Question

Firms are most likely to experience collateral damage during a  _____, and their borrowing and investment activities will _____ its severity.

a. recession; dampen

b. recession; amplify

c. expansion; dampen

d. expansion; amplify

According to macroeconomics theory, in the short run:

Select one:

a. there is a negative relationship between the inflation rate and real GDP growth rate

b. real GDP growth will reach a maximum when the inflation rate is zero.

c. there is a positive relationship between the inflation rate and real GDP growth rate

d. there is no relationship between the inflation rate and real GDP growth rate

The term business fluctuations refers to:

Select one:

a. changes in real GDP around its long-term trend.

b. changes in the prices of goods and services over time.

c. the different stages of a product cycle.

d. the trend in real GDP over a long period of time.

A change in aggregate demand will cause a change in the growth rate of the economy in the short run if:

Select one:

a. people decide to work in the social interest instead of their self interest

b. the change in AD is expected and prices are flexible

c. the change in AD is unexpected or prices are sticky

d. the government holds interest rates constant

Which investment project is most irreversible?

Select one:

a. the construction of a chemical plant that manufactures only a specific type of paint

b. the purchase of a Japanese restaurant that can be easily converted into a bistro

c. the construction of a bank branch location that can be later converted into an insurance company office

d. the construction of an open office space that can be used for different businesses

Answer 1

1) Collaterals are things that are pledged as security in case of defaults from borrowing. Collateral damage is likely to be faced during a period of recession when the demand is low. Borrowing and investment activities further damage the collateral during this period. Therefore, option b) is correct.

2) According to Microeconomics theory, there is a negative relationship between inflation and GDP growth rate as demonstrated by the downward sloping AD curve. Therefore, option a) is correct.

3) Business fluctuations refer to the change in fluctuations in real GDP growth rate over its long term trend. Therefore, option a) is correct.

4) If AD increases, it will shift to the right and output will increases provided that the prices adjust flexibly. Therefore, option b) is correct.

5) Investment is irreversible if after the investment is made, it has no other use or value until the output is produced with it. Therefore, option a) is correct.