Deck 24: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Question 1

In Panel (a)of Exhibit 16-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues that:

A)SRAS₁ will shift to SRAS₂ without government intervention.
B)lower wages will result in a shift from SRAS₁ to SRAS₂.
C)long-run equilibrium will be established at Y_p and P₃.
D)all of the above will take place.

Answer 1

all of the above will take place.

Question 2

Exhibit 16A-3 Macro AD\AS Models As shown in Panel (a)of Exhibit 16A-3, assume the economy adopts a classical nonintervention policy. Which of the following would cause the economy to self-correct?

A)Competition among firms for workers increases the nominal wage and SRAS shifts rightward.
B)Long-run equilibrium will be established at Y₁ and P₂.
C)Long-run equilibrium will be established at Y₁ and P₃.
D)Competition among unemployed workers decreases nominal wages and SRAS shifts rightward.

Answer 2

Competition among unemployed workers decreases nominal wages and SRAS shifts rightward.

Question 3

Exhibit 16A-1 Policy Alternatives In Panel (b)of Exhibit 16A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government decides to intervene, it would most likely:

A)increase taxes.
B)decrease the money supply.
C)increase the level of government spending for goods and services.
D)decrease the level of government spending for goods and services.

Answer 3

increase the level of government spending for goods and services.

Question 4

Assume the economy is experiencing a recessionary gap. Keynesian economists would support which of the following policies?

A)Nonstabilization
B)Expansionary
C)Nonintervention
D)Fixed wage

Question 5

Assume the economy is experiencing an inflationary gap, classical economists believe that:

A)flexible wages will restore full employment.
B)the federal government should decrease spending to shift the aggregate demand curve leftward.
C)the Federal Reserve should lower the interest rate.
D)the federal government should increase spending to shift the aggregate demand curve rightward.

Question 6

In Panel (a)of Exhibit 16-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the government decides to intervene, it would most likely:

A)decrease taxes.
B)increase transfer payments.
C)increase the level of government spending for goods and services.
D)decrease the level of government spending for goods and services.

Question 7

Classical theory advocates ____ policy and Keynesian theory advocates ____ policy.

A)nonintervention; intervention
B)active; nonstabilization
C)stabilization; fixed wage
D)fixed rule; passive

Question 8

Assuming the economy is in a recession, Keynesian economists predict that:

A)wages will remain fixed.
B)monetary policy will sell government securities.
C)higher wages will shift the short-run aggregate supply curve leftward.
D)lower wages will shift the short-run aggregate supply curve rightward.

Question 9

In Panel (b)of Exhibit 16-2, an expansionary stabilization policy designed to move the economy from Y₁ to Y_p would attempt to shift:

A)the aggregate demand curve (AD)leftward.
B)SRAS₁ to SRAS₂.
C)the aggregate demand curve (AD)rightward.
D)the LRAS rightward.

Question 10

A policy to do nothing and allow the economy to self-correct or adjust without interference from the federal government is also called a(n)____ policy.

A)Nonintervention
B)Active
C)Stabilization
D)fixed rule

Question 11

Exhibit 16A-1 Policy Alternatives Assume that the economy depicted in Panel (b)of Exhibit 16A-1 is in short-run equilibrium where AD₁ equals SRAS₁. Keynesian theory argues:

A)nominal wages will fall as long as employment remains above the natural level of unemployment.
B)lower wages will result in a shift from SRAS₁ to SRAS₂.
C)long-run equilibrium will be established at Y_p and P₁.
D)government intervention must shift AD₁ rightward to AD₂.

Question 12

Exhibit 16A-1 Policy Alternatives In Panel (a)of Exhibit 16A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues:

A)the federal government must shift AD₁ to AD₂ as shown in Panel (b).
B)the federal government must shift SRAS₁ to SRAS₂.
C)that SRAS₁ will shift to SRAS₂ without government intervention.
D)that AD will shift rightward without government intervention.

Question 13

Assume the economy is in short-run equilibrium at a real GDP below its potential real GDP. According to Keynesian theory, which of the following policies should be followed?

A)The Federal Reserve should increase the money supply.
B)The federal government should increase spending.
C)The federal government should do nothing because the economy will self correct to potential real GDP.
D)All of these.

Question 14

Exhibit 16-2 Macro AD\AS Models In Panel (a)of Exhibit 16-2, suppose that the initial equilibrium is at real GDP level   Y₁ and price level P₂. At real GDP level Y₁ there is:

A)an inflationary gap.
B)a recessionary gap.
C)full employment.
D)long-run equilibrium.

Question 15

Assume the economy is operating at a real GDP above full-employment real GDP. Classical economists would prescribe which of the following policies?

A)Nonintervention
B)Active monetary policy
C)Contractionary
D)Expansionary

Question 16

Assuming the economy is experiencing a recessionary gap, classical economists predict that:

A)wages will remain fixed.
B)monetary policy will sell government securities.
C)higher wages will shift the short-run aggregate supply curve leftward.
D)lower wages will shift the short-run aggregate supply curve rightward.
E)none of these.

Question 17

Exhibit 16A-1 Policy Alternatives Assume that the economy depicted in Panel (a)of Exhibit 16A-1 is in short-run equilibrium where AD equals SRAS₁. If the economy is left to correct itself according to classical theory:

A)wages will fall as long as real GDP is above Y_p.
B)lower wages will result in a shift from SRAS₁ to SRAS₂.
C)long-run equilibrium will be established at Y_p and P₃.
D)all of these will take place.

Question 18

Assume the economy is operating at a real GDP above full-employment real GDP. Keynesian economists would prescribe which of the following policies?

A)Nonintervention
B)Fixed rule
C)Contractionary
D)Expansionary

Question 19

As shown in Panel (b)of Exhibit 16-2, assume the economy adopts a nonintervention policy. Which of the following would cause the economy to self-correct?

A)Competition among firms for workers increases the nominal wage and SRAS shifts rightward.
B)Long-run equilibrium will be established at Y₁ and P₂.
C)Long-run equilibrium will be established at Y₁ and P₃.
D)Competition among unemployed workers decreases nominal wages and SRAS shifts rightward.

Question 20

Assume the economy is in short-run equilibrium at a real GDP above its potential real GDP. According to classical theory, which of the following policies should be followed?

A)The Federal Reserve should use open market operations and buy U.S. government securities.
B)The Federal Reserve should not follow a fixed rule.
C)The federal government should cut taxes.
D)Fiscal policy and monetary policy should not be activist.

Question 21

Exhibit 16A-5 Macro AD\AS Models As shown in Exhibit 16A-5, assume the marginal propensity to consume MPC equals 0.75. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E₁ to full employment.

A)increased by $.25 trillion
B)decreased by $.25 trillion
C)decreased by $2 trillion
D)increased by $2 trillion
E)increased by $1 trillion

Question 22

Exhibit 16A-3 Macro AD\AS Models In Panel (b)of Exhibit 16A-3, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

A)decrease taxes.
B)increase the money supply.
C)increase the level of government spending for goods and services.
D)decrease the level of government spending for goods and services.

Question 23

Exhibit 16A-4 Macro AD\AS Models As shown in Exhibit 16A-4, assume the marginal propensity to consume MPC equals 0.75. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E₁ to full employment.

A)increased by $1 trillion
B)increased by $2 trillion
C)decreased by $2 trillion
D)increased by $.50 trillion
E)increased by $.80 trillion

Question 24

Exhibit 16A-3 Macro AD\AS Models In Panel (a)of Exhibit 16A-3, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues that:

A)SRAS will shift to leftward and establish full employment at P₃Y_p without government intervention.
B)higher wages will result in a leftward shift of SRAS.
C)long-run equilibrium will be established at Y_p and P₁.
D)all of these will take place.

Question 25

Exhibit 16A-4 Macro AD\AS Models As shown in Exhibit 16A-4, assume the marginal propensity to consume MPC equals 0.80. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E₁ to full employment.

A)increased by $2 trillion
B)decreased by $2 trillion
C)decreased by $.40 trillion
D)increased by $.40 trillion
E)increased by $.80 trillion

Question 26

Assuming an inflationary gap exists, classical economists believe that flexible wages will restore full employment.

Question 27

Exhibit 16A-3 Macro AD\AS Models As shown in Panel (b)of Exhibit 16A-3, assume the economy adopts a classical nonintervention policy. Which of the following would cause the economy to self-correct?

A)Competition among firms for workers increases the nominal wage and SRAS shifts rightward.
B)Long-run equilibrium will be established at Y₁ and P₂.
C)Long-run equilibrium will be established at Y_p and P₃.
D)Competition among unemployed workers decreases nominal wages and SRAS shifts rightward.

Question 28

If the economy is not operating at full-employment real GDP, classical economists prescribe a government policy of nonintervention.

Question 29

Exhibit 16A-3 Macro AD\AS Models In Panel (a)of Exhibit 16A-3, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

A)increase taxes.
B)decrease the money supply.
C)increase the level of government spending for goods and services.
D)decrease the level of government spending for goods and services.

Question 30

Exhibit 16A-5 Macro AD\AS Models As shown in Exhibit 16A-5, assume the marginal propensity to consume MPC equals 0.80. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E₁ to full employment.

A)increased by $1.6 trillion
B)decreased by $1.6 trillion
C)increased by $.20 trillion
D)increased by $.80 trillion

Question 31

Exhibit 16A-3 Macro AD\AS Models In Panel (b)of Exhibit 16A-3, a Keynesian expansionary stabilization policy designed to move the economy from Y₁ to Y_p would attempt to shift the:

A)aggregate demand curve (AD)leftward.
B)SRAS curve leftward.
C)aggregate demand curve (AD)rightward.
D)LRAS curve rightward.

Question 32

Exhibit 16A-3 Macro AD\AS Models In Panel (a)of Exhibit 16A-3, an expansionary Keynesian government stabilization policy designed to move the economy from Y₁ to Y_p would shift the:

A)aggregate demand curve (AD)to the left.
B)aggregate demand curve (AD)to the right.
C)SRAS rightward.
D)LRAS rightward.

Question 33

If the economy is experiencing an inflationary gap, classical economists argue that the Federal Reserve should lower interest rates.

Question 34

Exhibit 16A-3 Macro AD\AS Models In Panel (b)of Exhibit 16A-3, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues that:

A)SRAS will shift to leftward and establish full employment at P₃Y_p without government intervention.
B)higher wages will result in a leftward shift of SRAS.
C)long-run equilibrium will be established at Y and P₃.
D)all of these will take place.

Question 35

If the economy is experiencing an inflationary gap, Keynesian economists advocate allowing flexible wages to shift the short-run aggregate supply curve (SRAC)upward and restore full employment.

Question 36

Assuming the economy is in a recession, Keynesian economists predict that lower wages will shift the short-run aggregate supply curve rightward.