Question 1

An inflationary output gap would generate which of the following conditions in the economy?

Accepted Answer

A) Firms are making low profits. 
B) Workers have relatively more bargaining power with employers. 
C) There is an unusually small demand for labour. 
D) There is downward pressure on wages. 
E) There is much idle capacity. 
A) Firms are making low profits. 
B) Workers have relatively more bargaining power with employers. 
C) There is an unusually small demand for labour. 
D) There is downward pressure on wages. 
E) There is much idle capacity.

Question 2

An inflationary output gap implies that

Accepted Answer

A) the demand for all factor services will be relatively low. 
B) the intersection of AD and AS occurs at real GDP below potential output. 
C) the economy's resources are being used beyond their normal capacity. 
D) there is a pressure for wages to decrease. 
E) there is excess supply of most factors of production. 
A) the demand for all factor services will be relatively low. 
B) the intersection of AD and AS occurs at real GDP below potential output. 
C) the economy's resources are being used beyond their normal capacity. 
D) there is a pressure for wages to decrease. 
E) there is excess supply of most factors of production.

Question 3

As a global recession began in late 2008,the governments of all major economies searched for policy responses to dampen the effects of the recession.In general,governments were aiming to

Accepted Answer

A) shift the AD curve to the left by decreasing tax rates. 
B) increase potential GDP. 
C) shift the AS curve to the right through large increases in government spending. 
D) shift the AD curve to the right through large increases in government spending. 
E) shift the AS curve to the left by increasing wage rates. 
A) shift the AD curve to the left by decreasing tax rates. 
B) increase potential GDP. 
C) shift the AS curve to the right through large increases in government spending. 
D) shift the AD curve to the right through large increases in government spending. 
E) shift the AS curve to the left by increasing wage rates.

Question 4

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

Accepted Answer

A) factor supplies are assumed to be flexible 
B) technology used in production is endogenous and variable 
C) the level of potential output fluctuates with the price level 
D) factor prices are assumed to be exogenous 
E) firms cannot operate near their normal capacity 
A) factor supplies are assumed to be flexible 
B) technology used in production is endogenous and variable 
C) the level of potential output fluctuates with the price level 
D) factor prices are assumed to be exogenous 
E) firms cannot operate near their normal capacity

Question 5

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 6

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.The initial effect of the positive AS shock shown in the diagram results in

Accepted Answer

A) a recessionary output gap of 250. 
B) a recessionary output gap of 450. 
C) an inflationary output gap of 200. 
D) an inflationary output gap of 300. 
E) an inflationary output gap of 550. 
A) a recessionary output gap of 250. 
B) a recessionary output gap of 450. 
C) an inflationary output gap of 200. 
D) an inflationary output gap of 300. 
E) an inflationary output gap of 550.

Question 7

In the basic AD/AS macro model,which of the following events would cause stagflation?

Accepted Answer

A) a large decrease in wages 
B) a large increase in business confidence 
C) a large increase in the net tax rate 
D) a large increase in the price of raw materials 
E) a large increase in labour productivity 
A) a large decrease in wages 
B) a large increase in business confidence 
C) a large increase in the net tax rate 
D) a large increase in the price of raw materials 
E) a large increase in labour productivity

Question 8

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 9

FIGURE 24-2
-Refer to Figure 24-2.Suppose the economy is in a short-run equilibrium at Y1.An appropriate fiscal policy for attaining potential output (Y*)is a(n)

Accepted Answer

A) increase in personal and corporate tax rates. 
B) increase in government spending. 
C) increase in current consumption. 
D) decrease in personal and corporate taxes. 
E) decrease in current imports. 
A) increase in personal and corporate tax rates. 
B) increase in government spending. 
C) increase in current consumption. 
D) decrease in personal and corporate taxes. 
E) decrease in current imports.

Question 10

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   to   ?

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 11

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

Accepted Answer

A) Factor prices are exogenous,and technology and factor supplies are changing. 
B) Factor prices adjust to output gaps,and technology and factor supplies are constant. 
C) Factor prices are exogenous,and technology and factor supplies are constant. 
D) Factor prices have fully adjusted to output gaps,and technology and factor supplies are changing. 
E) Factor prices are exogenous,technology and factor prices are exogenous. 
A) Factor prices are exogenous,and technology and factor supplies are changing. 
B) Factor prices adjust to output gaps,and technology and factor supplies are constant. 
C) Factor prices are exogenous,and technology and factor supplies are constant. 
D) Factor prices have fully adjusted to output gaps,and technology and factor supplies are changing. 
E) Factor prices are exogenous,technology and factor prices are exogenous.

Question 12

FIGURE 24-5
-Refer to Figure 24-5.If the economy is currently in equilibrium at E3,the concept of asymmetrical adjustment of the AS curve suggests that

Accepted Answer

A) the economy will attain potential output faster if there is no intervention by the government. 
B) a decrease in the price level will induce a rightward shift of AS. 
C) the return of the economy to potential output may be very slow without government intervention. 
D) the economy will never return to potential output. 
E) the price level is constant regardless of the level of equilibrium income. 
A) the economy will attain potential output faster if there is no intervention by the government. 
B) a decrease in the price level will induce a rightward shift of AS. 
C) the return of the economy to potential output may be very slow without government intervention. 
D) the economy will never return to potential output. 
E) the price level is constant regardless of the level of equilibrium income.

Question 13

The Phillips curve provides a theoretical link between

Accepted Answer

A) the liquidity preference and investment demand schedules. 
B) labour markets and foreign-exchange markets. 
C) the goods market and productivity. 
D) the goods market and the labour market. 
E) inflation and the demand for money. 
A) the liquidity preference and investment demand schedules. 
B) labour markets and foreign-exchange markets. 
C) the goods market and productivity. 
D) the goods market and the labour market. 
E) inflation and the demand for money.

Question 14

Suppose 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 increases.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 15

In the basic AD/AS macro model,the "paradox of thrift" is only a short-run phenomenon because

Accepted Answer

A) consumers exhibit cyclical consumption behaviour. 
B) in the long run output is determined by potential output. 
C) savings are transformed into expenditures in the long run. 
D) the marginal propensity to consume is fixed in the long run. 
E) consumers base their consumption expenditures only on their lifetime income. 
A) consumers exhibit cyclical consumption behaviour. 
B) in the long run output is determined by potential output. 
C) savings are transformed into expenditures in the long run. 
D) the marginal propensity to consume is fixed in the long run. 
E) consumers base their consumption expenditures only on their lifetime income.

Question 16

In the long run in the AD/AS macro model we can say that

Accepted Answer

A) both real GDP and the price level are determined by aggregate demand. 
B) both real GDP and the price level are determined by Y*. 
C) long-run real GDP is determined by Y* and the long-run price level by the AD curve. 
D) real GDP is determined by aggregate demand and the price level by Y*. 
E) long-run real GDP is determined by aggregate demand and the price level is determined solely by the AS curve. 
A) both real GDP and the price level are determined by aggregate demand. 
B) both real GDP and the price level are determined by Y*. 
C) long-run real GDP is determined by Y* and the long-run price level by the AD curve. 
D) real GDP is determined by aggregate demand and the price level by Y*. 
E) long-run real GDP is determined by aggregate demand and the price level is determined solely by the AS curve.

Question 17

FIGURE 24-1
-Refer to Figure 24-1.If the economy is currently producing output of Y0,the economy's automatic adjustment process will have the

Accepted Answer

A) AS curve shifting to the right until point A is reached. 
B) vertical line at Y* shifting to the left until it gets to Y0. 
C) AD curve shifting to the right until point B is reached. 
D) economy remaining where it is. 
E) level of potential output falling. 
A) AS curve shifting to the right until point A is reached. 
B) vertical line at Y* shifting to the left until it gets to Y0. 
C) AD curve shifting to the right until point B is reached. 
D) economy remaining where it is. 
E) level of potential output falling.

Question 18

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

Accepted Answer

A) decrease; decrease; decrease further; decrease further 
B) decrease; decrease; decrease further; be restored to potential output 
C) increase; increase; increase further; increase further 
D) increase; decrease; increase further; be restored to potential output 
E) increase; increase; increase further; be restored to potential output 
A) decrease; decrease; decrease further; decrease further 
B) decrease; decrease; decrease further; be restored to potential output 
C) increase; increase; increase further; increase further 
D) increase; decrease; increase further; be restored to potential output 
E) increase; increase; increase further; be restored to potential output

Question 19

An adjustment "asymmetry" 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 20

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 is operating at its long-run equilibrium?

Accepted Answer

A) Economy A 
B) Economy B 
C) Economy C 
D) Economy D 
E) Economy E 
A) Economy A 
B) Economy B 
C) Economy C 
D) Economy D 
E) Economy E

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

An inflationary output gap would generate which of the following conditions in the economy?

An inflationary output gap implies that

As a global recession began in late 2008,the governments of all major economies searched for policy responses to dampen the effects of the recession.In general,governments were aiming to

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

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.

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.The initial effect of the positive AS shock shown in the diagram results in

In the basic AD/AS macro model,which of the following events would cause stagflation?

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

FIGURE 24-2 -Refer to Figure 24-2.Suppose the economy is in a short-run equilibrium at Y1.An appropriate fiscal policy for attaining potential output (Y*)is a(n)

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 to ?

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

FIGURE 24-5 -Refer to Figure 24-5.If the economy is currently in equilibrium at E3,the concept of asymmetrical adjustment of the AS curve suggests that

The Phillips curve provides a theoretical link between

Suppose 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 increases.We can conclude that ________ has increased and there is now a(n)________ gap.

In the basic AD/AS macro model,the "paradox of thrift" is only a short-run phenomenon because

In the long run in the AD/AS macro model we can say that

FIGURE 24-1 -Refer to Figure 24-1.If the economy is currently producing output of Y0,the economy's automatic adjustment process will have the

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

An adjustment "asymmetry" 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 is operating at its long-run equilibrium?

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

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.

FIGURE 24-2 -Refer to Figure 24-2.Suppose the economy is in a short-run equilibrium at Y₁.An appropriate fiscal policy for attaining potential output (Y^*)is a(n)

FIGURE 24-5 -Refer to Figure 24-5.If the economy is currently in equilibrium at E₃,the concept of asymmetrical adjustment of the AS curve suggests that

Suppose 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 increases.We can conclude that has increased and there is now a(n) gap.

FIGURE 24-1 -Refer to Figure 24-1.If the economy is currently producing output of Y₀,the economy's automatic adjustment process will have the

Consider the basic AD/AS macro model in long-run equilibrium.An expansionary AD shock will the price level and output in the short run.In the long run,the price level will and output will .