Question 1

When we study the adjustment process in macroeconomics,what assumption are we making about potential output,Y*?

Accepted Answer

A) potential output is adjusting to changes in factor prices 
B) potential output is adjusting to changes in factor supplies 
C) potential output is adjusting to changes in technology 
D) potential output is constant 
E) potential output is not relevant to the analysis of the adjustment process 
A) potential output is adjusting to changes in factor prices 
B) potential output is adjusting to changes in factor supplies 
C) potential output is adjusting to changes in technology 
D) potential output is constant 
E) potential output is not relevant to the analysis of the adjustment process

Question 2

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.In which economy is there the most unused capacity?

Accepted Answer

A) Economy A 
B) Economy B 
C) Economy C 
D) Economy D 
E) Economy E 
A) Economy A 
B) Economy B 
C) Economy C 
D) Economy D 
E) Economy E

Question 3

If the short-run macroeconomic equilibrium occurs with real GDP less than Y*,the economy is

Accepted Answer

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

Question 4

Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be ________, and real GDP may________ potential GDP

Accepted Answer

A) too weak; stay below 
B) too weak; rise above 
C) too strong; stay below 
D) too strong; rise above 
E) appropriate; equal 
A) too weak; stay below 
B) too weak; rise above 
C) too strong; stay below 
D) too strong; rise above 
E) appropriate; equal

Question 5

Suppose the economy is experiencing an inflationary gap in the short run.The advantage of using a contractionary fiscal policy rather than allowing the economyʹs natural adjustment process to operate is that

Accepted Answer

A) it will reduce the upward pressure on the price level that would otherwise occur. 
B) if private-sector expenditures increase on their own,the policy will stabilize real GDP. 
C) it will shorten what might otherwise be a long recession. 
D) it will reduce the downward pressure on the price level that would otherwise occur. 
E) it will close the output gap. 
A) it will reduce the upward pressure on the price level that would otherwise occur. 
B) if private-sector expenditures increase on their own,the policy will stabilize real GDP. 
C) it will shorten what might otherwise be a long recession. 
D) it will reduce the downward pressure on the price level that would otherwise occur. 
E) it will close the output gap.

Question 6

Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap?

Accepted Answer

A) falling prices 
B) increasing investment 
C) declining government purchases 
D) rising wages 
E) increasing tax rates 
A) falling prices 
B) increasing investment 
C) declining government purchases 
D) rising wages 
E) increasing tax rates

Question 7

An inflationary output gap would generate which of the following conditions in the economy?

Accepted Answer

A) Firms are making low profits. 
B) Workers have relatively more bargaining power with employers. 
C) There is an unusually small demand for labour. 
D) There is downward pressure on wages. 
E) There is much idle capacity. 
A) Firms are making low profits. 
B) Workers have relatively more bargaining power with employers. 
C) There is an unusually small demand for labour. 
D) There is downward pressure on wages. 
E) There is much idle capacity.

Question 8

Consider the AD/AS macro model.An important asymmetry in the behaviour of aggregate supply is the

Accepted Answer

A) changing slope of the aggregate demand curve. 
B) difference between actual and potential output. 
C) different relative sizes of inflationary versus recessionary gaps. 
D) economyʹs path of potential output as a result of labour force growth. 
E) different speeds at which factor prices adjust to positive and negative output gaps. 
A) changing slope of the aggregate demand curve. 
B) difference between actual and potential output. 
C) different relative sizes of inflationary versus recessionary gaps. 
D) economyʹs path of potential output as a result of labour force growth. 
E) different speeds at which factor prices adjust to positive and negative output gaps.

Question 9

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.After the positive aggregate supply shock shown in the diagram,which of the following would shift the AS curve leftward during the economyʹs adjustment process?

Accepted Answer

A) an increase in factor supplies 
B) an increase in the unemployment rate 
C) a decrease in wages and other factor prices 
D) an increase in labour productivity 
E) an increase in wages and other factor prices 
A) an increase in factor supplies 
B) an increase in the unemployment rate 
C) a decrease in wages and other factor prices 
D) an increase in labour productivity 
E) an increase in wages and other factor prices

Question 10

Consider a simple macro model with demand-determined output.Which of the following parameters will produce the most stable real GDP in the face of 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 11

An economy may not quickly and automatically eliminate a recessionary output gap because wages

Accepted Answer

A) never change in response to changes in the demand for labour. 
B) have a tendency to be sticky downward. 
C) have a tendency to fall too quickly. 
D) have a tendency to rise too quickly. 
E) are flexible but prices have a tendency to be sticky downward. 
A) never change in response to changes in the demand for labour. 
B) have a tendency to be sticky downward. 
C) have a tendency to fall too quickly. 
D) have a tendency to rise too quickly. 
E) are flexible but prices have a tendency to be sticky downward.

Question 12

Suppose the economy is experiencing a significant recessionary gap,but it has taken the government six months to determine that it will change fiscal policy.This is an example of

Accepted Answer

A) an execution lag. 
B) fine tuning. 
C) gross tuning. 
D) a decision lag. 
E) automatic fiscal stabilizers. 
A) an execution lag. 
B) fine tuning. 
C) gross tuning. 
D) a decision lag. 
E) automatic fiscal stabilizers.

Question 13

Income taxes in Canada can be considered to be automatic stabilizers because tax

Accepted Answer

A) revenues increase when income increases,thereby offsetting some of the increase in aggregate demand. 
B) revenues decrease when income increases,thereby intensifying the increase in aggregate demand. 
C) structures can be changed when the Minister of Finance brings down a budget. 
D) revenues are changed through discretionary fiscal policy to keep the budget balanced. 
E) revenues are changed through discretionary fiscal policy to create surpluses in recessions. 
A) revenues increase when income increases,thereby offsetting some of the increase in aggregate demand. 
B) revenues decrease when income increases,thereby intensifying the increase in aggregate demand. 
C) structures can be changed when the Minister of Finance brings down a budget. 
D) revenues are changed through discretionary fiscal policy to keep the budget balanced. 
E) revenues are changed through discretionary fiscal policy to create surpluses in recessions.

Question 14

Suppose the economy begins in a long-run equilibrium with Y = Y*.A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with  a ________ shift of ________.

Accepted Answer

A) rightward; the aggregate supply curve 
B) rightward; the aggregate demand curve 
C) leftward; the aggregate supply curve 
D) leftward; the aggregate demand curve 
E) rightward; Y* 
A) rightward; the aggregate supply curve 
B) rightward; the aggregate demand curve 
C) leftward; the aggregate supply curve 
D) leftward; the aggregate demand curve 
E) rightward; Y*

Question 15

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.Following the positive AS shock shown in the diagram,the adjustment process will take the economy to a long-run equilibrium where the price level  is ________ and real GDP is ________.

Accepted Answer

A) 60; 1000 
B) 60; 1300 
C) 90; 750 
D) 90; 1200 
E) 110; 1000 
A) 60; 1000 
B) 60; 1300 
C) 90; 750 
D) 90; 1200 
E) 110; 1000

Question 16

In the long run, aggregate demand is ________ for determining real GDP, and the paradox of thrift ________.

Accepted Answer

A) not important; applies 
B) not important; does not apply 
C) the only influence; applies 
D) the most important influence; does not apply 
E) stable and important; applies 
A) not important; applies 
B) not important; does not apply 
C) the only influence; applies 
D) the most important influence; does not apply 
E) stable and important; applies

Question 17

What is sometimes called the ʺlong-run aggregate supply curveʺ shows the relationship between the price level and aggregate supply over a time period long enough to permit

Accepted Answer

A) changes in the capital stock. 
B) wages and other factor prices to adjust. 
C) changes in technology to occur. 
D) changes in the size of the resource base to occur. 
E) population to increase. 
A) changes in the capital stock. 
B) wages and other factor prices to adjust. 
C) changes in technology to occur. 
D) changes in the size of the resource base to occur. 
E) population to increase.

Question 18

Which of the following are the defining assumptions of the long 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 have fully adjusted to output gaps,and technology and factor supplies are changing. 
E) Factor prices are exogenous,technology and factor prices are exogenous. 
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 have fully adjusted to output gaps,and technology and factor supplies are changing. 
E) Factor prices are exogenous,technology and factor prices are exogenous.

Question 19

Fiscal policy refers to the

Accepted Answer

A) governmentʹs attempts to maintain a vertical AS curve so as to stabilize output. 
B) governmentʹs use of spending and taxing policies to influence equilibrium real GDP. 
C) governmentʹs use of trade-related policy tools to influence the net export function,thereby influencing GDP. 
D) business sectorʹs influence on investment and GDP. 
E) householdsʹ attempts to change saving to encourage growth. 
A) governmentʹs attempts to maintain a vertical AS curve so as to stabilize output. 
B) governmentʹs use of spending and taxing policies to influence equilibrium real GDP. 
C) governmentʹs use of trade-related policy tools to influence the net export function,thereby influencing GDP. 
D) business sectorʹs influence on investment and GDP. 
E) householdsʹ attempts to change saving to encourage growth.

Question 20

FIGURE 24-5
 
-Refer to Figure 24-5.Following a positive demand shock that takes the economy from E0 to E1,the movement of the economy from E1 to E2 indicates that

Accepted Answer

A) a demand shock can keep real GDP above potential output permanently. 
B) an increase in the price level causes the AS curve to shift to the left. 
C) an increase in the price level causes the AD curve to shift to the left. 
D) the economy cannot return to potential output without government intervention. 
E) the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted. 
A) a demand shock can keep real GDP above potential output permanently. 
B) an increase in the price level causes the AS curve to shift to the left. 
C) an increase in the price level causes the AD curve to shift to the left. 
D) the economy cannot return to potential output without government intervention. 
E) the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

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

When we study the adjustment process in macroeconomics,what assumption are we making about potential output,Y*?

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.In which economy is there the most unused capacity?

If the short-run macroeconomic equilibrium occurs with real GDP less than Y*,the economy is

Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be ________, and real GDP may________ potential GDP

Suppose the economy is experiencing an inflationary gap in the short run.The advantage of using a contractionary fiscal policy rather than allowing the economyʹs natural adjustment process to operate is that

Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap?

An inflationary output gap would generate which of the following conditions in the economy?

Consider the AD/AS macro model.An important asymmetry in the behaviour of aggregate supply is the

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

An economy may not quickly and automatically eliminate a recessionary output gap because wages

Suppose the economy is experiencing a significant recessionary gap,but it has taken the government six months to determine that it will change fiscal policy.This is an example of

Income taxes in Canada can be considered to be automatic stabilizers because tax

Suppose the economy begins in a long-run equilibrium with Y = Y*.A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a ________ shift of ________.

In the long run, aggregate demand is ________ for determining real GDP, and the paradox of thrift ________.

What is sometimes called the ʺlong-run aggregate supply curveʺ shows the relationship between the price level and aggregate supply over a time period long enough to permit

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

Fiscal policy refers to the

FIGURE 24-5 -Refer to Figure 24-5.Following a positive demand shock that takes the economy from E0 to E1,the movement of the economy from E1 to E2 indicates that

Economic Issues and Concepts

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Filters

Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be , and real GDP may potential GDP

Suppose the economy begins in a long-run equilibrium with Y = Y*.A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a shift of .

In the long run, aggregate demand is for determining real GDP, and the paradox of thrift .