ECN 211 Exam 3 ASU Hill Questions with Complete Solutions What is a recession? - Correct Answer economic contraction; two straight quarters of negative GDP growth What is a boom? - Correct Answer economic expansion; boom length does not predict a recession What are the characteristics of a good economy? - Correct Answer lots of job openings, firms are raising wages to attract workers, asset values are rising, consumers borrow and spend money freely What are the characteristics of a bad economy? - Correct Answer new job openings are scarce, firms not seeking new employees, asset prices fall, consumers try to save money business cycle - Correct Answer Alternating periods of economic expansion and economic recession Unemployment rates in the business cycle... - Correct Answer are a lagging indicator; when a recession occurs, employment may stay low for awhile Why do economies fluctuate? - Correct Answer a change in supply or demand Demand side recession - Correct Answer Changes in willingness of consumers and firms to spend causes fluctuations in GDP Supply side recession - Correct Answer Rare, large events like earthquakes, plagues, wars, oil shocks Say's Law - Correct Answer supply creates its own demand (if you buy something someone will want to buy it) Keynes Theory - Correct Answer Recession caused by business and consumers hoarding cash; explained the Great Depression 1 / 2
paradox of thrift - Correct Answer If everyone saves at the same time, income falls, so no one saves why can't prices change to restore the economy to full production? - Correct Answer frictions Friction #1:Sector switching - Correct Answer Switching people from slowing sectors to rising sectors takes time and resources Friction #2: The liquidity trap - Correct Answer Savings increase and investment decrease lowers equilibrium interest rate below zero; fed can not make the interest rate any lower-> :( Friction #3: Deflationary cycle - Correct Answer Spending falls --> prices fall --> wages fall --> repeat Friction #4: Sticky prices and wages - Correct Answer Wages/prices stick, not allowing markets to clear
Spending is aggregated into 4 categories: - Correct Answer consumption
investment government net exports (usually negative) When do you move along the aggregate demand curve? - Correct Answer when the price level changes wealth effect - Correct Answer effects price level/aggregate demand: At lower prices, consumers buy more goods and services interest rate effect - Correct Answer effects price level/aggregate demand: When prices fall, people need less cash. More saving lowers interest rates, increasing investment spending; cheaper for consumers and investments to borrow exchange rate effect - Correct Answer effects price level/aggregate demand: Lower prices leads to lower interest rates. Capital leaves, lowering the exchange rate and encouraging export
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