Question 1

According to real business cycle theory, if the Bank of Canada increases the quantity of money when real GDP decreases, real GDP

Accepted Answer

The answer of According to real business cycle theory, if...

Question 2

According to mainstream business cycle theory, ________ grows at a steady rate and ________ grows at a fluctuating rate.

Accepted Answer

According to mainstream business cycle theory, potential GDP grows at a steady rate due to growth in the factors of production, while aggregate demand grows at a fluctuating rate due to changes in consumer and investment spending.

Question 3

According to real business cycle theory, a fall in the real interest rate ________ the supply of labour and ________ employment.

Accepted Answer

The answer of According to real business cycle theory, a...

Question 4

In real business cycle theory, the supply of labour

Accepted Answer

In real business cycle theory, an increase in the real interest rate makes saving more attractive, leading individuals to work more to take advantage of higher returns on savings, thus increasing the supply of labor.

Question 5

Suppose the economy is in long-run equilibrium when the price of oil rises. Which one of the following is not a short-run effect of this situation?

Accepted Answer

In the short run, an increase in the price of oil will lead to an increase in the cost of production for firms, leading to higher prices for consumers (B) and potentially reducing real GDP (C). Increased costs may also lead to firms reducing employment (D) and reducing consumer spending (E). However, it is unlikely that this situation would result in an increase in real GDP above long-run real GDP (A).

Question 6

Demand-pull inflation can start

Accepted Answer

Demand-pull inflation occurs when aggregate demand in the economy increases, leading to higher prices as businesses are unable to keep up with the higher demand. This can happen due to factors such as increased consumer confidence, government spending, or low interest rates, all of which lead to higher levels of spending in the economy. Therefore, choice A is the correct answer.

B is incorrect because a decrease in aggregate supply would lead to a different type of inflation called cost-push inflation. 
C is incorrect because input costs rising would also lead to cost-push inflation. 
D is incorrect because incorrect inflation forecasting may influence saving, consumption, and investment patterns, but does not directly cause demand-pull inflation. 
E is incorrect because unemployment being above the natural rate also leads to cost-push inflation rather than demand-pull inflation.

Question 7

Stagflation occurs when the economy experiences both a

Accepted Answer

Stagflation occurs when there is a combination of rising prices (inflation) and decreasing real GDP (economic growth). This situation is often caused by supply-side shocks such as a sudden increase in oil prices or a decrease in productivity. Option A (rising price level and increasing real GDP) is not stagflation, but a normal expansionary phase of the business cycle. Option B (falling price level and decreasing real GDP) is deflationary, which is also not stagflation. Option D (falling price level and increasing real GDP) is a situation called "disinflation" where the inflation rate decreases while the economy is growing, and Option E (low exports and low imports) is not related to the concept of stagflation.

Question 8

Suppose that the business cycle in Canada is best described by RBC theory. An advance in technology increases productivity. The when-to-work decision depends on the real interest rate. The ________ the real interest rate, other things remaining the same, the ________ is the supply of labour today. RBC theorists believe the when-to-work effect is ________.

Accepted Answer

RBC theory suggests that an increase in real interest rates causes an increase in labour supply today as individuals will work more to save and invest for the future. Therefore, choice C is correct. Additionally, RBC theorists generally believe that the when-to-work effect is large, suggesting that small changes in real interest rates can result in significant changes in labour supply.

Question 9

In real business cycle theory, ________ are the main source of economic fluctuations.

Accepted Answer

In real business cycle theory, fluctuations in productivity are considered to be the main source of economic fluctuations. This theory emphasizes that business cycle fluctuations are primarily driven by random changes in the level of technology, natural disasters, and other exogenous shocks to the economy that affect the productivity of workers and capital. These fluctuations in productivity lead to changes in output, employment, and prices, as businesses adjust their production levels in response to changes in demand and supply conditions. The other options listed are not considered to be the main sources of economic fluctuations in this theory.

Question 10

In real business cycle theory, the supply of labour

Accepted Answer

The answer of In real business cycle theory, the supply...

Question 11

According to real business cycle theory, workers' decisions to work now versus later depend on

Accepted Answer

According to real business cycle theory, workers base their decisions to work now versus later on the real interest rate, which represents the opportunity cost of not consuming now. A higher real interest rate incentivizes individuals to work more now and consume less, increasing savings for future consumption.

Question 12

Which of the following would cause the aggregate demand curve to keep shifting rightward year after year?

Accepted Answer

A persistent increase in the quantity of money would cause the aggregate demand curve to keep shifting rightward year after year, as it leads to an increase in consumer spending and investment spending. A one-time tax cut or increase in government expenditures on goods and services would only have a one-time effect and not cause a continuous shift in the aggregate demand curve. Inflation and excess wage demands may lead to a short-term shift in the aggregate demand curve, but not a persistent rightward shift.

Question 13

At full employment, an increase in the quantity of money (ceteris paribus)can start

Accepted Answer

At full employment, an increase in the quantity of money can lead to an increase in aggregate demand, resulting in higher demand-pull inflation. Similarly, an increase in government expenditure can also lead to a higher level of aggregate demand, resulting in demand-pull inflation. Therefore, both options (A) and (E) are possible, but (A) is the better choice as it directly responds to the given scenario.

Question 14

Real business cycle theorists believe that the intertemporal substitution effect ________. Many other economists believe that the intertemporal substitution effect ________.

Accepted Answer

Real business cycle theorists argue that the intertemporal substitution effect is large, meaning that people significantly change their labor supply in response to changes in real wages over time. Many other economists, however, believe this effect is negligible, suggesting that labor supply is not highly sensitive to wage changes.

Question 15

According to the real business cycle theory, during a recession the demand for labour ________ and the supply of labour ________.

Accepted Answer

According to the real business cycle theory, during a recession, there is a decrease in demand for labour due to a fall in output and production. This leads to a decrease in the supply of labour as workers become unemployed or leave the labour force. Therefore, the correct choice is D: decreases; decreases.

Question 16

Which one of the following can start a demand-pull inflation?

Accepted Answer

A cut in the interest rate can increase consumer and business spending, leading to higher demand for goods and services, which can start demand-pull inflation.

Question 17

Suppose that in response to a decrease in real interest rates, a person decides to reduce his supply of labour today and increase it in the future. This behaviour is most consistent with the

Accepted Answer

Real business cycle theory suggests that individuals make labor supply decisions based on intertemporal substitution, responding to changes in real interest rates by adjusting labor supply over time.

Question 18

Suppose that a severe shock that decreases the demand for loanable funds hits Canada. Which of the following can we expect to occur according to real business cycle theory?

Accepted Answer

According to real business cycle theory, a decrease in the demand for loanable funds leads to a fall in the real interest rate (A), which can reduce the incentive to work, leading to fewer hours worked (B). Additionally, the real wage rate may fall due to decreased demand for labor (C), and the demand for loanable funds will decrease as stated (D).

Question 19

According to real business cycle theory, an increase in productivity ________ the demand for loanable funds, ________ the demand for labour, and ________ the supply of labour. The real interest rate will ________.

Accepted Answer

According to real business cycle theory, an increase in productivity increases the demand for loanable funds, which raises the real interest rate. This also increases the demand for labour, as firms require more workers to produce more output. With an increase in demand for labour, the supply of labour also increases, as individuals are more likely to enter the labour market when wages rise. Therefore, the increased demand for loanable funds and labour, along with the increased supply of labour, lead to a higher real interest rate and higher employment levels, resulting in an increase in productivity.

Question 20

Inflation that starts because aggregate demand increases is called

Accepted Answer

When inflation starts because aggregate demand increases, it is referred to as demand-pull inflation. This type of inflation occurs when there is excess demand for goods and services, causing prices to rise. As demand remains high, businesses may increase prices to maximize their profits. This can lead to a cycle of rising prices and increased inflation.

Quiz 28: The Business Cycle, Inflation, and Deflation

According to real business cycle theory, if the Bank of Canada increases the quantity of money when real GDP decreases, real GDP

According to mainstream business cycle theory, grows at a steady rate and grows at a fluctuating rate.

According to real business cycle theory, a fall in the real interest rate the supply of labour and employment.

In real business cycle theory, the supply of labour

Suppose the economy is in long-run equilibrium when the price of oil rises. Which one of the following is not a short-run effect of this situation?

Demand-pull inflation can start

Stagflation occurs when the economy experiences both a

In real business cycle theory, ________ are the main source of economic fluctuations.

In real business cycle theory, the supply of labour

According to real business cycle theory, workers' decisions to work now versus later depend on

Which of the following would cause the aggregate demand curve to keep shifting rightward year after year?

At full employment, an increase in the quantity of money (ceteris paribus) can start

Real business cycle theorists believe that the intertemporal substitution effect . Many other economists believe that the intertemporal substitution effect .

According to the real business cycle theory, during a recession the demand for labour and the supply of labour .

Which one of the following can start a demand-pull inflation?

Suppose that in response to a decrease in real interest rates, a person decides to reduce his supply of labour today and increase it in the future. This behaviour is most consistent with the

Suppose that a severe shock that decreases the demand for loanable funds hits Canada. Which of the following can we expect to occur according to real business cycle theory?

According to real business cycle theory, an increase in productivity the demand for loanable funds, the demand for labour, and the supply of labour. The real interest rate will .

Inflation that starts because aggregate demand increases is called