Question 1

Consider the AD/AS macro model.A permanent demand shock that causes equilibrium output to rise above potential output will

Accepted Answer

A) allow a stable expansion of real income over time. 
B) always reverse itself. 
C) be negated in the long run,through the economyʹs adjustment process. 
D) result in a price level lower than that preceding the demand shock. 
E) set off an endless cycle of price rises and increases in unemployment. 
A) allow a stable expansion of real income over time. 
B) always reverse itself. 
C) be negated in the long run,through the economyʹs adjustment process. 
D) result in a price level lower than that preceding the demand shock. 
E) set off an endless cycle of price rises and increases in unemployment.

Question 2

Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since governmentʹs net tax revenues ________ during booms and ________ during recessions.

Accepted Answer

A) magnify; increase; decrease 
B) magnify; decrease; increase 
C) dampen; increase; decrease 
D) dampen; decrease; increase 
E) does not affect; are constant; are constant 
A) magnify; increase; decrease 
B) magnify; decrease; increase 
C) dampen; increase; decrease 
D) dampen; decrease; increase 
E) does not affect; are constant; are constant

Question 3

Consider the AD/AS macro model.The study of short-run cyclical fluctuations usually assumes,for simplicity,that there are no changes in

Accepted Answer

A) the AS curve. 
B) potential GDP. 
C) either the AS curve or potential GDP. 
D) either the AD or AS curves. 
E) the intersection of the AD and AS curves. 
A) the AS curve. 
B) potential GDP. 
C) either the AS curve or potential GDP. 
D) either the AD or AS curves. 
E) the intersection of the AD and AS curves.

Question 4

Consider the basic AD/AS macro model in long -run equilibrium.An expansionary AD shock would have output effect in the short run and output effect in the long run.

Accepted Answer

A) a positive; no 
B) a positive; a positive 
C) no; a positive 
D) no; no 
E) not enough information to know 
A) a positive; no 
B) a positive; a positive 
C) no; a positive 
D) no; no 
E) not enough information to know

Question 5

Automatic fiscal stabilizers are most helpful in

Accepted Answer

A) making discretionary fiscal policy effective. 
B) removing persistent output gaps. 
C) promoting economic growth. 
D) eliminating price fluctuations in the economy. 
E) reducing the intensity of business cycles. 
A) making discretionary fiscal policy effective. 
B) removing persistent output gaps. 
C) promoting economic growth. 
D) eliminating price fluctuations in the economy. 
E) reducing the intensity of business cycles.

Question 6

Which of the following are the defining assumptions of the short run in macroeconomics?

Accepted Answer

A) Factor prices are exogenous,and technology and factor supplies are changing. 
B) Factor prices adjust to output gaps,and technology and factor supplies are constant. 
C) Factor prices are exogenous,and technology and factor supplies are constant. 
D) Factor prices adjust to output gaps,and technology and factor prices are changing. 
E) Factor prices are exogenous,technology and factor prices are endogenous. 
A) Factor prices are exogenous,and technology and factor supplies are changing. 
B) Factor prices adjust to output gaps,and technology and factor supplies are constant. 
C) Factor prices are exogenous,and technology and factor supplies are constant. 
D) Factor prices adjust to output gaps,and technology and factor prices are changing. 
E) Factor prices are exogenous,technology and factor prices are endogenous.

Question 7

Consider a simple macro model with demand-determined output.Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?

Accepted Answer

A) MPC = 0.8,t = 0.2,m = 0.3 
B) MPC = 0.7,t = 0.3,m = 0.2 
C) MPC = 0.7,t = 0.1,m = 0.4 
D) MPC = 0.9,t = 0.2,m = 0.4 
E) MPC = 0.8,t = 0.1,m = 0.2 
A) MPC = 0.8,t = 0.2,m = 0.3 
B) MPC = 0.7,t = 0.3,m = 0.2 
C) MPC = 0.7,t = 0.1,m = 0.4 
D) MPC = 0.9,t = 0.2,m = 0.4 
E) MPC = 0.8,t = 0.1,m = 0.2

Question 8

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 9

If the economy is experiencing an inflationary output gap,the adjustment process operates as follows:

Accepted Answer

A) wages do not adjust,but the AD curve shifts to the right. 
B) wages fall,unit costs fall,and the AD curve shifts rightward. 
C) wages rise,unit costs rise,and the AS curve shifts leftward. 
D) wages rise,unit costs rise,and the AS curve shifts rightward. 
E) wages fall,unit costs fall,and the AS curve shifts rightward. 
A) wages do not adjust,but the AD curve shifts to the right. 
B) wages fall,unit costs fall,and the AD curve shifts rightward. 
C) wages rise,unit costs rise,and the AS curve shifts leftward. 
D) wages rise,unit costs rise,and the AS curve shifts rightward. 
E) wages fall,unit costs fall,and the AS curve shifts rightward.

Question 10

Following any AD or AS shock,economists typically assume that the adjustment process continues until

Accepted Answer

A) the AD and AS curves intersect each other at the correct price level. 
B) real GDP returns to Y*. 
C) factor prices have returned to their levels previous to the shock. 
D) Y* adjusts to its long-run equilibrium level. 
E) the output gap is at a stable level. 
A) the AD and AS curves intersect each other at the correct price level. 
B) real GDP returns to Y*. 
C) factor prices have returned to their levels previous to the shock. 
D) Y* adjusts to its long-run equilibrium level. 
E) the output gap is at a stable level.

Question 11

Consider the basic AD/AS diagram.The vertical line at Y* shows the relationship between the price level and the amount of output have adjusted to output gaps.

Accepted Answer

A) demanded by households after all factor prices 
B) supplied by firms after all factor prices 
C) demanded by households before all factor prices 
D) supplied by firms before all factor prices 
E) supplied by firms after all output prices 
A) demanded by households after all factor prices 
B) supplied by firms after all factor prices 
C) demanded by households before all factor prices 
D) supplied by firms before all factor prices 
E) supplied by firms after all output prices

Question 12

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is a decrease in the Canadian price of all imported raw materials.In the short run,________. In the long run,________.

Accepted Answer

A) real GDP and the price level both fall; real GDP is below its original level with a lower price level 
B) real GDP and the price level both rise; real GDP is above its original level with a higher price level 
C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level 
D) real GDP rises and the price level falls; real GDP and the price level return to their original levels 
E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level 
A) real GDP and the price level both fall; real GDP is below its original level with a lower price level 
B) real GDP and the price level both rise; real GDP is above its original level with a higher price level 
C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level 
D) real GDP rises and the price level falls; real GDP and the price level return to their original levels 
E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Question 13

Consider the global recession that began in late 2008.In terms of the AD/AS model,which of the following statements best describes the macroeconomic effect on Canadaʹs economy?

Accepted Answer

A) The AD curve shifted to the right due to reduced demand for Canadian exports,which created a recessionary gap. 
B) The AD curve shifted to the left due to reduced demand for Canadian exports,which created a recessionary output gap. 
C) The AS curve shifted to the right due to increased factor prices,which created a recessionary gap. 
D) The AS curve shifted to the left due to increased factor prices,which created a recessionary gap. 
E) Potential GDP fell,which reduced actual national income. 
A) The AD curve shifted to the right due to reduced demand for Canadian exports,which created a recessionary gap. 
B) The AD curve shifted to the left due to reduced demand for Canadian exports,which created a recessionary output gap. 
C) The AS curve shifted to the right due to increased factor prices,which created a recessionary gap. 
D) The AS curve shifted to the left due to increased factor prices,which created a recessionary gap. 
E) Potential GDP fell,which reduced actual national income.

Question 14

A recessionary output gap implies that

Accepted Answer

A) the demand for all factor services will be relatively low. 
B) the intersection of AD and AS occurs where real GDP exceeds potential output. 
C) the economyʹs resources are being used at more than their normal capacity. 
D) there is upward pressure on wages. 
E) there is excess demand for most factors of production. 
A) the demand for all factor services will be relatively low. 
B) the intersection of AD and AS occurs where real GDP exceeds potential output. 
C) the economyʹs resources are being used at more than their normal capacity. 
D) there is upward pressure on wages. 
E) there is excess demand for most factors of production.

Question 15

Which of the following statements about fiscal policy is the best description of ʺfine tuningʺ?

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 16

The study of the long run in macroeconomics focuses

Accepted Answer

A) on changes to actual GDP but not on changes in potential GDP. 
B) equally on potential GDP and actual GDP. 
C) primarily on changes to potential GDP. 
D) primarily on changes to the output gap,with a constant level of potential output. 
E) solely on the supply of factors of production. 
A) on changes to actual GDP but not on changes in potential GDP. 
B) equally on potential GDP and actual GDP. 
C) primarily on changes to potential GDP. 
D) primarily on changes to the output gap,with a constant level of potential output. 
E) solely on the supply of factors of production.

Question 17

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.
   FIGURE 24-4
-Refer to Figure 24-4.The initial effect of the positive AS shock shown in the diagram results in

Accepted Answer

A) a recessionary output gap of 250. 
B) a recessionary output gap of 450. 
C) an inflationary output gap of 200. 
D) an inflationary output gap of 300. 
E) an inflationary output gap of 550. 
A) a recessionary output gap of 250. 
B) a recessionary output gap of 450. 
C) an inflationary output gap of 200. 
D) an inflationary output gap of 300. 
E) an inflationary output gap of 550.

Question 18

An inflationary output gap is characterized by

Accepted Answer

A) falling prices. 
B) constant prices. 
C) real output that varies one-for-one with aggregate demand. 
D) real GDP exceeding potential output. 
E) real GDP falling below potential output. 
A) falling prices. 
B) constant prices. 
C) real output that varies one-for-one with aggregate demand. 
D) real GDP exceeding potential output. 
E) real GDP falling below potential output.

Question 19

As the macro economy adjusts from the short run to the long run,

Accepted Answer

A) wages and other factor prices adjust to close output gaps. 
B) potential output is adjusting to close inflationary or recessionary gaps. 
C) wages and other factor prices remain constant. 
D) aggregate demand shocks cause deviations from potential output. 
E) aggregate supply shocks cause deviations from potential output. 
A) wages and other factor prices adjust to close output gaps. 
B) potential output is adjusting to close inflationary or recessionary gaps. 
C) wages and other factor prices remain constant. 
D) aggregate demand shocks cause deviations from potential output. 
E) aggregate supply shocks cause deviations from potential output.

Question 20

Which of the following statements about fiscal policy is the best example of ʺgross tuningʺ?

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.

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

Consider the AD/AS macro model.A permanent demand shock that causes equilibrium output to rise above potential output will

Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since governmentʹs net tax revenues ________ during booms and ________ during recessions.

Consider the AD/AS macro model.The study of short-run cyclical fluctuations usually assumes,for simplicity,that there are no changes in

Consider the basic AD/AS macro model in long -run equilibrium.An expansionary AD shock would have output effect in the short run and output effect in the long run.

Automatic fiscal stabilizers are most helpful in

Which of the following are the defining assumptions of the short run in macroeconomics?

Consider a simple macro model with demand-determined output.Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?

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?

If the economy is experiencing an inflationary output gap,the adjustment process operates as follows:

Following any AD or AS shock,economists typically assume that the adjustment process continues until

Consider the basic AD/AS diagram.The vertical line at Y* shows the relationship between the price level and the amount of output have adjusted to output gaps.

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is a decrease in the Canadian price of all imported raw materials.In the short run,________. In the long run,________.

Consider the global recession that began in late 2008.In terms of the AD/AS model,which of the following statements best describes the macroeconomic effect on Canadaʹs economy?

A recessionary output gap implies that

Which of the following statements about fiscal policy is the best description of ʺfine tuningʺ?

The study of the long run in macroeconomics focuses

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A. FIGURE 24-4 -Refer to Figure 24-4.The initial effect of the positive AS shock shown in the diagram results in

An inflationary output gap is characterized by

As the macro economy adjusts from the short run to the long run,

Which of the following statements about fiscal policy is the best example of ʺgross tuningʺ?

Economic Issues and Concepts

Economic Theories, data, and Graphs

Demand, supply, and Price

Elasticity

Price Controls and Market Efficiency

Consumer Behaviour

Producers in the Short Run

Producers in the Long Run

Competitive Markets

Monopoly, cartels, and Price Discrimination

Imperfect Competition and Strategic Behaviour

Economic Efficiency and Public Policy

How Factor Markets Work

Labour Markets and Income Inequality

Market Failures and Government Intervention

The Economics of Environmental Protection

Taxation and Public Expenditure

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

Output and Prices 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

Exchange Rates and the Balance of Payments

Filters

Automatic fiscal stabilizers the impact of demand or supply shocks on the economy since governmentʹs net tax revenues during booms and during recessions.

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is a decrease in the Canadian price of all imported raw materials.In the short run,. In the long run,.