Question 1

"Automatic fiscal stabilization" in the economy refers to

Accepted Answer

A) the properties of government spending and taxation that cause the simple multiplier to be increased. 
B) the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap. 
C) the properties of government spending and taxation that cause the simple multiplier to be reduced. 
D) the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap. 
E) all discretionary fiscal policies. 
A) the properties of government spending and taxation that cause the simple multiplier to be increased. 
B) the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap. 
C) the properties of government spending and taxation that cause the simple multiplier to be reduced. 
D) the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap. 
E) all discretionary fiscal policies.

Question 2

What is meant by the term "stagflation"?

Accepted Answer

A) the combination of falling real GDP and a rising price level 
B) a persistent inflationary gap 
C) a persistent recessionary gap 
D) the sluggish downward wage adjustment in response to a recessionary gap 
E) the combination of inflation and rising real GDP 
A) the combination of falling real GDP and a rising price level 
B) a persistent inflationary gap 
C) a persistent recessionary gap 
D) the sluggish downward wage adjustment in response to a recessionary gap 
E) the combination of inflation and rising real GDP

Question 3

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 economy's 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 economy's 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 4

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 5

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 6

If the economy in the short run is experiencing a recessionary gap,we are likely to see

Accepted Answer

A) severe and widespread labour shortages. 
B) quickly rising output prices. 
C) an increase in the number of workers receiving employment-insurance benefits. 
D) the number of employment-insurance recipients the lowest ever. 
E) consumers optimistic about the future. 
A) severe and widespread labour shortages. 
B) quickly rising output prices. 
C) an increase in the number of workers receiving employment-insurance benefits. 
D) the number of employment-insurance recipients the lowest ever. 
E) consumers optimistic about the future.

Question 7

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 8

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 9

Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government's 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 10

Consider the AD/AS model.Since output in the long run is determined by Y*,the only role of the AD curve is to determine the price level.This is true because

Accepted Answer

A) Y* is independent of the price level. 
B) the aggregate demand curve is vertical. 
C) the aggregate demand curve is horizontal. 
D) Y* depends on the price level. 
E) the AS curve is upward sloping. 
A) Y* is independent of the price level. 
B) the aggregate demand curve is vertical. 
C) the aggregate demand curve is horizontal. 
D) Y* depends on the price level. 
E) the AS curve is upward sloping.

Question 11

In macroeconomic analysis,the assumption that potential output (Y*)is changing is a characteristic of

Accepted Answer

A) the short run. 
B) the adjustment process. 
C) the national accounts model. 
D) the long run. 
E) the business cycle model. 
A) the short run. 
B) the adjustment process. 
C) the national accounts model. 
D) the long run. 
E) the business cycle model.

Question 12

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?

Accepted Answer

A) The growth rate of potential output may be reduced due to the crowding out of private investment. 
B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy. 
C) Potential output will drop below its starting point because of the crowding out of investment. 
D) The growth rate of potential output will rise due to the higher level of aggregate demand. 
E) The level of potential output is fixed and will not be affected by fiscal policy. 
A) The growth rate of potential output may be reduced due to the crowding out of private investment. 
B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy. 
C) Potential output will drop below its starting point because of the crowding out of investment. 
D) The growth rate of potential output will rise due to the higher level of aggregate demand. 
E) The level of potential output is fixed and will not be affected by fiscal policy.

Question 13

If an economy is experiencing neither a recessionary gap nor an inflationary gap,the real output of the economy will be reflected by

Accepted Answer

A) the aggregate supply curve shifting to the left. 
B) the aggregate demand curve shifting to the left. 
C) the aggregate expenditure curve shifting upward. 
D) the intersection of the AD and AS curves at potential output. 
E) a point to the right of the aggregate supply curve at potential GDP. 
A) the aggregate supply curve shifting to the left. 
B) the aggregate demand curve shifting to the left. 
C) the aggregate expenditure curve shifting upward. 
D) the intersection of the AD and AS curves at potential output. 
E) a point to the right of the aggregate supply curve at potential GDP.

Question 14

When an economy experiences sustained growth in real GDP,

Accepted Answer

A) actual GDP is greater than potential GDP. 
B) actual GDP is less than potential GDP. 
C) potential GDP is likely to be increasing. 
D) factor prices are likely to be decreasing. 
E) wage rates will decrease slowly as factor-utilization rates decrease. 
A) actual GDP is greater than potential GDP. 
B) actual GDP is less than potential GDP. 
C) potential GDP is likely to be increasing. 
D) factor prices are likely to be decreasing. 
E) wage rates will decrease slowly as factor-utilization rates decrease.

Question 15

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 16

Which of the following statements about fiscal policy is the best description of "fine tuning"?

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 17

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.   FIGURE 24-3
-Refer to Figure 24-3.Following the negative AD shock shown in the diagram (from   to   ),the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________.

Accepted Answer

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

Question 18

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 19

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 20

An inflationary output gap occurs when

Accepted Answer

A) actual GDP exceeds potential GDP. 
B) nominal GDP exceeds real GDP. 
C) demand for labour services is very low. 
D) equilibrium national income is below potential national income. 
E) potential GDP exceeds actual GDP. 
A) actual GDP exceeds potential GDP. 
B) nominal GDP exceeds real GDP. 
C) demand for labour services is very low. 
D) equilibrium national income is below potential national income. 
E) potential GDP exceeds actual GDP.

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

"Automatic fiscal stabilization" in the economy refers to

What is meant by the term "stagflation"?

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

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?

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

If the economy in the short run is experiencing a recessionary gap,we are likely to see

Automatic fiscal stabilizers are most helpful in

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.

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

Consider the AD/AS model.Since output in the long run is determined by Y*,the only role of the AD curve is to determine the price level.This is true because

In macroeconomic analysis,the assumption that potential output (Y*)is changing is a characteristic of

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?

If an economy is experiencing neither a recessionary gap nor an inflationary gap,the real output of the economy will be reflected by

When an economy experiences sustained growth in real GDP,

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?

Which of the following statements about fiscal policy is the best description of "fine tuning"?

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

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

An inflationary output gap occurs when

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

Consider the AD/AS model.Since output in the long run is determined by Y^*,the only role of the AD curve is to determine the price level.This is true because