Question

1. What problems are we most likely to see at which stage of the business cycle?

1. High inflation during recessions.
2. High unemployment during booms.
3. Low inflation during booms.
4. High unemployment during recessions.
5. Both high unemployment and high inflation during booms

2. Why is the instability of the business cycle a problem?

1. During recessions there is high unemployment, and resources are underutilized.
2. High unemployment is associated with individual and social stress, such as suicide, domestic violence, illness and crime.
3. During booms, high inflation can erode purchasing power, savings and pensions
4. Unpredictable fluctuations in rates of inflation, interest rates, and foreign exchange rates make it difficult for individuals and organizations to plan for the future
5. All of the above.

3. Which of the following is not one of the ideas associated with the school of classical economics?

1. Specialization and the division of labor
2. Laissez-faire and the functioning of markets free of government intervention
3. The pursuit of individual self-interest leads to positive economic outcomes
4. Supply creates its own demand
5. Markets sometimes fail, necessitating government intervention.

4. Which of the following is not a component of aggregate expenditure?

1. consumption
2. unsold inventories
3. intended investment
4. government spending
5. all of these are components of aggregate expenditure

5. Which of the following is not an example of a transfer payment?

1. Welfare payments to firms or individuals
2. Social Security payments
3. Unemployment compensation
4. A corporate tax cut
5. Payments of interest to holders of government bonds.

6. Which of the following have been proposed as explanations for sticky wages?

1. psychological resistance to wage cuts
2. minimum wages and long term contracts
3. efficiency wages
4. people receiving higher wages holding out for a long time against other forces
5. all of the above

Answer 1

Q1. Problems associated with different phases of a business cycle:

Recession - High rate of unemployment & low inflation

Booms - High inflation

Ans: d. High unemployment during recessions

Q2. Problems related to the instability of the business cycle -

• Underutilization of resources and high unemployment during a recession coupled with lower inflation rates; lower incomes; lower aggregate demand - Problem of a deflationary spiral
• High inflation during a boom reduces the real value of money i.e., it reduces the purchasing power
• Unpredictable changes in the inflation rate, interest rates, and the exchange rate causes problems for people to plan effectively for their future

Ans: e. All of the above

Q3. Ideas propagated by classical economists -

a. Laissez-faire i.e., no government intervention in the markets; Invisible hand of the market drives away any instabilities in the market.

b. Say's law - Supply creates its own demand. There is no concept of insufficient aggregate demand in the market.

c. Individuals must seek to maximize their respective goals which drive the market to an efficient outcome.

d. Division of labor and specialization improves the level of production.

Ans: e. Markets sometimes fail, necessitating government intervention

Q4. Aggregate Expenditure = C + I + G + (X-M)

C = Consumption; I = Investment; G = Government Spending; X = Exprots; M = Imports; X - M = Net Exports

Unsold inventories are considered to be a part of investment.

Ans: e. all of these are components of aggregate expenditure