The contraction phase of a business cycle is most

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1.The contraction phase of a business cycle is most likelyaccompanied by increasing: A.unemployment. B.inflation. C.real GDP. 2.The inventory/sales ratio is most likelyto be falling: 3.Which business cycle theory suggests that an expansionary monetary or fiscal policy should be used to revive an economy from a recession? 4.A situation where qualified workers are not immediately matched with existing job openings is bestdescribed as: 5.An economy’s year-end consumer price index over a four-year period is as follows: Year 1: 100 Year 2: 105 Year 3: 110 Year 4: 115 The economy is most likelyexperiencing: A.constant inflation. B.disinflation. C.deflation. 6.While determining public economic policy, the inflation rate most likelyrelied on is: 7.Which of the following inflation index most likelyhas the highest substitution bias? 120
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R15 Understanding Business Cycles 2020 Level I Notes © IFT. All rights reserved 29 8.A demand-pull inflation would least likelybe caused by an increase in: 9.An economic indicator that has turning points which tend to precede the turning points in the business cycle is classified as: A.leading indicator. B.lagging indicator. C.coincident indicator. 121
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R15 Understanding Business Cycles 2020 Level I Notes Solutions 1. A is correct. The contraction phase of a business cycle is accompanied by increasing unemployment and decreasing inflation and real GDP. 2. A is correct. Inventory to sales ratio typically begins to decrease near the end of contractions when sales begin to accelerate. It typically begins to increase late into expansions when sales slowdown. 3. B is correct. Keynesian theory suggests that an expansionary monetary or fiscal policy should be implemented by the government to stimulate aggregate demand and revive an economy from a recession. Monetarist theory suggests that money supply growth should be kept stable and predictable. New classical theory suggests that there should be no government intervention. 4. B is correct. Frictional unemployment results from people that are not working because they are in between jobs. 5. B is correct. The yearly inflation rates are: Year 2: (105 - 100)/100 = 5% Year 3: (110 - 105)/105 = 4.76% Year 4: (115 - 110)/110 = 4.54% The price level is increasing but the inflation rate is decreasing. Hence, the economy is most likely experiencing disinflation. 6. A is correct. Food and energy prices have high short term volatility. Core inflation excludes food and energy prices and is, therefore, less volatile as compared to headline inflation. Hence, using core inflation leads to less policy overreactions.
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