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

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

Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy because 1) the multiplier effects associated with fiscal policy take a long time; 2) changes in government spending and taxation are too small in relation to the size of the economy to have much effect; 3) there are long and uncertain lags in implementing fiscal policy.

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, . In the long run, .

In the basic AD/AS macro model, the ʺparadox of thriftʺ is only a short-run phenomenon because

An inflationary output gap occurs when

Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long -run effects on potential output?

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

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

Which of the following is a defining assumption of the AD/AS macro model in the long run?

Fiscal policies typically affect the short-run level of GDP because they cause shifts in the but they will not generally have any long-run effects on real GDP unless they affect .

Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap?

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

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?

A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices rise and the

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

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

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 -Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate increases and the price level decreases. We can conclude that Has decreased and there is now an) gap.

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?

An adjustment ʺasymmetryʺ in aggregate supply is

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