Deck 15: Modern Macroeconomics: From the Short Run to the Long Run

Question 1

In the short run

A) the level of GDP is determined by the demand and supply for labor, the supply of capital, and technological progress.
B) increases in the money supply increase GDP.
C) prices are flexible.
D) the economy always operates at full employment.

Answer 1

increases in the money supply increase GDP.

Question 2

The long run in macroeconomics is the period of time in which prices do not change or do not change very much.

Answer 2

False

Question 3

In the short run, the level of GDP is determined primarily by the aggregate supply.

Answer 3

False

Question 4

In the short run, decreases in government spending will

A) increase the level of prices and GDP.
B) decrease the level of GDP.
C) increase the level of prices.
D) have no effect on either the level of prices or GDP.

Question 5

Suppose an economy that has been operating at full employment has been experiencing 4 percent annual inflation. If output later falls to a level that is less than potential output, prices generally will begin to rise at

A) a rate of 4 percent.
B) a rate greater than 4 percent.
C) a rate less than 4 percent.
D) a rate of 0 percent.

Question 6

If GDP is ________ potential output, the economy is in a ________ and prices and wages will tend to decrease.

A) below; recession
B) below; boom
C) above; recession
D) above; boom

Question 7

The level of GDP is determined by the same factors in the long run as in the short run.

Question 8

Suppose the unemployment rate is ________ the natural rate. We would expect to see GDP ________ potential output, falling wages, and falling prices.

A) above; below
B) above; above
C) below; below
D) below; above

Question 9

Suppose an economy that has been operating at full employment has been experiencing 4 percent annual inflation. If output later exceeds potential output, prices generally will begin to rise at

A) a rate of 4 percent.
B) a rate greater than 4 percent.
C) a rate less than 4 percent.
D) a rate of 0 percent.

Question 10

Wages and prices throughout an economy will rise above previous inflation rates when

A) imports increase dramatically.
B) fewer goods are exported abroad.
C) output exceeds potential output.
D) unemployment has highs and lows.

Question 11

Suppose GDP ________ the level of potential output. We would expect to see ________ unemployment, rising wages, and rising prices.

A) exceeds; high
B) exceeds; low
C) is below; high
D) is below; low

Question 12

In the short run, ________ in the supply of money ________ the level of output.

A) increases; decrease
B) increases; do not change
C) increases; increase
D) decreases; do not change

Question 13

When employees demand higher wages as a result of price increases which were caused by higher wages being paid by companies, it is called

A) economic inflation.
B) the wage-price spiral.
C) out of kilter fiscal policies.
D) a recession.

Question 14

Wages and prices throughout an economy are less than previous inflation rates when what occurs?

A) Imports increase dramatically.
B) More goods are exported abroad.
C) Output exceeds potential output.
D) Output is less than potential output.

Question 15

A wage-price spiral occurs when

A) rising wages cause higher prices, which in turn cause higher wages.
B) rising wages cause higher prices, which in turn cause lower wages.
C) falling wages cause higher prices, which in turn cause lower wages.
D) falling wages cause falling prices, which in turn cause higher wages.

Question 16

In the long run, any decreases in aggregate demand

A) decrease the level of prices and output.
B) decrease the level of prices.
C) decrease the level of output.
D) have no effect on either the level of prices or of output.

Question 17

In macroeconomics, the period of time in which prices have fully adjusted to any economic changes is called the short run.

Question 18

If potential output is ________ than the current level of GDP, the unemployment rate is ________ the natural rate.

A) greater; above
B) greater; below
C) less; above
D) less; at

Question 19

When GDP is below potential output, prices fall because

A) firms can easily find new workers and are forced to offer higher wages, which decreases the costs of production.
B) firms can easily find new workers and can offer lower wages, which decreases the costs of production.
C) firms find it difficult to hire and retain workers and are forced to offer higher wages, which increases the costs of production.
D) firms find it difficult to hire and retain workers and can offer higher wages, which decreases the costs of production.

Question 20

In the long run

A) prices are sticky.
B) the economy operates at full employment.
C) increases in government spending do not effect other uses of output.
D) increases in the money supply increase the level of output.

Question 21

Assuming an upward-sloping short-run aggregate supply curve, an increase in the money supply results in ________ in output and ________ in prices in the short run.

A) an increase; an increase
B) a decrease; a slight decrease
C) a decrease; no change
D) no change; an increase

Question 22

As output exceeds potential output, wages and prices throughout an economy will rise above previous inflation rates.

Question 23

When the economy is producing below full employment, the wage-price spiral cannot occur.

Question 24

The short-run aggregate supply curve is relatively flat because

A) in the short run, prices are flexible but output is equal to potential output.
B) in the long run, prices are flexible but output is equal to potential output.
C) in the short run, prices do not change very much but output may be above, below, or equal to potential output.
D) in the long run, prices are fixed and output is equal to potential output.

Question 25

Explain what is meant by the "wage-price spiral." Does it always work in one direction?

Question 26

Wages and prices will decrease when unemployment is below the natural rate.

Question 27

Consider an aggregate demand / aggregate supply diagram. The intersection of the vertical aggregate supply curve and the aggregate demand curve determines the

A) short-run levels of prices and output.
B) short-run and long-run levels of prices and output.
C) long-run levels of prices and output.
D) short-run level of output and the long-run level of prices.

Question 28

For most firms, wages are the smallest cost of production.

Question 29

In an aggregate supply and aggregate demand diagram, the long-run aggregate supply curve is represented by

A) a downward sloping line relating prices and output.
B) an upward sloping line relating prices and output.
C) a horizontal line at the current level of price.
D) a vertical line at full employment.

Question 30

Assuming an upward-sloping short-run aggregate supply curve, ________ in aggregate demand will result in a new equilibrium at a greater level of output and ________ price level.

A) an increase; a higher
B) an increase; a lower
C) a decrease; a lower
D) a decrease; no change in the

Question 31

Refer to Figure 15.1. The long-run equilibrium occurs at point

A) a.
B) b.
C) c.
D) y?.

Question 32

What is meant when economists use the term "overheating of the economy"?

A) Consumers have dramatically increased spending.
B) GDP is higher than potential output.
C) The stock market is experiencing heavy trading.
D) The balance of trade is affecting the GDP too much.

Question 33

In an aggregate supply and aggregate demand diagram, the short-run aggregate supply curve is represented by

A) a downward sloping line relating prices and output.
B) a steeply upward sloping line relating prices and output.
C) an upward sloping but relatively flat line.
D) a vertical line at full employment.

Question 34

Refer to Figure 15.1. At point b

A) GDP is above potential output.
B) GDP is below potential output.
C) unemployment is above the natural rate.
D) the economy is in long-run equilibrium.

Question 35

What is the difference in how GDP is determined in the short run and in the long run?

Question 36

Refer to Figure 15.1. The short-run equilibrium occurs at point

A) a.
B) b.
C) c.
D) yF.

Question 37

The long-run aggregate supply curve is vertical because

A) in the short run, prices are flexible but output is equal to potential output.
B) in the long run, prices are flexible but output is equal to potential output.
C) in the short run, prices are fixed but output may be above, below, or equal to potential output.
D) in the long run, prices are fixed and output is equal to potential output.

Question 38

Refer to Figure 15.1. At point a

A) unemployment is above the natural rate.
B) unemployment is below the natural rate.
C) GDP is equal to potential output.
D) GDP is below potential output.

Question 39

Assuming an upward-sloping short-run aggregate supply curve, a decrease in government spending results in ________ in output and ________ in prices in the short run.

A) a decrease; a slight decrease
B) an increase; no change
C) an increase; a slight increase
D) no change; a decrease

Question 40

Assuming an upward-sloping short-run aggregate supply curve, a decrease in taxes results in ________ in output and ________ in prices in the short run.

A) an increase; an increase
B) a decrease; an increase
C) a decrease; no change
D) no change; a decrease

Question 41

Suppose Venezuela experiences economic expansion in 2013, yet its unemployment rate is 15 percent, and economists have estimated that the natural rate of unemployment in Venezuela is also approximately 15 percent. All else equal, if this is the case, what will tend to happen in the Venezuelan economy over time?

A) Wages and prices will fall.
B) Wages and prices will rise.
C) Wages will rise and prices will fall.
D) Wages and prices will remain close to their current levels.

Question 42

Refer to Figure 15.2. The economy is at full employment and the unemployment rate is at the natural rate at point

A) a.
B) b.
C) c.
D) d.

Question 43

Refer to Figure 15.2. Output is likely to rise and prices are likely to fall if the economy is at point

A) a.
B) b.
C) c.
D) d.

Question 44

Refer to Figure 15.2. Adjustment from a short-run equilibrium to the long-run equilibrium is represented by a movement from point ________ to point ________.

A) b; e
B) c; b
C) b; c
D) c; d

Question 45

Refer to Figure 15.2. An increase in wages is represented by a movement from point ________ to point ________.

A) c; d
B) c; b
C) a; b
D) e; a

Question 46

Suppose Venezuela experiences economic expansion in 2013, yet its unemployment rate is 15 percent, and economists have estimated that the natural rate of unemployment in Venezuela is also approximately 15 percent.. If this is the case, then for the Venezuelan economy in 2013,

A) actual output is significantly above potential output.
B) potential output is significantly above actual output.
C) actual output is roughly equal to potential output.
D) None of the above are correct because there is no relationship between actual output and potential output in the short run.

Question 47

Consider an aggregate demand / aggregate supply diagram. The intersection of the relatively flat, upward-sloping aggregate supply curve and the aggregate demand curve determines the

A) short-run levels of prices and output.
B) short-run and long-run levels of prices and output.
C) long-run levels of prices and output.
D) short-run level of prices and the long-run level of output.

Question 48

Refer to Figure 15.2. The unemployment rate is below the natural rate at point

A) a.
B) b.
C) c.
D) d.

Question 49

Refer to Figure 15.2. Adjustment from a short-run equilibrium to the long-run equilibrium is represented by a movement from point ________ to point ________.

A) a; e
B) a; c
C) e; b
D) a; b

Question 50

If the unemployment rate is below the natural rate, then we expect to see

A) falling wages, causing the short-run aggregate supply curve to shift up.
B) falling wages, causing the short-run aggregate supply curve to shift down.
C) increasing wages, causing the short-run aggregate supply curve to shift up.
D) increasing wages, causing the short-run aggregate supply curve to shift down.

Question 51

Refer to Figure 15.2. The unemployment rate is above the natural rate at point

A) a.
B) b.
C) c.
D) d.

Question 52

Refer to Figure 15.2. Output is likely to fall and prices are likely to rise if the economy is at point

A) a.
B) b.
C) c.
D) d.

Question 53

Refer to Figure 15.2. A movement from point c to point b would be the result of the

A) unemployment rate being higher than the natural rate, causing wages to rise.
B) unemployment rate being higher than the natural rate, causing wages to fall.
C) natural rate being higher than the unemployment rate, causing wages to rise.
D) natural rate being higher than the unemployment rate, causing wages to fall.

Question 54

Refer to Figure 15.2. A movement from point a to point b would be the result of the

A) unemployment rate exceeding the natural rate, causing wages to rise.
B) unemployment rate exceeding the natural rate, causing wages to fall.
C) natural rate exceeding the unemployment rate, causing wages to rise.
D) natural rate exceeding the unemployment rate, causing wages to fall.

Question 55

Suppose Venezuela experiences economic expansion in 2013, yet its unemployment rate is 15 percent. All else equal, if this unemployment rate is above the natural rate of unemployment, what will tend to happen over time?

A) Wages and prices will fall.
B) Wages and prices will rise.
C) Wages will rise and prices will fall.
D) Wages will fall and prices will rise.

Question 56

If GDP is above potential output, then we expect to see

A) increasing wages, causing the short-run aggregate supply curve to shift up.
B) increasing wages, causing the short-run aggregate supply curve to shift down.
C) falling wages, causing the short-run aggregate supply curve to shift up.
D) falling wages, causing the short-run aggregate supply curve to shift down.

Question 57

Refer to Figure 15.2. A decrease in wages is represented by a movement from point ________ to point ________.

A) d; c
B) c; b
C) a; b
D) a; e

Question 58

If GDP is ________ potential output, adjustment to the long-run equilibrium requires that output rises and prices ________.

A) above; rise
B) above; fall
C) below; rise
D) below; fall

Question 59

Suppose Venezuela experiences economic growth in 2013, yet its unemployment rate is 15 percent, which is above the South American average. This indicates that Venezuela's 2013 output is

A) below potential output.
B) above potential output.
C) above actual output.
D) below actual output.

Question 60

If GDP is ________ potential output, adjustment to the long-run equilibrium requires that output falls and prices ________.

A) above; rise
B) above; fall
C) below; rise
D) below; fall

Question 61

When an economy is experiencing a "liquidity trap," monetary policy to bring the economy back to full employment

A) has too large of an effect.
B) changes wages, but prices remain unchanged.
C) changes prices but not wages.
D) no longer works.

Question 62

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
Recall the Application. Before becoming Fed Chairman, Ben Bernanke argued that the Bank of Japan should have committed to increasing inflation as a response to the Japanese liquidity trap. Doing this would allow for

A) real interest rates to be negative.
B) real interest rates to increase even if nominal rates decreased.
C) nominal interest rates to be negative.
D) both nominal and real interest rates to decrease and become negative.

Question 63

The GDP for the nation of Economia is currently above potential output. If the adjustment to the long-run equilibrium occurs slowly, the government of Economia is most likely to pursue a policy of

A) increasing government spending to decrease aggregate demand.
B) decreasing the money supply to decrease aggregate demand.
C) taking no action and allowing the economy to adjust naturally.
D) decreasing government spending to increase aggregate demand.

Question 64

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
The classic political business cycle would have a politician following

A) expansionary policies before an election, and contractionary policies after the election.
B) contractionary policies before an election, and expansionary policies after the election.
C) expansionary policies before and after an election.
D) contractionary policies before and after an election.

Question 65

Recall the Application about the links between presidential elections and macroeconomic performance to answer the following question(s). Early theories on the links between presidential elections and macroeconomic performance focused on incumbent presidents trying to manipulate the economy in their favor to gain reelection. Subsequent research began to incorporate other factors. The first innovation was recognizing that political parties can have different goals or preferences on how to manipulate the economy. In the United States, Republicans historically have been more concerned about fighting inflation, whereas Democrats have concentrated on reducing unemployment. The second major innovation was recognizing that the public would anticipate that politicians will try to manipulate the economy before an election.
Republicans have historically been primarily concerned with fighting inflation. Assuming this is true, then after a Republican electoral victory, the public could anticipate which of the following economic actions to fight inflation?

A) an increase in taxes and an increase in government spending
B) open market purchases and a decrease in taxes
C) open market sales and a decrease in government spending
D) a decrease in the discount rate and an increase in reserve requirements

Question 66

If the economy was operating below full employment, it could return to full employment

A) by itself, through falling wages and prices.
B) through increases in government spending or tax cuts.
C) through open market purchases.
D) all of the above

Question 67

If GDP is ________ potential output, then we expect to see ________ wages, causing the short-run aggregate supply curve to shift up.

A) above; increasing
B) above; decreasing
C) below; increasing
D) below; decreasing

Question 68

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
Recall the Application. If nominal interest rates are ________ and the inflation rate is expected to be ________, the result will be negative real interest rates.

A) close to zero; low
B) close to zero; high
C) high; close to zero
D) low; close to zero

Question 69

Recall the Application about the links between presidential elections and macroeconomic performance to answer the following question(s). Early theories on the links between presidential elections and macroeconomic performance focused on incumbent presidents trying to manipulate the economy in their favor to gain reelection. Subsequent research began to incorporate other factors. The first innovation was recognizing that political parties can have different goals or preferences on how to manipulate the economy. In the United States, Republicans historically have been more concerned about fighting inflation, whereas Democrats have concentrated on reducing unemployment. The second major innovation was recognizing that the public would anticipate that politicians will try to manipulate the economy before an election.
If Republicans are primarily concerned with controlling inflation and Democrats are primarily concerned with controlling unemployment, then Republicans would tend to focus on ________ economic policies and Democrats would tend to focus on ________ economic policies.

A) expansionary; expansionary
B) contractionary; contractionary
C) expansionary; contractionary
D) contractionary; expansionary

Question 70

Recall the Application about the links between presidential elections and macroeconomic performance to answer the following question(s). Early theories on the links between presidential elections and macroeconomic performance focused on incumbent presidents trying to manipulate the economy in their favor to gain reelection. Subsequent research began to incorporate other factors. The first innovation was recognizing that political parties can have different goals or preferences on how to manipulate the economy. In the United States, Republicans historically have been more concerned about fighting inflation, whereas Democrats have concentrated on reducing unemployment. The second major innovation was recognizing that the public would anticipate that politicians will try to manipulate the economy before an election.
This Application addresses the idea that politicians use monetary or fiscal policy to stimulate the economy before an election to improve their reelection prospects. This concept is known as a(n)

A) circular flow model.
B) political business cycle.
C) liquidity trap.
D) automatic stabilization policy.

Question 71

The GDP for the nation of Economia is currently above potential output. If the adjustment to the long-run equilibrium occurs rapidly, the government of Economia is likely to pursue a policy of

A) decreasing government spending to decrease aggregate demand.
B) decreasing the money supply to decrease aggregate demand.
C) decreasing government spending to increase aggregate demand.
D) taking no action and allowing the economy to adjust naturally.

Question 72

The GDP for the nation of Economia is currently below potential output. If the adjustment to the long-run equilibrium occurs slowly, the government of Economia is likely to pursue a policy of

A) increasing government spending to increase aggregate demand.
B) decreasing the money supply to increase aggregate demand.
C) taking no action and allowing the economy to adjust naturally.
D) decreasing government spending to increase aggregate demand.

Question 73

Keynes expressed doubts that that the economy would

A) ever return to full-employment.
B) ever move away from full-employment.
C) recover from a major recession without active policy.
D) recover from the effects of higher prices.

Question 74

If the unemployment rate is ________ the natural rate, then we expect to see ________ wages, causing the short-run aggregate supply curve to shift up.

A) less than; increasing
B) less than; decreasing
C) greater than; increasing
D) greater than; decreasing

Question 75

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
According to the Application, future Fed Chairman Ben Bernanke criticized the Bank of Japan for not taking strong enough action when their interest rates fell close to zero. Bernanke argued that the Bank of Japan should have made substantial purchases of ________ and also publicly commit to ________ inflation.

A) long-term bonds; increasing
B) long-term bonds; decreasing
C) short-term bonds; increasing
D) short-term bonds; decreasing

Question 76

The GDP for the nation of Economia is currently below potential output. If the adjustment to the long-run equilibrium occurs rapidly, the government of Economia is likely to pursue a policy of

A) increasing government spending to increase aggregate demand.
B) increasing the money supply to increase aggregate demand.
C) taking no action and allowing the economy to adjust naturally.
D) decreasing government spending to increase aggregate demand.

Question 77

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
Recall the Application. After becoming Fed Chairman, Ben Bernanke ________ a policy of purchasing long-term government bonds and ________ a policy of creating expectations of inflation in an effort to fight a liquidity trap.

A) still supported; still supported
B) still supported; no longer supported
C) no longer supported; still supported
D) no longer supported; no longer supported

Question 78

How long do economists think it takes the U.S. economy to move from the short run to the long run?

A) two years
B) three years
C) four years
D) None of the above; economists disagree on the answer.

Question 79

If the economy was operating above full employment, it could return to full employment

A) by itself, through rising wages and prices.
B) through decreases in government spending or tax increases.
C) through open market sales.
D) all of the above

Question 80

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
Suppose a politician stimulates the economy before an election to improve the chances she is reelected. This is known as

A) an election cycle.
B) a political business cycle.
C) lobbying.
D) campaigning.