Business Cycles: Conceptual Questions and Solutions

Intermediate Macroeconomics Problems and Solutions - Section 6

See Mr. Stolyarov's complete index of Intermediate Macroeconomics Problems and Solutions here.

Problem 26. What is the output gap?

(a) The difference between output at the peak of an expansionary boom and output at the bottom of a recession's trough.
(b) The difference between output produced and output consumed.
(c) The difference between output consumed at the upper 50% of income levels
and the output consumed at the lower 50% of income levels.
(d) The difference between the trend or potential output and actual output.
(e) The difference between the current year's output and output in the past year.
(f) A fashionable clothing retail store that has added "output" to its name and began to write its name using all lowercase letters.

Solution 26. The correct answer is (d): The difference between the trend or potential output and actual output.

Problem 27. Which of these variables tend to have large fluctuations during business cycles? More than one answer is possible.

(a) Interest rates
(b) Employment
(c) Wages
(d) Inflation
(e) Output
(f) Consumption
(g) Investment

Solution 27. Output, employment, and investment tend to have large fluctuations during business cycles. The other variables listed tend to have small fluctuations. So (b), (e), and (g) are correct answers.

Problem 28. In the Frisch-Slutsky Paradigm, what are the three components of any business cycle?

(a) Impulse, Propagation, Business Cycle
(b) Expansion, Contraction, Recovery
(c) Boom, Bust, Bailout
(d) Peak, Trough, Peak
(e) Consumption, Investment, Government Spending

Solution 28. The correct answer is (a): Impulse, Propagation, Business Cycle

Problem 29. According to the Keynesian view, what initially causes business cycles? More than one answer is possible.