Question 1

The Phillips curve describes the relationship between which two variables?

Accepted Answer

A) aggregate expenditure and aggregate demand 
B) the money supply and interest rates 
C) unemployment and the rate of change of wages 
D) inflation and interest rates 
E) the output gap and potential GDP 
A) aggregate expenditure and aggregate demand 
B) the money supply and interest rates 
C) unemployment and the rate of change of wages 
D) inflation and interest rates 
E) the output gap and potential GDP

Question 2

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.   FIGURE 24-7 Refer to Figure 24-7.The government could close the existing output gap by

Accepted Answer

A) increasing the net tax rate. 
B) decreasing the net tax rate. 
C) increasing government purchases. 
D) decreasing government transfer payments. 
E) implementing an expansionary fiscal policy. 
A) increasing the net tax rate. 
B) decreasing the net tax rate. 
C) increasing government purchases. 
D) decreasing government transfer payments. 
E) implementing an expansionary fiscal policy.

Question 3

When we study the adjustment process in macroeconomics,we are analyzing the process by which

Accepted Answer

A) potential output is adjusting to changes in factor supplies. 
B) potential output is adjusting to changes in technology. 
C) real GDP returns to the level of potential output. 
D) real GDP expands over time. 
E) changes in technology affect the level of real GDP. 
A) potential output is adjusting to changes in factor supplies. 
B) potential output is adjusting to changes in technology. 
C) real GDP returns to the level of potential output. 
D) real GDP expands over time. 
E) changes in technology affect the level of real GDP.

Question 4

Consider the basic AD/AS macro model in long-run equilibrium.An expansionary AD shock will ________ the price level and ________ output in the short run.In the long run,the price level will ________ and output will ________.

Accepted Answer

A) decrease; decrease; decrease further; decrease further 
B) decrease; decrease; decrease further; be restored to potential output 
C) increase; increase; increase further; increase further 
D) increase; decrease; increase further; be restored to potential output 
E) increase; increase; increase further; be restored to potential output 
A) decrease; decrease; decrease further; decrease further 
B) decrease; decrease; decrease further; be restored to potential output 
C) increase; increase; increase further; increase further 
D) increase; decrease; increase further; be restored to potential output 
E) increase; increase; increase further; be restored to potential output

Question 5

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.   FIGURE 24-3 Refer to Figure 24-3.After the negative aggregate demand shock shown in the diagram (from   to   ),which of the following describes the adjustment process that would return the economy to its long-run equilibrium?

Accepted Answer

A) Wages would eventually fall,causing the AD curve to shift to the right,returning to the original equilibrium at point A. 
B) Wages would eventually fall,causing the AS curve to shift slowly to the right,reaching a new equilibrium at point E. 
C) Wages would increase,causing the AS curve to shift to the right,reaching a new equilibrium at point E. 
D) Wages would increase,causing the AD curve to shift to the right,returning to the original equilibrium at point A. 
E) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D. 
A) Wages would eventually fall,causing the AD curve to shift to the right,returning to the original equilibrium at point A. 
B) Wages would eventually fall,causing the AS curve to shift slowly to the right,reaching a new equilibrium at point E. 
C) Wages would increase,causing the AS curve to shift to the right,reaching a new equilibrium at point E. 
D) Wages would increase,causing the AD curve to shift to the right,returning to the original equilibrium at point A. 
E) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D.

Question 6

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.   FIGURE 24-6 Refer to Figure 24-6.The government could close the existing output gap by

Accepted Answer

A) increasing the net tax rate. 
B) decreasing the net tax rate. 
C) decreasing government purchases. 
D) decreasing government transfer payments. 
E) implementing a contractionary fiscal policy. 
A) increasing the net tax rate. 
B) decreasing the net tax rate. 
C) decreasing government purchases. 
D) decreasing government transfer payments. 
E) implementing a contractionary fiscal policy.

Question 7

Which of the following describes the distinction between the Phillips curve and the AS curve?

Accepted Answer

A) The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis. 
B) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of change in the interest rate on the vertical axis. 
C) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. 
D) The AS curve has the rate of price inflation on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. 
E) There is no distinction: the two curves are essentially the same thing. 
A) The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis. 
B) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of change in the interest rate on the vertical axis. 
C) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. 
D) The AS curve has the rate of price inflation on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. 
E) There is no distinction: the two curves are essentially the same thing.

Question 8

Which of the following statements about fiscal policy is the best description of "fine tuning"?

Accepted Answer

A) The government continuously alters its spending and taxing plans to hold real GDP at potential. 
B) The government cuts taxes to remove a large and persistent recessionary gap. 
C) The government increases its spending to reduce an inflationary gap. 
D) The government decreases tax rates to decrease an inflationary gap. 
E) The government uses automatic stabilizers to reduce any output gaps. 
A) The government continuously alters its spending and taxing plans to hold real GDP at potential. 
B) The government cuts taxes to remove a large and persistent recessionary gap. 
C) The government increases its spending to reduce an inflationary gap. 
D) The government decreases tax rates to decrease an inflationary gap. 
E) The government uses automatic stabilizers to reduce any output gaps.

Question 9

Which of the following best describes the concept of potential output?

Accepted Answer

A) the total output that can be produced when all factors of production (land,labour,and capital)are fully employed 
B) the total output that can be produced when the economy is in short-run economic equilibrium 
C) the total output that can be produced when all productive resources (land,labour,and capital)are used at their maximum capacity 
D) the total output that could be produced in the future when technological advances allow for a higher level of output 
E) the total output that could be produced if no productive resource (land,labour,and capital)was ever left idle 
A) the total output that can be produced when all factors of production (land,labour,and capital)are fully employed 
B) the total output that can be produced when the economy is in short-run economic equilibrium 
C) the total output that can be produced when all productive resources (land,labour,and capital)are used at their maximum capacity 
D) the total output that could be produced in the future when technological advances allow for a higher level of output 
E) the total output that could be produced if no productive resource (land,labour,and capital)was ever left idle

Question 10

Consider the AD/AS model,and suppose that the economy begins at potential output.The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________.

Accepted Answer

A) rightward; AS 
B) rightward; AD 
C) leftward; AS 
D) leftward; AD 
E) leftward; Y* 
A) rightward; AS 
B) rightward; AD 
C) leftward; AS 
D) leftward; AD 
E) leftward; Y*

Question 11

Consider the AD/AS macro model.The main source of increases in material living standards over the long term is the

Accepted Answer

A) maintenance of a continuous inflationary gap. 
B) continual avoidance of recessionary gaps. 
C) continuous outward shift of aggregate demand. 
D) continual increase in potential national income. 
E) positive slope of the aggregate supply curve. 
A) maintenance of a continuous inflationary gap. 
B) continual avoidance of recessionary gaps. 
C) continuous outward shift of aggregate demand. 
D) continual increase in potential national income. 
E) positive slope of the aggregate supply curve.

Question 12

Consider the simplest macro model with demand-determined output.Other things being equal,the ________ the value of the simple multiplier,the ________ stable is real GDP in response to shocks to autonomous spending.

Accepted Answer

A) larger; more 
B) larger; less 
C) smaller; more 
D) smaller; less 
E) both B and C are correct 
A) larger; more 
B) larger; less 
C) smaller; more 
D) smaller; less 
E) both B and C are correct

Question 13

Consider the basic AD/AS macro model in long-run equilibrium.A negative AS shock will ________ the price level and ________ output in the short run.In the long run,the price level will ________ and output ________.

Accepted Answer

A) decrease; decrease; decrease further; will decrease further 
B) decrease; decrease; decrease further; will be restored to potential output 
C) increase; decrease; decrease; will be restored to potential output 
D) increase; decrease; increase further; will be restored to potential output 
E) increase; increase; increase further; will be restored to potential output 
A) decrease; decrease; decrease further; will decrease further 
B) decrease; decrease; decrease further; will be restored to potential output 
C) increase; decrease; decrease; will be restored to potential output 
D) increase; decrease; increase further; will be restored to potential output 
E) increase; increase; increase further; will be restored to potential output

Question 14

If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output,the economy is

Accepted Answer

A) at its full-employment level of output. 
B) experiencing a recessionary output gap. 
C) experiencing an inflationary output gap. 
D) threatened with a demand shock. 
E) operating at full capacity. 
A) at its full-employment level of output. 
B) experiencing a recessionary output gap. 
C) experiencing an inflationary output gap. 
D) threatened with a demand shock. 
E) operating at full capacity.

Question 15

An important assumption in the AD/AS macro model is that when real GDP exceeds potential output,factor prices rise and the

Accepted Answer

A) AS curve shifts to the left. 
B) AD curve shifts to the right. 
C) AS curve shifts to the right very rapidly. 
D) AD curve shifts to the left rapidly. 
E) None of the above - the AS curve remains unchanged. 
A) AS curve shifts to the left. 
B) AD curve shifts to the right. 
C) AS curve shifts to the right very rapidly. 
D) AD curve shifts to the left rapidly. 
E) None of the above - the AS curve remains unchanged.

Question 16

Consider the AD/AS model after factor prices have fully adjusted to output gaps.A reduction in the level of potential output,with aggregate demand constant,will

Accepted Answer

A) leave real output unaffected and increase the price level. 
B) decrease real output and decrease the price level. 
C) decrease real output and leave the price level unchanged. 
D) decrease real output and increase the price level. 
E) increase real output and decrease the price level. 
A) leave real output unaffected and increase the price level. 
B) decrease real output and decrease the price level. 
C) decrease real output and leave the price level unchanged. 
D) decrease real output and increase the price level. 
E) increase real output and decrease the price level.

Question 17

The table below shows data for five economies of similar size.Real GDP is measured in billions of dollars.Assume that potential output for each economy is $340 billion.   TABLE 24-1 Refer to Table 24-1.Which of the following statements explains why wages are rising in Economy E?

Accepted Answer

A) The inflationary gap generates lower profits for firms because workers are demanding higher wages. 
B) The inflationary gap generates excess demand for labour,which causes wages to rise. 
C) The aggregate supply curve is shifting to the right,which is causing wages to rise. 
D) The aggregate demand curve is shifting to the right,causing wages to rise. 
E) Potential output is rising,putting upward pressure on wages. 
A) The inflationary gap generates lower profits for firms because workers are demanding higher wages. 
B) The inflationary gap generates excess demand for labour,which causes wages to rise. 
C) The aggregate supply curve is shifting to the right,which is causing wages to rise. 
D) The aggregate demand curve is shifting to the right,causing wages to rise. 
E) Potential output is rising,putting upward pressure on wages.

Question 18

FIGURE 24-5 Refer to Figure 24-5.If the economy is currently in equilibrium at E3,the concept of asymmetrical adjustment of the AS curve suggests that

Accepted Answer

A) the economy will attain potential output faster if there is no intervention by the government. 
B) a decrease in the price level will induce a rightward shift of AS. 
C) the return of the economy to potential output may be very slow without government intervention. 
D) the economy will never return to potential output. 
E) the price level is constant regardless of the level of equilibrium income. 
A) the economy will attain potential output faster if there is no intervention by the government. 
B) a decrease in the price level will induce a rightward shift of AS. 
C) the return of the economy to potential output may be very slow without government intervention. 
D) the economy will never return to potential output. 
E) the price level is constant regardless of the level of equilibrium income.

Question 19

If wages rise faster than increases in labour productivity,then unit labour costs will

Accepted Answer

A) fall and the AS curve will shift left. 
B) fall and the AS curve will shift right. 
C) rise and the AS curve will shift left. 
D) rise and the AS curve will shift right. 
E) not change because only total labour costs change. 
A) fall and the AS curve will shift left. 
B) fall and the AS curve will shift right. 
C) rise and the AS curve will shift left. 
D) rise and the AS curve will shift right. 
E) not change because only total labour costs change.

Question 20

What is meant by the term "stagflation"?

Accepted Answer

A) the combination of falling real GDP and a rising price level 
B) a persistent inflationary gap 
C) a persistent recessionary gap 
D) the sluggish downward wage adjustment in response to a recessionary gap 
E) the combination of inflation and rising real GDP 
A) the combination of falling real GDP and a rising price level 
B) a persistent inflationary gap 
C) a persistent recessionary gap 
D) the sluggish downward wage adjustment in response to a recessionary gap 
E) the combination of inflation and rising real GDP

The Phillips curve describes the relationship between which two variables?

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A. FIGURE 24-7 Refer to Figure 24-7.The government could close the existing output gap by

When we study the adjustment process in macroeconomics,we are analyzing the process by which

Consider the basic AD/AS macro model in long-run equilibrium.An expansionary AD shock will the price level and output in the short run.In the long run,the price level will and output will .

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A. FIGURE 24-6 Refer to Figure 24-6.The government could close the existing output gap by

Which of the following describes the distinction between the Phillips curve and the AS curve?

Which of the following statements about fiscal policy is the best description of "fine tuning"?

Which of the following best describes the concept of potential output?

Consider the AD/AS model,and suppose that the economy begins at potential output.The effect of a positive AS shock on real GDP will be reversed in the long run with a shift in .

Consider the AD/AS macro model.The main source of increases in material living standards over the long term is the

Consider the simplest macro model with demand-determined output.Other things being equal,the the value of the simple multiplier,the stable is real GDP in response to shocks to autonomous spending.

Consider the basic AD/AS macro model in long-run equilibrium.A negative AS shock will the price level and output in the short run.In the long run,the price level will and output .

If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output,the economy is

An important assumption in the AD/AS macro model is that when real GDP exceeds potential output,factor prices rise and the

Consider the AD/AS model after factor prices have fully adjusted to output gaps.A reduction in the level of potential output,with aggregate demand constant,will

The table below shows data for five economies of similar size.Real GDP is measured in billions of dollars.Assume that potential output for each economy is $340 billion. TABLE 24-1 Refer to Table 24-1.Which of the following statements explains why wages are rising in Economy E?

FIGURE 24-5 Refer to Figure 24-5.If the economy is currently in equilibrium at E₃,the concept of asymmetrical adjustment of the AS curve suggests that

If wages rise faster than increases in labour productivity,then unit labour costs will

What is meant by the term "stagflation"?

Economic Issues and Concepts

Economic Theories, data, and Graphs

Demand, supply, and Price

What Macroeconomics Is All About

The Measurement of National Income

The Simplest Short-Run Macro Model

Adding Government and Trade to the Simple Macro Model

Real Gdp and the Price Level in the Short Run

Long-Run Economic Growth

Money and Banking

Money, interest Rates, and Economic Activity

Monetary Policy in Canada

Inflation and Disinflation

Unemployment Fluctuations and the Nairu

Government Debt and Deficits

The Gains From International Trade

Trade Policy

Exchange Rates and the Balance of Payments

Filters

Exam 24: From the Short Run to the Long Run: the Adjustment of Factor Prices

The Phillips curve describes the relationship between which two variables?

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A. FIGURE 24-7 Refer to Figure 24-7.The government could close the existing output gap by

When we study the adjustment process in macroeconomics,we are analyzing the process by which

Consider the basic AD/AS macro model in long-run equilibrium.An expansionary AD shock will ________ the price level and ________ output in the short run.In the long run,the price level will ________ and output will ________.

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A. FIGURE 24-6 Refer to Figure 24-6.The government could close the existing output gap by

Which of the following describes the distinction between the Phillips curve and the AS curve?

Which of the following statements about fiscal policy is the best description of "fine tuning"?

Which of the following best describes the concept of potential output?

Consider the AD/AS model,and suppose that the economy begins at potential output.The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________.

Consider the AD/AS macro model.The main source of increases in material living standards over the long term is the

Consider the simplest macro model with demand-determined output.Other things being equal,the ________ the value of the simple multiplier,the ________ stable is real GDP in response to shocks to autonomous spending.

Consider the basic AD/AS macro model in long-run equilibrium.A negative AS shock will ________ the price level and ________ output in the short run.In the long run,the price level will ________ and output ________.

If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output,the economy is

An important assumption in the AD/AS macro model is that when real GDP exceeds potential output,factor prices rise and the

Consider the AD/AS model after factor prices have fully adjusted to output gaps.A reduction in the level of potential output,with aggregate demand constant,will

The table below shows data for five economies of similar size.Real GDP is measured in billions of dollars.Assume that potential output for each economy is $340 billion. TABLE 24-1 Refer to Table 24-1.Which of the following statements explains why wages are rising in Economy E?

FIGURE 24-5 Refer to Figure 24-5.If the economy is currently in equilibrium at E3,the concept of asymmetrical adjustment of the AS curve suggests that

If wages rise faster than increases in labour productivity,then unit labour costs will

What is meant by the term "stagflation"?

Economic Issues and Concepts

Economic Theories, data, and Graphs

Demand, supply, and Price

What Macroeconomics Is All About

The Measurement of National Income

The Simplest Short-Run Macro Model

Adding Government and Trade to the Simple Macro Model

Real Gdp and the Price Level in the Short Run

Long-Run Economic Growth

Money and Banking

Money, interest Rates, and Economic Activity

Monetary Policy in Canada

Inflation and Disinflation

Unemployment Fluctuations and the Nairu

Government Debt and Deficits

The Gains From International Trade

Trade Policy

Exchange Rates and the Balance of Payments

Filters

Consider the basic AD/AS macro model in long-run equilibrium.An expansionary AD shock will the price level and output in the short run.In the long run,the price level will and output will .

Consider the AD/AS model,and suppose that the economy begins at potential output.The effect of a positive AS shock on real GDP will be reversed in the long run with a shift in .

Consider the simplest macro model with demand-determined output.Other things being equal,the the value of the simple multiplier,the stable is real GDP in response to shocks to autonomous spending.

Consider the basic AD/AS macro model in long-run equilibrium.A negative AS shock will the price level and output in the short run.In the long run,the price level will and output .

FIGURE 24-5 Refer to Figure 24-5.If the economy is currently in equilibrium at E₃,the concept of asymmetrical adjustment of the AS curve suggests that