestic investment, and government purchases.

personal consumption expenditures, gross private domestic investment, government purchases, and net exports.

True/False Questions

After watching the Business Cycles and GDP video lecture, consider the question(s) below. Then “submit” your response.

Question

1. When a recession ends, all participants in the economy feel that a recovery is in place.

True

False

Question

2. GDP provides a consistent measure to compare output between countries.

True

False

Question

3. Intermediate goods, such as raw materials, are included in the calculation of GDP.

True

False

Short Answer/Discussion Questions

After watching the Business Cycles and GDP video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Can macroeconomic policies eliminate recessions?

Suggested solution: No. Business cycles (which include recessions) will always be part of the economic landscape. Macroeconomic policies are focused on minimizing the length and severity of recessions (contractions in GDP) because recessions carry a significant human cost in terms of lost jobs and other dislocations. (Answers may vary.)

Question

2. Explain why the income and expenditure approaches to calculating GDP yield the same result.

Suggested solution: The expenditures approach to calculating GDP totals all expenditures for final goods and services. The income approach does the same for all forms of income. Because one person’s expenditure is another person’s income, both approaches yield the same result. (Answers may vary.)

Question

3. GDP per capita is a useful tool for comparing various countries' standard of living. Why may this tool not be perfect for comparing standards of living across countries?

Suggested solution: Though GDP per capita does provide some insight into the relative standards of living of countries, it does have some shortfalls in this application. (1) GDP per capita does not take into account income inequality, meaning that the average GDP per capita in one country could be composed of only very rich and very poor people, while a country with the same GDP per capita could have most of the population at the average level. (2) GDP per capita does not capture the informal, or underground, economy. A country with a large underground economy would have an understated GDP per capita. (3) GDP per capita does not include measures of nonmonetary quality of life, such as environmental quality or happiness. Although two countries have about the same GDP per capita and distribution of wealth, perhaps one has a better environment, hence is considered a better place to live. (Answers may vary.)