Question 1

If the economy is near full capacity, the effect of a negative aggregate demand shock is to

Accepted Answer

A)  increase the level of aggregate demand. 
B)  cause the price level to fall. 
C)  increase the firm's cost of producing at every level of output. 
D)  increase the level of employment. 
A)  increase the level of aggregate demand. 
B)  cause the price level to fall. 
C)  increase the firm's cost of producing at every level of output. 
D)  increase the level of employment.

Question 2

Keynes and his followers believed that

Accepted Answer

A)  capitalism was one economic system that guaranteed full employment. 
B)  wages and prices in the short run were flexible. 
C)  the economy could not operate at any level of real Gross Domestic Product (GDP) less than full capacity. 
D)  there was no guarantee that a capitalist economy would reach a full employment equilibrium. 
A)  capitalism was one economic system that guaranteed full employment. 
B)  wages and prices in the short run were flexible. 
C)  the economy could not operate at any level of real Gross Domestic Product (GDP) less than full capacity. 
D)  there was no guarantee that a capitalist economy would reach a full employment equilibrium.

Question 3

In the classical model, a shift to the right in aggregate demand would result in

Accepted Answer

A)  a permanent increase in unemployment. 
B)  a permanent increase in real incomes. 
C)  an increase in the price level. 
D)  a permanent shift past full employment. 
A)  a permanent increase in unemployment. 
B)  a permanent increase in real incomes. 
C)  an increase in the price level. 
D)  a permanent shift past full employment.

Question 4

Which of the following is a TRUE statement?

Accepted Answer

A)  A decrease in aggregate demand was not possible according to the classical economists but was possible according to Keynes. 
B)  A decrease in aggregate demand has no short-run effects according to the classical economists but had significant effects according to Keynes. 
C)  Classical economists believed real GDP adjusted more than prices when aggregate demand fell, while Keynes argued that prices adjusted more than output. 
D)  Classical economists believed price adjusted more than output when aggregate demand fell, while Keynes argued real GDP adjusted more than prices. 
A)  A decrease in aggregate demand was not possible according to the classical economists but was possible according to Keynes. 
B)  A decrease in aggregate demand has no short-run effects according to the classical economists but had significant effects according to Keynes. 
C)  Classical economists believed real GDP adjusted more than prices when aggregate demand fell, while Keynes argued that prices adjusted more than output. 
D)  Classical economists believed price adjusted more than output when aggregate demand fell, while Keynes argued real GDP adjusted more than prices.

Question 5

Which of the following is NOT an assumption of the classical model?

Accepted Answer

A)  Buyers and sellers react to changes in relative prices. 
B)  Households want to maximize economic well being. 
C)  No single buyer or seller of a commodity can affect its price. 
D)  Wages and prices will move freely in the upward direction but not the downward direction. 
A)  Buyers and sellers react to changes in relative prices. 
B)  Households want to maximize economic well being. 
C)  No single buyer or seller of a commodity can affect its price. 
D)  Wages and prices will move freely in the upward direction but not the downward direction.

Question 6

A decrease in aggregate demand will cause

Accepted Answer

A)  prices to fall according to classical economists, and unemployment to increase according to Keynes. 
B)  prices to fall and unemployment to increase according to both classical economists and Keynes. 
C)  aggregate supply to fall according to classical economists, and prices to fall according to Keynes. 
D)  aggregate supply to fall according to Keynes, and unemployment to increase according to classical economists. 
A)  prices to fall according to classical economists, and unemployment to increase according to Keynes. 
B)  prices to fall and unemployment to increase according to both classical economists and Keynes. 
C)  aggregate supply to fall according to classical economists, and prices to fall according to Keynes. 
D)  aggregate supply to fall according to Keynes, and unemployment to increase according to classical economists.

Question 7

The simple Keynesian model assumes that

Accepted Answer

A)  gross private domestic investment exceeds net investment by the capital consumption allowance. 
B)  prices, especially the price of wages, are "sticky downward." 
C)  there will never be any excess capacity in the short run. 
D)  aggregate demand will always equal aggregate supply. 
A)  gross private domestic investment exceeds net investment by the capital consumption allowance. 
B)  prices, especially the price of wages, are "sticky downward." 
C)  there will never be any excess capacity in the short run. 
D)  aggregate demand will always equal aggregate supply.

Question 8

In the above figure, if the relevant aggregate demand curve is AD2, what type of gap exists and how large is it?

Accepted Answer

A)  inflationary gap of $500 billion 
B)  inflationary gap of $1 trillion 
C)  recessionary gap of $1 trillion 
D)  recessionary gap of $500 billion 
A)  inflationary gap of $500 billion 
B)  inflationary gap of $1 trillion 
C)  recessionary gap of $1 trillion 
D)  recessionary gap of $500 billion

Question 9

Which of the following statements about the classical model of the economy is FALSE?

Accepted Answer

A)  Savings and investment will always be equal. 
B)  Wages and prices are flexible. 
C)  The economy will always move toward, or be at, full employment. 
D)  Individuals pursue the public interest, not their own self-interest. 
A)  Savings and investment will always be equal. 
B)  Wages and prices are flexible. 
C)  The economy will always move toward, or be at, full employment. 
D)  Individuals pursue the public interest, not their own self-interest.

Question 10

Long-run aggregate supply curve in the classical model

Accepted Answer

A)  is the level of real GDP corresponding to 100 percent labor force participation. 
B)  is the level of real GDP corresponding to the natural rate of unemployment. 
C)  is a downward sloping line. 
D)  is determined by the capital stock of the economy, not the labor force. 
A)  is the level of real GDP corresponding to 100 percent labor force participation. 
B)  is the level of real GDP corresponding to the natural rate of unemployment. 
C)  is a downward sloping line. 
D)  is determined by the capital stock of the economy, not the labor force.

Question 11

Full employment in the classical model is maintained by

Accepted Answer

A)  flexible interest rates. 
B)  flexible wage rates. 
C)  flexible prices. 
D)  flexible income. 
A)  flexible interest rates. 
B)  flexible wage rates. 
C)  flexible prices. 
D)  flexible income.

Question 12

In the classical model, the aggregate supply curve

Accepted Answer

A)  is horizontal. 
B)  is positively sloped. 
C)  is consistent with the natural rate of unemployment. 
D)  is not related to the employment rate. 
A)  is horizontal. 
B)  is positively sloped. 
C)  is consistent with the natural rate of unemployment. 
D)  is not related to the employment rate.

Question 13

Consider a nation in which most workers are unionized. If all the nation's unions band together and succeed in boosting wages established by long-term labor contracts, then

Accepted Answer

A)  there is a leftward shift in just LRAS. 
B)  there is a leftward shift in both LRAS and SRAS. 
C)  there is a rightward shift in just SRAS. 
D)  there is a rightward movement along the SRAS curve. 
A)  there is a leftward shift in just LRAS. 
B)  there is a leftward shift in both LRAS and SRAS. 
C)  there is a rightward shift in just SRAS. 
D)  there is a rightward movement along the SRAS curve.

Question 14

Some economists believe that a positive aggregate demand shock to an economy with large amounts of excess capacity and unemployment does NOT necessarily cause an increase in prices. Economists who adhere to this belief are followers of

Accepted Answer

A)  classical economics. 
B)  Say's laws of economics. 
C)  Keynesian economics. 
D)  supply-side economics. 
A)  classical economics. 
B)  Say's laws of economics. 
C)  Keynesian economics. 
D)  supply-side economics.

Question 15

Refer to the above figure. Assume that B is the current long-run aggregate supply (LRAS) curve and E is the current short-run aggregate supply (SRAS) curve. If a 90-day embargo of oil from the Middle East to the United States were announced, and if after that 90-day period oil prices were expected to return to normal pre-embargo prices, then you would expect

Accepted Answer

A)  the LRAS and the SRAS to remain at B and E, respectively. 
B)  the LRAS to remain at B, but the SRAS to shift to D. 
C)  the LRAS to remain at B, but the SRAS to shift to F. 
D)  the LRAS to shift to C, and the SRAS to shift to F. 
A)  the LRAS and the SRAS to remain at B and E, respectively. 
B)  the LRAS to remain at B, but the SRAS to shift to D. 
C)  the LRAS to remain at B, but the SRAS to shift to F. 
D)  the LRAS to shift to C, and the SRAS to shift to F.

Question 16

Jacob buys less soda when the price of soda rises 10 percent, while the prices of all other goods also rise 10 percent. Jacob is

Accepted Answer

A)  suffering from money illusion. 
B)  worrying too much about a coming recession. 
C)  behaving in accordance with classical economic theory. 
D)  paying too much attention to changes in relative prices. 
A)  suffering from money illusion. 
B)  worrying too much about a coming recession. 
C)  behaving in accordance with classical economic theory. 
D)  paying too much attention to changes in relative prices.

Question 17

An unexpected event that causes the aggregate demand curve to shift inward or outward is an

Accepted Answer

A)  aggregate demand shock. 
B)  aggregate supply shock. 
C)  aggregate supply increase. 
D)  aggregate supply decrease. 
A)  aggregate demand shock. 
B)  aggregate supply shock. 
C)  aggregate supply increase. 
D)  aggregate supply decrease.

Question 18

The exchange rate last year was $1 = 1.1 euros. This year it is $1 = 1.2 euros. We can say that the value of the dollar

Accepted Answer

A)  fell; causing net exports to increase and aggregate demand to rise. 
B)  fell; causing net exports to decrease and aggregate demand to fall. 
C)  increased; causing net exports to decrease and aggregate demand to fall. 
D)  increased; causing net exports to decrease and aggregate demand to rise. 
A)  fell; causing net exports to increase and aggregate demand to rise. 
B)  fell; causing net exports to decrease and aggregate demand to fall. 
C)  increased; causing net exports to decrease and aggregate demand to fall. 
D)  increased; causing net exports to decrease and aggregate demand to rise.

Question 19

Say's law states that

Accepted Answer

A)  desired expenditures will equal actual expenditures. 
B)  people produce only the goods they want. 
C)  demand is always less than supply. 
D)  overproduction is never possible because of limited resources. 
A)  desired expenditures will equal actual expenditures. 
B)  people produce only the goods they want. 
C)  demand is always less than supply. 
D)  overproduction is never possible because of limited resources.

Question 20

According to the Keynesian model, the short-run aggregate supply (SRAS) curve is horizontal when

Accepted Answer

A)  real Gross Domestic Product (GDP) is at full capacity but prices are not flexible. 
B)  there are no unemployed resources and wages do not change when prices change. 
C)  prices react to an aggregate demand shock but real Gross Domestic Product (GDP) does not. 
D)  there are unemployed resources and prices do not fall when aggregate demand falls. 
A)  real Gross Domestic Product (GDP) is at full capacity but prices are not flexible. 
B)  there are no unemployed resources and wages do not change when prices change. 
C)  prices react to an aggregate demand shock but real Gross Domestic Product (GDP) does not. 
D)  there are unemployed resources and prices do not fall when aggregate demand falls.

Exam 11: Classical and Keynesian Macro Analyses

If the economy is near full capacity, the effect of a negative aggregate demand shock is to

Keynes and his followers believed that

In the classical model, a shift to the right in aggregate demand would result in

Which of the following is a TRUE statement?

Which of the following is NOT an assumption of the classical model?

A decrease in aggregate demand will cause

The simple Keynesian model assumes that

In the above figure, if the relevant aggregate demand curve is AD2, what type of gap exists and how large is it?

Which of the following statements about the classical model of the economy is FALSE?

Long-run aggregate supply curve in the classical model

Full employment in the classical model is maintained by

In the classical model, the aggregate supply curve

Consider a nation in which most workers are unionized. If all the nation's unions band together and succeed in boosting wages established by long-term labor contracts, then

Some economists believe that a positive aggregate demand shock to an economy with large amounts of excess capacity and unemployment does NOT necessarily cause an increase in prices. Economists who adhere to this belief are followers of

Jacob buys less soda when the price of soda rises 10 percent, while the prices of all other goods also rise 10 percent. Jacob is

An unexpected event that causes the aggregate demand curve to shift inward or outward is an

The exchange rate last year was $1 = 1.1 euros. This year it is $1 = 1.2 euros. We can say that the value of the dollar

Say's law states that

According to the Keynesian model, the short-run aggregate supply (SRAS) curve is horizontal when

The Nature of Economics

Scarcity and the World of Trade-Offs

Demand and Supply

Extensions of Demand and Supply Analysis

Public Spending and Public Choice

Funding the Public Sector

The Macroeconomy: Unemployment, Inflation, and Deflation

Measuring the Economys Performance

Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

Consumption, Real GDP, and the Multiplier

Fiscal Policy

Deficit Spending and the Public Debt

Money, Banking, and Central Banking

Domestic and International Dimensions of Monetary Policy

Stabilization in an Integrated World Economy

Policies and Prospects for Global Economic Growth

Demand and Supply Elasticity

Consumer Choice

Rents, Profits, and the Financial Environment of Business

The Firm: Cost and Output Determination

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Regulation and Antitrust Policy in a Globalized Economy

The Labor Market: Demand, Supply and Outsourcing

Unions and Labor Market Monopoly Power

Income, Poverty, and Health Care

Environmental Economics

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

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