UT  Supplemental  Instructor  Program  

ECO  320  L  
Business  Cycle  Theory  &  General  Equilibrium    
SI  leader:  Bauyrzhan  Zhaxybekov    
 
 
 
Multiple  Choice  
 
(1) The  dates  of  turning  points  are  determined  by  a  committee  from  the    
 
(a) FBI  
(b) BLS  
(c) BEA  
(d) NBER    
 
 
(2) The  tendency  of  many  economic  variables  to  move  together  in  a  predictable  way  over  the  business  
cycle  is  called  
 
(a) recurrence.  
(b) persistence.  
(c) comovement.    
(d) inflation.  
 
(3) The  deepest  contraction  in  American  history  occurred  
 
(a) during  1970s.  
(b) in  the  years  right  before  World  War  I.  
(c) during  the  1930s.    
(d) during  the  1970s.  
 
(4) Which  of  the  following  is  not  a  procyclical  variable?  
 
(a) Unemployment  rate    
(b) Business  fixed  investment  
(c) Average  labor  productivity  
(d) Stock  prices  
 
 
 
 
 
 
 
 
 
Word  Problem:  
 
(1)  Identify  the  comovements  (i.e.,  direction  and  timing)  of  the  following  variables  over  the  
business  cycle:  (a)  industrial  production;  (b)  unemployment;  (c)  nominal  interest  rates;  (d)  
nominal  money  supply  growth;  and  (e)  investment.  
 
 
 
 
 
(2)The  seasonal  component  of  economic  fluctuations  is  just  as  important  as  the  cyclical  
component.  This  question  asks  you  to  investigate  the  effects  of  the  increased  demand  for  
consumption  around  Christmas.  Assume  that  people  are  willing  to  substitute  leisure  
intertemporally,  and  that  the  money  multiplier  is  constant.  Assume  also  that  expected  inflation  is  
given  and  is  unchanging.  
 
(a)  Under  the  above  assumptions,  illustrate  the  general  equilibrium  of  the  economy  using  
the  IS/LM/FE  curves.  Illustrate  the  corresponding  equilibrium  situation  in  the  labor  market,  
goods  market  and  asset  market.   Mark  the  equilibrium  values  of  the  real  interest  rate,  output,  the  
price  level,  saving,  investment,  employment  and  real  money  balances  with  variables  subscripted  
with  1  (r1*,  Y1*,  P1*  etc.).  Make  sure  that  the  connections  between  the  different  figures  are  clear.  
 
Show  the  initial  effect  of  an  increase  in  demand  for  consumption.  Show  the  change  in  the  market  
that  is  initially  affected.  (Which  market  is  it  and  which  curve  shifts?)  Illustrate  the  reflection  of  
this  initial  change  in  the  general  equilibrium  diagram.  Make  sure  you  connect  the  magnitude  of  
the  shift(s)  in  the  different  figures.  
 
(b)  Assume  we  are  in  the  classical  world.  In  the  general  equilibrium  diagram,  mark  the  new  
equilibrium  situation  with  variables  subscripted  2.  How  is  the  new  equilibrium  attained?  (Which  
curve  shifts  to  bring  the  economy  to  general  equilibrium?)  
 
(c)  Once  the  new  general  equilibrium  situation  is  attained,  the  effects  of  this  for  the  various  
markets  can  be  traced  out.  Show  the  implied  effect  on  the  goods  market,  labor  market  and  asset  
market.  Use  variables  subscripted  with  2  to  mark  the  equilibrium  values  of  the  real  interest  rate,  
output,  saving,  investment,  employment  and  real  money  balances  in  these  figures.  
 
(d)  Now  assume  that  we  are  in  the  Keynesian  world.  What  is  the  short  run  equilibrium  of  the  
economy?  Illustrate  it  in  the  general  equilibrium  graph  with  variables  superscripted  by  SR.  
(Redraw  your  graph  to  make  your  work  clear.)  
 
(e)  Trace  out  the  endogenous  effects  of  the  new  short-­‐run  equilibrium  for  the  goods  market  and  
the  money  market.  Use  variables  subscripted  with  SR  to  mark  the  equilibrium  values  of  the  real  
interest  rate,  output,  saving,  investment,  and  real  money  balances  in  these  figures.