Question 1

Which of the following describes the distinction between the Phillips curve and the AS curve?

Accepted Answer

A) The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis. 
B) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of change in the interest rate on the vertical axis. 
C) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. 
D) The AS curve has the rate of price inflation on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. 
E) There is no distinction: the two curves are essentially the same thing. 
A) The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis. 
B) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of change in the interest rate on the vertical axis. 
C) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. 
D) The AS curve has the rate of price inflation on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. 
E) There is no distinction: the two curves are essentially the same thing.

Question 2

Following any AD or AS shock,economists typically assume that the adjustment process continues until

Accepted Answer

A) the AD and AS curves intersect each other at the correct price level. 
B) real GDP returns to Y*. 
C) factor prices have returned to their levels previous to the shock. 
D) Y* adjusts to its long-run equilibrium level. 
E) the output gap is at a stable level. 
A) the AD and AS curves intersect each other at the correct price level. 
B) real GDP returns to Y*. 
C) factor prices have returned to their levels previous to the shock. 
D) Y* adjusts to its long-run equilibrium level. 
E) the output gap is at a stable level.

Question 3

In any decision about stimulating the economy with a fiscal expansion (increasing government purchases),the government must weigh the short-run benefits of ________ against the long-run costs of ________.

Accepted Answer

A) a higher price level; unemployment 
B) increased potential output; a higher price level 
C) a higher price level; lower real GDP 
D) increased real GDP; higher economic growth 
E) increased economic activity; lower economic growth 
A) a higher price level; unemployment 
B) increased potential output; a higher price level 
C) a higher price level; lower real GDP 
D) increased real GDP; higher economic growth 
E) increased economic activity; lower economic growth

Question 4

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 decreases and the price level decreases.We can conclude that ________ has increased and there is now a(n)________ gap.

Accepted Answer

A) aggregate supply; inflationary 
B) aggregate demand; recessionary 
C) aggregate supply; recessionary 
D) aggregate demand; inflationary 
A) aggregate supply; inflationary 
B) aggregate demand; recessionary 
C) aggregate supply; recessionary 
D) aggregate demand; inflationary

Question 5

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 6

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

Question 7

The paradox of thrift does not exist in the long run because

Accepted Answer

A) not everyone increases saving in the long run. 
B) aggregate supply has an impact on real GDP only in the short run. 
C) everyone increases consumption in the long run. 
D) changes in aggregate demand have no impact on real GDP in the long run. 
E) potential output is determined by changes in the price level. 
A) not everyone increases saving in the long run. 
B) aggregate supply has an impact on real GDP only in the short run. 
C) everyone increases consumption in the long run. 
D) changes in aggregate demand have no impact on real GDP in the long run. 
E) potential output is determined by changes in the price level.

Question 8

Consider the basic AD/AS macro model in long-run equilibrium.A permanent expansionary AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run.

Accepted Answer

A) a positive; no 
B) a negative; no 
C) a positive; an even larger 
D) a positive; a smaller 
E) a negative; a positive 
A) a positive; no 
B) a negative; no 
C) a positive; an even larger 
D) a positive; a smaller 
E) a negative; a positive

Question 9

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 10

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

Accepted Answer

A) AS curve shifts to the left. 
B) AD curve shifts to the right. 
C) AS curve shifts to the right very rapidly. 
D) AD curve shifts to the left rapidly. 
E) none of the above - the AS curve remains unchanged. 
A) AS curve shifts to the left. 
B) AD curve shifts to the right. 
C) AS curve shifts to the right very rapidly. 
D) AD curve shifts to the left rapidly. 
E) none of the above - the AS curve remains unchanged.

Question 11

An important automatic fiscal stabilizer in Canada is

Accepted Answer

A) the exchange rate. 
B) the marginal propensity to consume. 
C) the marginal propensity to import. 
D) the income-tax system. 
E) government purchases of goods and services. 
A) the exchange rate. 
B) the marginal propensity to consume. 
C) the marginal propensity to import. 
D) the income-tax system. 
E) government purchases of goods and services.

Question 12

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

Accepted Answer

A) affect only the price level. 
B) decrease real GDP and the price level. 
C) affect only the level of real GDP. 
D) increase real GDP and lower the price level. 
E) decrease real GDP and raise the price level. 
A) affect only the price level. 
B) decrease real GDP and the price level. 
C) affect only the level of real GDP. 
D) increase real GDP and lower the price level. 
E) decrease real GDP and raise the price level.

Question 13

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 14

Which of the following statements about fiscal policy is the best example of "gross 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 15

Consider the AD/AS macro model.An important asymmetry in the behaviour of the AS curve is that

Accepted Answer

A) prices are sticky but wages are not. 
B) positive output gaps can persist for a long time without causing increases in wages and prices,whereas negative output gaps lead to immediate reductions in wages and prices. 
C) negative output gaps can persist for a while without causing large decreases in wages and prices,whereas positive output gaps lead more quickly to increases in wages and prices. 
D) wages are very flexible in the downward direction,but not in the upward direction. 
E) wages and prices are equally sticky in both directions. 
A) prices are sticky but wages are not. 
B) positive output gaps can persist for a long time without causing increases in wages and prices,whereas negative output gaps lead to immediate reductions in wages and prices. 
C) negative output gaps can persist for a while without causing large decreases in wages and prices,whereas positive output gaps lead more quickly to increases in wages and prices. 
D) wages are very flexible in the downward direction,but not in the upward direction. 
E) wages and prices are equally sticky in both directions.

Question 16

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 leftward 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 17

Consider the basic AD/AS macro model,initially in a long-run equilibrium.A positive 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; increase; decrease further; will be restored to potential output 
C) decrease; increase; return to its initial level; will be restored to potential output 
D) increase; increase; decrease; will be restored to potential output 
E) increase; increase; return to its initial level; will be restored to potential output 
A) decrease; decrease; decrease further; will decrease further 
B) decrease; increase; decrease further; will be restored to potential output 
C) decrease; increase; return to its initial level; will be restored to potential output 
D) increase; increase; decrease; will be restored to potential output 
E) increase; increase; return to its initial level; will be restored to potential output

Question 18

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 19

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 20

Which of the following provides the best explanation for why GDP may increase over long periods of time?

Accepted Answer

A) increase in capital stock 
B) increase in emigration 
C) increase in mortality rates 
D) increase in interest rates 
E) increase in unemployment 
A) increase in capital stock 
B) increase in emigration 
C) increase in mortality rates 
D) increase in interest rates 
E) increase in unemployment

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

Which of the following describes the distinction between the Phillips curve and the AS curve?

Following any AD or AS shock,economists typically assume that the adjustment process continues until

In any decision about stimulating the economy with a fiscal expansion (increasing government purchases),the government must weigh the short-run benefits of ________ against the long-run costs of ________.

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 decreases and the price level decreases.We can conclude that ________ has increased and there is now a(n)________ gap.

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?

The paradox of thrift does not exist in the long run because

Consider the basic AD/AS macro model in long-run equilibrium.A permanent expansionary AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run.

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

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

An important automatic fiscal stabilizer in Canada is

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

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?

Which of the following statements about fiscal policy is the best example of "gross tuning"?

Consider the AD/AS macro model.An important asymmetry in the behaviour of the AS curve is that

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 leftward unexpectedly,the fiscal policy may be ________,and real GDP may ________ potential GDP.

Consider the basic AD/AS macro model,initially in a long-run equilibrium.A positive AS shock will ________ the price level and ________ output in the short run.In the long run,the price level will ________ and output ________.

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

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

Which of the following provides the best explanation for why GDP may increase over long periods of time?

Economic Issues and Concepts

Economic Theories,Data,and Graphs

Demand, Supply, and Price

Elasticity

Price Controls and Market Efficiency

Consumer Behaviour

Producers in the Short Run

Producers in the Long Run

Competitive Markets

Monopoly, cartels, and Price Discrimination

Imperfect Competition and Strategic Behaviour

Economic Efficiency and Public Policy

How Factor Markets Work

Labour Markets and Income Inequality

Interest Rates and the Capital Market

Market Failures and Government Intervention

The Economics of Environmental Protection

Taxation and Public Expenditure

What Macroeconomics Is All About

The Measurement of National Income

The Simplest Short-Run Macro Model

Adding Government and Trade to the Simple Macro Model

Output and Prices in the Short Run

Long-Run Economic Growth

Money and Banking

Money, Interest Rates, and Economic Activity

Monetary Policy in Canada

Inflation and Disinflation

Unemployment Fluctuations and the Nairu

Government Debt and Deficits

The Gains From International Trade

Trade Policy

Exchange Rates and the Balance of Payments

Filters

In any decision about stimulating the economy with a fiscal expansion (increasing government purchases),the government must weigh the short-run benefits of against the long-run costs of .

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 decreases and the price level decreases.We can conclude that has increased and there is now a(n) gap.

Consider the basic AD/AS macro model in long-run equilibrium.A permanent expansionary AD shock has price-level effect in the short run and price-level effect in the long run.

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 leftward unexpectedly,the fiscal policy may be ,and real GDP may potential GDP.

Consider the basic AD/AS macro model,initially in a long-run equilibrium.A positive AS shock will the price level and output in the short run.In the long run,the price level will and output .