Question 1

What economists sometimes call the ʺlong-run aggregate supply curveʺ is

Accepted Answer

A) vertical. 
B) horizontal. 
C) nonlinear. 
D) negatively sloped. 
E) positively sloped. 
A) vertical. 
B) horizontal. 
C) nonlinear. 
D) negatively sloped. 
E) positively sloped.

Question 2

A recessionary output gap is characterized by

Accepted Answer

A) rising 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) rising 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 3

Consider an economy with a relatively steep AS curve.If there is a shift to the right in the AD curve,there will be a ________ in the price level and ________ in national output.

Accepted Answer

A) small increase; a large increase 
B) small increase; a large decrease 
C) large increase; a small increase 
D) large increase; a small decrease 
E) large increase; no change 
A) small increase; a large increase 
B) small increase; a large decrease 
C) large increase; a small increase 
D) large increase; a small decrease 
E) large increase; no change

Question 4

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.A negative shock to the economy shifts the AD curve from AD1 to AD2.At the new short-run equilibrium,the price level is ________ and real GDP is ________.

Accepted Answer

A) 90; 900 
B) 110; 800 
C) 60; 1000 
D) 60; 700 
E) 90; 1250 
A) 90; 900 
B) 110; 800 
C) 60; 1000 
D) 60; 700 
E) 90; 1250

Question 5

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 6

An adjustment ʺasymmetryʺ in aggregate supply is

Accepted Answer

A) the concave shape of the AS curve. 
B) the convex shape of the AS curve. 
C) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps). 
D) the difference in speed of increases in factor prices versus wage rates. 
E) the difference in speed of decreases in output levels. 
A) the concave shape of the AS curve. 
B) the convex shape of the AS curve. 
C) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps). 
D) the difference in speed of increases in factor prices versus wage rates. 
E) the difference in speed of decreases in output levels.

Question 7

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 economies are experiencing an inflationary gap?

Accepted Answer

A) Economies A and B 
B) Economies B and C 
C) Economies C and D 
D) Economies D and E 
E) none of the economies 
A) Economies A and B 
B) Economies B and C 
C) Economies C and D 
D) Economies D and E 
E) none of the economies

Question 8

In the basic AD/AS macro model,permanent increases in real GDP are possible only if

Accepted Answer

A) potential output is increasing. 
B) the correct fiscal policy is implemented. 
C) the economyʹs automatic stabilizers are allowed to operate. 
D) the aggregate supply curve is vertical. 
E) aggregate demand responds positively to demand shocks. 
A) potential output is increasing. 
B) the correct fiscal policy is implemented. 
C) the economyʹs automatic stabilizers are allowed to operate. 
D) the aggregate supply curve is vertical. 
E) aggregate demand responds positively to demand shocks.

Question 9

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 10

An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________.

Accepted Answer

A) rises to an unsustainable level; real GDP is reduced 
B) is crowded out; corporate tax revenue is reduced 
C) increases; aggregate demand increases 
D) increases; net exports increases 
E) is crowded out; potential output is reduced 
A) rises to an unsustainable level; real GDP is reduced 
B) is crowded out; corporate tax revenue is reduced 
C) increases; aggregate demand increases 
D) increases; net exports increases 
E) is crowded out; potential output is reduced

Question 11

A reduction in the net tax rate might lead to an increase in the growth rate of potential output if

Accepted Answer

A) the simple multiplier is large. 
B) the tax cuts stimulate private investment. 
C) firms are operating at their normal capacity. 
D) households are not forward looking. 
E) the marginal propensity to consume is large. 
A) the simple multiplier is large. 
B) the tax cuts stimulate private investment. 
C) firms are operating at their normal capacity. 
D) households are not forward looking. 
E) the marginal propensity to consume is large.

Question 12

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. In the initial short-run equilibrium, there is ________ output gap of ________ but this gap could be closed by a ________.

Accepted Answer

A) a recessionary; 100; fiscal contraction 
B) a recessionary; 200; fiscal expansion 
C) a recessionary; 200; fiscal contraction 
D) an inflationary; 100; fiscal contraction 
E) an inflationary; 200; fiscal expansion 
A) a recessionary; 100; fiscal contraction 
B) a recessionary; 200; fiscal expansion 
C) a recessionary; 200; fiscal contraction 
D) an inflationary; 100; fiscal contraction 
E) an inflationary; 200; fiscal expansion

Question 13

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.Which of the following events could have shifted the AD curve from AD1 to AD2?

Accepted Answer

A) an increase in net exports 
B) an increase in government purchases 
C) an increase in desired investment 
D) an increase in autonomous household saving 
E) an increase in autonomous consumption 
A) an increase in net exports 
B) an increase in government purchases 
C) an increase in desired investment 
D) an increase in autonomous household saving 
E) an increase in autonomous consumption

Question 14

FIGURE 24-5
 
-Refer to Figure 24-5.The economy is not in long-run equilibrium at E1 because the

Accepted Answer

A) AD1 curve will shift back to AD0 due to an increase in the price level. 
B) AD1 curve will shift back to the left due to a fall in current consumption. 
C) AS will shift to the left due to an increase in wages. 
D) AS will shift to the left due to an increase in the price level. 
E) AS will shift to the right due to a decrease in the price level. 
A) AD1 curve will shift back to AD0 due to an increase in the price level. 
B) AD1 curve will shift back to the left due to a fall in current consumption. 
C) AS will shift to the left due to an increase in wages. 
D) AS will shift to the left due to an increase in the price level. 
E) AS will shift to the right due to a decrease in the price level.

Question 15

The economyʹs output gap is defined as the

Accepted Answer

A) difference between actual GDP and potential GDP. 
B) level of total output that would be produced if capacity utilization is at its normal rate. 
C) difference between actual national income and desired aggregate expenditure. 
D) result of economic growth. 
E) difference between nominal GDP and real GDP. 
A) difference between actual GDP and potential GDP. 
B) level of total output that would be produced if capacity utilization is at its normal rate. 
C) difference between actual national income and desired aggregate expenditure. 
D) result of economic growth. 
E) difference between nominal GDP and real GDP.

Question 16

Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP.One disadvantage of this policy is that

Accepted Answer

A) the effect of economic shocks on government revenues becomes more volatile,while the economy becomes more stable. 
B) further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer. 
C) private investment is crowded out,which may reduce the future growth rate of potential output. 
D) the effect of the automatic stabilizer is reduced and the economy will be more unstable. 
E) both C and D are correct. 
A) the effect of economic shocks on government revenues becomes more volatile,while the economy becomes more stable. 
B) further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer. 
C) private investment is crowded out,which may reduce the future growth rate of potential output. 
D) the effect of the automatic stabilizer is reduced and the economy will be more unstable. 
E) both C and D are correct.

Question 17

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
-Consider Figure 24-7. At the initial short-run equilibrium, there is ________ output gap of ________. This gap could be closed by a ________.

Accepted Answer

A) a recessionary; 100; fiscal contraction 
B) a recessionary; 200; fiscal expansion 
C) an inflationary; 100; fiscal contraction 
D) an inflationary; 200; fiscal contraction 
E) an inflationary; 350; fiscal expansion 
A) a recessionary; 100; fiscal contraction 
B) a recessionary; 200; fiscal expansion 
C) an inflationary; 100; fiscal contraction 
D) an inflationary; 200; fiscal contraction 
E) an inflationary; 350; fiscal expansion

Question 18

Consider an AD/AS model in long-run equilibrium.An output gap,caused by a leftward shift of the AD curve,will be eliminated if

Accepted Answer

A) wages rise quickly. 
B) the AS curve shifts upward. 
C) wages and other factor prices fall sufficiently. 
D) real national income decreases. 
E) prices rise quickly. 
A) wages rise quickly. 
B) the AS curve shifts upward. 
C) wages and other factor prices fall sufficiently. 
D) real national income decreases. 
E) prices rise quickly.

Question 19

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.How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E?

Accepted Answer

A) The size of the output gap is the same in Economies A and E,but wages are rising in A and falling in E. 
B) The output gap is larger in Economy A,yet wages are changing more slowly. 
C) The output gap is much larger in Economy E,so wages are changing at a faster rate. 
D) The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E. 
E) There is insufficient data with which to observe the adjustment asymmetry. 
A) The size of the output gap is the same in Economies A and E,but wages are rising in A and falling in E. 
B) The output gap is larger in Economy A,yet wages are changing more slowly. 
C) The output gap is much larger in Economy E,so wages are changing at a faster rate. 
D) The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E. 
E) There is insufficient data with which to observe the adjustment asymmetry.

Question 20

Suppose the economy has a high level of unemployment and a low level of aggregate output.Which of the following policies could the government implement to alleviate these conditions?

Accepted Answer

A) an expansionary fiscal policy that increases tax rates 
B) a contractionary fiscal policy that increases government purchases 
C) automatic fiscal stabilizers 
D) a contractionary fiscal policy that increases tax rates 
E) an expansionary fiscal policy that increases government purchases 
A) an expansionary fiscal policy that increases tax rates 
B) a contractionary fiscal policy that increases government purchases 
C) automatic fiscal stabilizers 
D) a contractionary fiscal policy that increases tax rates 
E) an expansionary fiscal policy that increases government purchases

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

What economists sometimes call the ʺlong-run aggregate supply curveʺ is

A recessionary output gap is characterized by

Consider an economy with a relatively steep AS curve.If there is a shift to the right in the AD curve,there will be a ________ in the price level and ________ in national output.

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

An adjustment ʺasymmetryʺ in aggregate supply is

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 economies are experiencing an inflationary gap?

In the basic AD/AS macro model,permanent increases in real GDP are possible only if

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 ________.

An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________.

A reduction in the net tax rate might lead to an increase in the growth rate of potential output if

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. In the initial short-run equilibrium, there is ________ output gap of ________ but this gap could be closed by a ________.

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.Which of the following events could have shifted the AD curve from AD1 to AD2?

FIGURE 24-5 -Refer to Figure 24-5.The economy is not in long-run equilibrium at E1 because the

The economyʹs output gap is defined as the

Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP.One disadvantage of this policy is that

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 -Consider Figure 24-7. At the initial short-run equilibrium, there is ________ output gap of ________. This gap could be closed by a ________.

Consider an AD/AS model in long-run equilibrium.An output gap,caused by a leftward shift of the AD curve,will be eliminated if

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.How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E?

Suppose the economy has a high level of unemployment and a low level of aggregate output.Which of the following policies could the government implement to alleviate these conditions?

Economic Issues and Concepts

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Consider an economy with a relatively steep AS curve.If there is a shift to the right in the AD curve,there will be a in the price level and in national output.

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 .

An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment and, as a result, the future growth rate of .

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. In the initial short-run equilibrium, there is output gap of but this gap could be closed by a .

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 -Consider Figure 24-7. At the initial short-run equilibrium, there is output gap of . This gap could be closed by a .