Question 1

As a contractionary gap is closed in the long run by firms' actions,

Accepted Answer

A) nominal and real GDP both decline 
B) nominal and real GDP both increase 
C) nominal GDP increases but real GDP declines 
D) nominal GDP declines but real GDP increases 
E) real GDP increases, but nominal GDP can increase, decrease, or remain the same 
A) nominal and real GDP both decline 
B) nominal and real GDP both increase 
C) nominal GDP increases but real GDP declines 
D) nominal GDP declines but real GDP increases 
E) real GDP increases, but nominal GDP can increase, decrease, or remain the same E

Question 2

Compensation is usually negotiated in terms of the nominal wage because wage agreements are based on expected price levels.

Accepted Answer

A) True 
 B)False  True

Question 3

If the expected price level exceeds the actual price level

Accepted Answer

A) the inflation rate is negative 
B) the inflation rate is positive 
C) production becomes less attractive to firms 
D) production becomes more attractive to firms 
E) the short-run aggregate supply curve is negatively sloped 
A) the inflation rate is negative 
B) the inflation rate is positive 
C) production becomes less attractive to firms 
D) production becomes more attractive to firms 
E) the short-run aggregate supply curve is negatively sloped C

Question 4

Real wages are nominal wages adjusted for price changes.

Accepted Answer

A) True 
 B)False

Question 5

As actual output falls below the potential level, which of the following must be true?

Accepted Answer

A) more resources become unemployed 
B) prices remain constant 
C) real GDP rises 
D) nominal GDP remains constant 
E) production rises 
A) more resources become unemployed 
B) prices remain constant 
C) real GDP rises 
D) nominal GDP remains constant 
E) production rises

Question 6

The amount by which actual output falls short of potential output is called an expansionary gap.

Accepted Answer

A) True 
 B)False

Question 7

Suppose that the real wage remained unchanged between year 1 and 2 but the nominal wage increased from $20 to $24. What is true about the price level?

Accepted Answer

A) It rose by 20 percent. 
B) It rose by 25 percent. 
C) It remained unchanged. 
D) It fell by 10 percent. 
E) It fell by 20 percent. 
A) It rose by 20 percent. 
B) It rose by 25 percent. 
C) It remained unchanged. 
D) It fell by 10 percent. 
E) It fell by 20 percent.

Question 8

Wage agreements may cause costs to be __________ flexible than prices so that __________ in the price level cause __________ in aggregate quantity supplied.

Accepted Answer

A) less; decreases; decreases 
B) less; increases; increases 
C) less; decreases; increases 
D) more; decreases; increases 
E) more; increases; increases 
A) less; decreases; decreases 
B) less; increases; increases 
C) less; decreases; increases 
D) more; decreases; increases 
E) more; increases; increases

Question 9

Which of the following is true in the long run?

Accepted Answer

A) The aggregate demand curve determines the level of potential output. 
B) The long-run aggregate supply curve is vertical. 
C) The actual price level is greater than the expected price level. 
D) Cyclical unemployment is between 5 percent and 6 percent. 
E) The price level is determined entirely by the long-run aggregate supply curve. 
A) The aggregate demand curve determines the level of potential output. 
B) The long-run aggregate supply curve is vertical. 
C) The actual price level is greater than the expected price level. 
D) Cyclical unemployment is between 5 percent and 6 percent. 
E) The price level is determined entirely by the long-run aggregate supply curve.

Question 10

Which of the following is true of a contractionary gap?

Accepted Answer

A) It develops when the expected price level is less than the actual price level. 
B) In the long run, this gap will close when resource suppliers negotiate lower resource payments. 
C) It measures the amount by which actual output is greater than the economy's potential output. 
D) In the long run, this gap will close when the short-run aggregate supply curve shifts rightward. 
E) In the long run, this gap will close when the aggregate demand curve shifts rightward. 
A) It develops when the expected price level is less than the actual price level. 
B) In the long run, this gap will close when resource suppliers negotiate lower resource payments. 
C) It measures the amount by which actual output is greater than the economy's potential output. 
D) In the long run, this gap will close when the short-run aggregate supply curve shifts rightward. 
E) In the long run, this gap will close when the aggregate demand curve shifts rightward.

Question 11

The potential level of output can be altered by changes in

Accepted Answer

A) the actual price level 
B) the expected price level 
C) aggregate demand 
D) real GDP 
E) a nation's stock of capital 
A) the actual price level 
B) the expected price level 
C) aggregate demand 
D) real GDP 
E) a nation's stock of capital

Question 12

In the short run, real and nominal GDP will both decrease whenever

Accepted Answer

A) aggregate demand decreases, but not always when aggregate supply decreases 
B) aggregate supply decreases, but not always when aggregate demand decreases 
C) either aggregate demand or supply decreases 
D) aggregate supply decreases 
E) aggregate supply decreases along a constant aggregate demand curve 
A) aggregate demand decreases, but not always when aggregate supply decreases 
B) aggregate supply decreases, but not always when aggregate demand decreases 
C) either aggregate demand or supply decreases 
D) aggregate supply decreases 
E) aggregate supply decreases along a constant aggregate demand curve

Question 13

The steepness of the short-run aggregate supply curve depends primarily on

Accepted Answer

A) the length of time for which resource prices are fixed 
B) the length of time for which output prices are fixed 
C) the difference between the expected and the actual price levels 
D) how quickly employment increases as output expands 
E) how quickly production costs increase as output expands 
A) the length of time for which resource prices are fixed 
B) the length of time for which output prices are fixed 
C) the difference between the expected and the actual price levels 
D) how quickly employment increases as output expands 
E) how quickly production costs increase as output expands

Question 14

Exhibit 11-2  
-If the actual price level in Exhibit 11-2 exceeds the expected price level, then

Accepted Answer

A) equilibrium output is Y2 in the short run 
B) equilibrium output is Y1 in the short run 
C) the actual unemployment rate is below the natural rate 
D) potential output is greater than actual output 
E) the actual price level is less than the equilibrium price level 
A) equilibrium output is Y2 in the short run 
B) equilibrium output is Y1 in the short run 
C) the actual unemployment rate is below the natural rate 
D) potential output is greater than actual output 
E) the actual price level is less than the equilibrium price level

Question 15

In constructing the short-run aggregate supply curve, we define the short run as the period in which

Accepted Answer

A) the price level is constant 
B) output is fixed 
C) profit is constant 
D) the costs of some resources are fixed 
E) the economic growth rate is less than 4 percent 
A) the price level is constant 
B) output is fixed 
C) profit is constant 
D) the costs of some resources are fixed 
E) the economic growth rate is less than 4 percent

Question 16

Beneficial supply shocks include all of the following except one. Which is the exception?

Accepted Answer

A) an abundant harvest that increases food supplies 
B) discoveries of natural resources 
C) changes in legislation favorable to production 
D) technological advances 
E) establishment of the Occupational Safety and Health Administration (OSH
A)  
A) an abundant harvest that increases food supplies 
B) discoveries of natural resources 
C) changes in legislation favorable to production 
D) technological advances 
E) establishment of the Occupational Safety and Health Administration (OSH
A)

Question 17

In the long run, an increase in aggregate demand will cause

Accepted Answer

A) a decrease in price and output levels 
B) an increase in price and output levels 
C) an increase in the price level and a decrease in output 
D) a decrease in the price level and an increase in output 
E) an increase in the price level and no change in output 
A) a decrease in price and output levels 
B) an increase in price and output levels 
C) an increase in the price level and a decrease in output 
D) a decrease in the price level and an increase in output 
E) an increase in the price level and no change in output

Question 18

When the economy is at its potential output level, which of the following is not true?

Accepted Answer

A) Firms' and workers' expectations about the price level are realized. 
B) The nominal wage is a good measure of the expected real wage. 
C) The unemployment rate is about 4 to 6 percent. 
D) The economy is producing its maximum sustainable output. 
E) The actual price level is greater than the expected price level. 
A) Firms' and workers' expectations about the price level are realized. 
B) The nominal wage is a good measure of the expected real wage. 
C) The unemployment rate is about 4 to 6 percent. 
D) The economy is producing its maximum sustainable output. 
E) The actual price level is greater than the expected price level.

Question 19

Potential output will decrease if

Accepted Answer

A) there is an increase in the price level 
B) there is a decrease in the price level 
C) there is technological change that increases labor productivity 
D) workers choose shorter work schedules in order to enjoy more leisure time 
E) the nation's capital stock increases 
A) there is an increase in the price level 
B) there is a decrease in the price level 
C) there is technological change that increases labor productivity 
D) workers choose shorter work schedules in order to enjoy more leisure time 
E) the nation's capital stock increases

Question 20

Exhibit 11-2  
-In Exhibit 11-2, if P3 is the prevailing price level, then

Accepted Answer

A) the expected price level is less than the actual price level 
B) there is a contractionary gap 
C) the price level will rise 
D) the actual unemployment rate is above the natural rate 
E) potential output is greater than actual output 
A) the expected price level is less than the actual price level 
B) there is a contractionary gap 
C) the price level will rise 
D) the actual unemployment rate is above the natural rate 
E) potential output is greater than actual output

Exam 11: Aggregate Supply

As a contractionary gap is closed in the long run by firms' actions,

Compensation is usually negotiated in terms of the nominal wage because wage agreements are based on expected price levels.

If the expected price level exceeds the actual price level

Real wages are nominal wages adjusted for price changes.

As actual output falls below the potential level, which of the following must be true?

The amount by which actual output falls short of potential output is called an expansionary gap.

Suppose that the real wage remained unchanged between year 1 and 2 but the nominal wage increased from $20 to $24. What is true about the price level?

Wage agreements may cause costs to be __________ flexible than prices so that __________ in the price level cause __________ in aggregate quantity supplied.

Which of the following is true in the long run?

Which of the following is true of a contractionary gap?

The potential level of output can be altered by changes in

In the short run, real and nominal GDP will both decrease whenever

The steepness of the short-run aggregate supply curve depends primarily on

Exhibit 11-2 -If the actual price level in Exhibit 11-2 exceeds the expected price level, then

In constructing the short-run aggregate supply curve, we define the short run as the period in which

Beneficial supply shocks include all of the following except one. Which is the exception?

In the long run, an increase in aggregate demand will cause

When the economy is at its potential output level, which of the following is not true?

Potential output will decrease if

Exhibit 11-2 -In Exhibit 11-2, if P3 is the prevailing price level, then

The Art and Science of Economic Analysis

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Economic Decision Makers

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Introduction to Macroeconomics

Tracking the Us Economy

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Aggregate Expenditure and Aggregate Demand

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Money and the Financial System

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Wage agreements may cause costs to be flexible than prices so that in the price level cause __ in aggregate quantity supplied.

Exhibit 11-2 -In Exhibit 11-2, if P₃ is the prevailing price level, then