AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 601:

  Which one of the following most accurately describes the normal sequence of a business cycle?

  A. Expansion, contraction, trough, and peak.

  B. Expansion, peak, contraction, and trough.

  C. Peak, contraction, expansion, and trough.

  D. Trough, contraction, expansion, and peak.

  Correct Answer: B

  Explanation:

  

  Choice "b" is correct. The sequence of a typical business cycle includes an expansionary phase, a peak of

  economic activity, a contractionary phase, and a trough of economic activity.

  Choice "a" is incorrect. A peak does not follow a trough.

  Choice "c" is incorrect. A trough does not follow an expansion.

  Choice "d" is incorrect. A contraction does not follow a trough.

• Question 602:

  An increase in the personal income tax will tend to cause:

  A. Real GDP to fall and unemployment to rise.

  B. Real GDP to rise and unemployment to fall.

  C. Real GDP to rise and unemployment to rise.

  D. Real GDP to fall and unemployment to fall.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. An increase in the personal income tax will cause a decrease in aggregate demand

  (i.e., causes the aggregate demand curve to shift left). As a result, an increase in taxes causes real GDP to

  fall and unemployment to rise.

  Choice "b" is incorrect. Real GDP will fall, not rise.

  Choice "c" is incorrect. Real GDP will fall, not rise.

  Choice "d" is incorrect. Unemployment will rise, not fall.

• Question 603:

  An increase in government spending will tend to cause:

  A. Real GDP to fall and unemployment to rise.

  B. Real GDP to rise and unemployment to fall.

  C. Real GDP to rise and unemployment to rise.

  D. Real GDP to fall and unemployment to fall.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. An increase in government spending causes an increase in aggregate demand (i.e.,

  causes the aggregate demand curve to shift right). As a result, an increase in government spending

  causes real GDP to rise and unemployment to fall.

  Choice "a" is incorrect. Real GDP will rise, not fall.

  Choice "c" is incorrect. Unemployment will fall, not rise.

  Choice "d" is incorrect. Real GDP will rise, not fall.

• Question 604:

  Which of the following might be considered the most expansionary set of fiscal policies?

  A. Increase government purchases, increase in taxes.

  B. Increase government purchases, decrease in taxes.

  C. Decrease in taxes, increase in the money supply.

  D. Increase in government purchases, increase in the money supply.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Expansionary fiscal policy involves increasing government purchases and/or

  decreasing taxes. Both increases in government spending and decreases in taxes cause the aggregate

  demand curve to shift right and thus cause real GDP (output) to increase.

  Choice "a" is incorrect. An increase in taxes is an example of contractionary fiscal policy.

  Choice "c" is incorrect. An increase in the money supply is expansionary monetary policy (not fiscal policy).

  Choice "d" is incorrect per above Explanation.

• Question 605:

  A period during which real GDP is rising and unemployment is falling is called a(n):

  A. Recession.

  B. Peak.

  C. Expansion.

  D. Trough.

  Correct Answer: A

  Explanation:

  Choice "c" is correct. During an expansion, real GDP is rising and unemployment is falling.

  Choice "a" is incorrect. A recession is when real GDP is falling NOT rising.

  Choice "b" is incorrect. A peak is the highest point of economic activity. It is the point where real GDP is at

  its highest level in the cycle and unemployment is at its lowest level in the cycle.

  Choice "d" is incorrect. A trough is the lowest level of economic activity. It is the point where real GDP is at

  its lowest level in the cycle and unemployment is at its highest level in the cycle.

• Question 606:

  A recession can be caused by:

  A. An increase in aggregate demand.

  B. A decrease in aggregate supply.

  C. A decrease in aggregate demand.

  D. Both "b" and "c".

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Both choices "b" and "c" can cause a recession. A recession is defined as a period of

  falling GDP and rising unemployment. GDP will fall if there is a decrease in aggregate demand or a

  decrease in aggregate supply.

  Choice "a" is incorrect. An increase in aggregate demand will cause GDP to increase NOT decrease.

  Choice "b" is incorrect, per the above Explanation.

  Choice "c" is incorrect, per the above Explanation.

• Question 607:

  During a recession:

  A. Output (real GDP) will be increasing.

  B. The natural rate of unemployment will increase dramatically.

  C. Potential output will exceed actual output.

  D. Actual output will exceed potential output.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. During a recession, potential output (real GDP) will exceed actual output (real GDP).

  Choice "a" is incorrect. Real GDP is falling during a recession.

  Choice "b" is incorrect. The natural rate of unemployment will not be affected by the various phases of the

  business cycle. Actual unemployment will change with the cycle.

  Choice "d" is incorrect. Actual output will not exceed potential output except at the peak of the cycle, and

  perhaps not then.

• Question 608:

  The trough of a business cycle is generally characterized by:

  A. Shortages of essential raw materials and rising costs.

  B. Increasing purchasing power and increasing capital investments.

  C. Unused productive capacity and an unwillingness to risk investments.

  D. Declining purchasing power and unused productive capacity.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. The trough of a business cycle is an economic low point with no positive indicators

  for the future. It is characterized by unused productive capacity and an unwillingness to risk new

  investments.

  Choice "a" is incorrect. Shortages may occur during a peak.

  Choice "b" is incorrect. Increasing purchasing power and increasing capital investments come with

  recovery.

  Choice "d" is incorrect. Declining purchasing power comes with inflation; unlikely in a trough.

• Question 609:

  An increase (shift right) in aggregate demand causes:

  A. An increase in the price level and a decrease in real GDP.

  B. A decrease in the price level and an increase in real GDP.

  C. An increase in the price level and an increase in real GDP.

  D. A decrease in the price level and a decrease in real GDP.

  Correct Answer: A

  Explanation:

  

  Choice "c" is correct. As shown above, an increase in aggregate demand causes the equilibrium price

  level to rise and equilibrium output (real GDP) to increase.

  Choice "a" is incorrect. As shown above, equilibrium output increases, not decreases.

  Choice "b" is incorrect. As shown above, the equilibrium price level increases, not decreases.

  Choice "d" is incorrect. As shown above, the equilibrium price level increases, not decreases.

• Question 610:

  In 1990, ABC Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of ABC Corp. and the rights and duties of its stockholders, directors, and officers.

  A. Adams, Frank, and Berg must be elected as directors because they own 55% of the issued and outstanding stock.

  B. Adams, Frank, and Berg must always be elected as officers because they own 55% of the issued and outstanding stock.

  C. Adams, Frank, and Berg must always vote for each other as directors because they have a voting agreement.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Shareholders in a voting agreement must vote their shares in accordance with the

  agreement. There is no requirement that majority shareholders be elected as directors or officers. Business Cycles and Reasons for Business Fluctuations