CFA Level I · CFA Level I Exam · Understanding Business Cycles
According to Keynesian business cycle theory, a recession is most likely prolonged because:
Keynesian theory says recessions persist because wages and prices adjust slowly, so weak aggregate demand keeps output below potential for an extended time. Technology-shock explanations are real business cycle ideas, and excessive money growth is the monetarist explanation for cycles.
- Awages and prices adjust slowly, leaving aggregate demand below potential outputCorrect
- Bfirms rationally reduce labor supply after a negative technology shock
- Ccentral banks increase money growth too rapidly during expansions
Explanation
Keynesians emphasize sticky wages and prices and weak aggregate demand, so the economy can stay below potential output for long periods. The technology-shock explanation belongs to real business cycle theory. Excess money growth is the monetarist explanation.
Did you get it right without looking?
One question tells you little. A timed set on Understanding Business Cycles shows your real accuracy, how long you take and where you lose marks.
More Understanding Business Cycles questions
- At the start of an economic slowdown, retailers see sales fall below expectations. The inventory-to-sales ratio most likely:
- During which phase of the business cycle are economic activity, such as output and employment, most likely to be at their lowest level befor…
- During the late expansion phase of a business cycle, as output approaches its capacity limit, which of the following changes in resource use…
- A worker who has stopped searching for a job because she believes none are available, but who would accept one if offered, is most likely cl…
- Austrian school economists most likely explain the business cycle as resulting from:
- Firms in an economy have experienced a long recession and now see sales stabilizing. Unemployment remains high and capacity utilization is l…