Question

During the expansion phase of a business cycle:

	A.	employment and output are both at a peak.
	B.	employment and output are both rising.
	C.	employment is falling and output is rising.
	D.	unemployment and output are both rising.
	E.	employment is rising and output is falling.

In the following index, which year is likely to be the base period: 1991 = 123.3; 1992 = 145.3; 1993 = 111.4; 1994 = 100; 1995 = 94.3?

	A.	1991
	B.	1992
	C.	1993
	D.	1994
	E.	1995

Which of the following assumptions of the classical model is the best reason we cannot use it to explain short run economic fluctuations?

	A.	markets never clear in the long run
	B.	the labor market clears
	C.	prices remain constant and supply and demand adjust
	D.	it does not show how an economy recovers from a recession
	E.	government intervention is essential to get markets to clear

Answer 1

1. Option D. Unemployment and output are both rising.

Explanation: In the expansion phase, firms produce more and employ more workers.

2. Option D. 1994

Explanation: The value of the index is 100 in the base year.

3. Option B. The labor market clears

Explanation: Classical economics assume that the labor market clears and this does not explain why short-term economic fluctuations happen.