AP Macro AP Macro Business Cycles and Output Gaps 1 — Questions and Answers
Question 1: In a standard business cycle, which phase immediately follows a trough?
- Recession
- Peak
- Expansion (Correct answer)
- Contraction
Correct answer: Expansion
After reaching the trough (lowest point), the economy enters an expansion phase where output and employment begin to rise.
Question 2: A recessionary gap exists when:
- Actual GDP exceeds potential GDP
- Actual GDP is below potential GDP (Correct answer)
- The price level is above the target inflation rate
- The unemployment rate is below the natural rate
Correct answer: Actual GDP is below potential GDP
A recessionary gap occurs when the economy produces less than its full-employment potential, leaving resources underutilized.
Question 3: Which of the following is the most commonly used definition of a recession?
- A single quarter of negative GDP growth
- Two consecutive quarters of negative real GDP growth (Correct answer)
- An unemployment rate above 7%
- A decline in the stock market of more than 20%
Correct answer: Two consecutive quarters of negative real GDP growth
The conventional rule of thumb defines a recession as two consecutive quarters of negative real GDP growth.
Question 4: Potential GDP represents:
- The maximum GDP ever recorded historically
- The output level the economy would produce at the natural rate of unemployment with full resource utilization (Correct answer)
- GDP minus depreciation and taxes
- The nominal GDP adjusted for population growth
Correct answer: The output level the economy would produce at the natural rate of unemployment with full resource utilization
Potential GDP is the sustainable output level the economy can achieve when unemployment equals its natural rate and resources are fully but not excessively employed.
Question 5: During which phase of the business cycle would consumer confidence and business investment typically be at their highest?
- Trough
- Contraction
- Peak (Correct answer)
- Recession
Correct answer: Peak
At the peak of the business cycle, output, employment, and optimism are at their highest before the economy begins to contract.
Question 6: An inflationary gap is closed in the long run through:
- An increase in government spending
- Rising wages and input costs that shift short-run aggregate supply leftward (Correct answer)
- A decrease in the money supply by the Fed
- An increase in taxes to reduce consumer spending
Correct answer: Rising wages and input costs that shift short-run aggregate supply leftward
When the economy overheats, tight labor markets push wages up, raising production costs and shifting SRAS left until output returns to potential.
AP Macro AP Macro Business Cycles and Output Gaps 1
In a standard business cycle, which phase immediately follows a trough?