Deck 5: Output, Business Cycles, Growth Employment

Question 1

The aggregate demand - aggregate supply model is used to:

A) explain changes in the prices and quantities of a particular good or service.
B) explain the behaviour of real GDP and prices in a national economy.
C) the general price level in an economy but not the real GDP.
D) the real GDP in an economy but not the price level.

Answer 1

explain the behaviour of real GDP and prices in a national economy.

Question 2

The aggregate demand (AD) function of an economy is based on:

A) the expenditure approach used in national accounts to measure GDP.
B) the income approach used in national accounts to measure real GDP.
C) the current capacity of the economy to produce goods and services.
D) the sales of domestic goods and services to residents of other countries.

Answer 2

the expenditure approach used in national accounts to measure GDP.

Question 3

The aggregate supply (AS) function of an economy is based on:

A) the supply of imported goods and services available to the domestic economy.
B) the expenditure approach used in national accounts to measure GDP.
C) the size of the labour force in the national economy.
D) the output approach used in national accounts to measure GDP.

Answer 3

the output approach used in national accounts to measure GDP.

Question 4

For any given year the AD/AS model illustrates the relationship between:

A) the level of employment and real GDP (Y).
B) the GDP deflator (P) and the unemployment rate.
C) the GDP deflator (P) and real GDP (Y).
D) current real GDP (Y) and real GDP (Y) in the previous year.
Use the following Figure 5.1 to answer question 5:

Question 5

-Refer to Figure 5.1. If the GDP deflator has a base year value of P = 1.0 then the following are correct except:

A) real GDP in the year 2006 is 0Y.
B) nominal GDP in the year 2006 is the area 0Y x 0P.
C) nominal and real GDP will be the same in every year.
D) the GDP deflator in the year 2007 is 0P.

Question 6

An AD curve is:

A) vertical if full employment exists.
B) horizontal when there is considerable unemployment in the economy.
C) downsloping because of the interest-rate effect, wealth (or real balances) effect, and foreign trade (or substitution) effects.
D) downsloping because production costs decrease as real output increases.

Question 7

The wealth effect indicates that:

A) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.
B) a lower price level will decrease the real value of many financial assets and therefore reduce spending.
C) a higher price level will increase the real value of many financial assets and therefore increase spending.
D) a higher price level will decrease the real value of many financial assets and therefore reduce spending.

Question 8

The substitution (trade-effect) shows that:

A) an increase in the domestic price level will make domestic goods more expensive relative to foreign goods. As a result, people would buy less domestic goods and buy more foreign goods.
B) a lower price level will decrease the real value of many financial assets and therefore reduce net export spending.
C) a higher price level will increase the real value of many financial assets and therefore increase net export spending.
D) an increase in the price level in foreign economies will also make domestic goods more expensive relative to foreign goods. As a result, people would buy less domestic goods and buy more foreign goods

Question 9

A fall in the Canadian price level will cause foreigners to:

A) substitute Canadian goods for foreign goods.
B) substitute foreign goods for Canadian goods.
C) buy more foreign goods.
D) buy fewer Canadian goods.

Question 10

Other things being equal, the higher the price level, the lower the level of domestic output purchased. This occurs because of:

A) interest rate effect, foreign trade effect and supply effect
B) interest rate effect, foreign trade effect and wealth effect
C) employment effect, foreign trade effect and wealth effect
D) interest rate effect, expected inflation effect and wealth effect

Question 11

The interest-rate and wealth effects are important because they help explain:

A) rightward and leftward shifts of the aggregate demand curve.
B) the movement across a given AS curve
C) the movement across a given AD curve.
D) the shape of the AS curve.

Question 12

The substitution effect suggests that an increase in the Canadian price level relative to other countries will:

A) increase the amount of Canadian real output purchased.
B) increase Canadian imports and decrease Canadian exports.
C) increase both Canadian imports and Canadian exports.
D) decrease both Canadian imports and Canadian exports.

Question 13

The wealth effect suggests that a:

A) lower price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending.
B) lower price level will decrease the real value of many financial assets and therefore cause an increase in spending.
C) lower price level will increase the real value of many financial assets and therefore cause an increase in spending.
D) higher price level will increase the real value of many financial assets and therefore cause an increase in spending.

Question 14

The substitution effect suggests that a decrease in the Canadian price level relative to other countries will:

A) shift the aggregate demand curve leftward.
B) shift the aggregate supply curve leftward.
C) decrease Canadian net exports.
D) increase Canadian net exports.

Question 15

A fall in the Canadian price level will cause:

A) both exports and imports to increase.
B) both exports and imports to decrease
C) exports to increase and imports to decrease.
D) exports to decrease and imports to increase.

Question 16

A rise in the Canadian price level will cause:

A) both exports and imports to increase.
B) exports to increase and imports to decrease.
C) both exports and imports to decrease.
D) exports to decrease and imports to increase.

Question 17

Consider the following list of factors related to the aggregate demand curve:

Which of the factors below best explain the downward slope of aggregate demand curve?

A) 2, 4, and 6.
B) 7, 9, and 10.
C) 1, 3, and 8.
D) 4, 6, and 7.

Question 18

Aggregate supply is:

A) the supply of labour services available from households at different prices.
B) the output of domestic goods and services businesses would produce at different price levels.
C) the availability of imported goods and services at different price levels.
D) the increase in household wealth caused by a fall in the price level.

Question 19

The aggregate supply curve is:

A) upward sloping because costs of production increase as real output increases.
B) horizontal because producers sell their output at fixed prices.
C) downward sloping because lower prices call for higher output to maintain revenues.
D) vertical because the economy's output is fixed in the short run.

Question 20

-Refer to Table 5.2. From the data provided when real GDP is 2420 the GDP deflator:

A) is 100.0.
B) is 110.0.
C) is 108.0.
D) cannot be determined.

Question 21

-Refer to Table 5.2. From the data provided, as real GDP rises rising labour costs per unit:

A) are illustrated by columns A and B.
B) are illustrated by column A.
C) are illustrated by columns A and E.
D) are illustrated by columns A and F.

Question 22

-Refer to Table 5.2. The upward sloping AS curve is illustrated by columns:

A) F and G.
B) A and F.
C) B and E.
D) E and G.

Question 23

-Refer to Table 5.2. In each case, dividing the sum of the data across columns A to D by the data in column F illustrates _____________ and the _______________.

A) rising expenditures, downward sloping AD curve
B) rising unit costs, upward sloping AS curve
C) constant unit costs, horizontal AS curve
D) falling unit costs, downward sloping AS curve

Question 24

-Refer to Table 5.2. A plot of the AS curve would be a scatter diagram with data from column
____________ on the horizontal axis and corresponding data from column ___________________ on the vertical axis.

A) E, G
B) F, G
C) E, F
D) A, G

Question 25

Other things being equal, a reorganization of the OPEC cartel to permit it to increase world oil prices by 70 percent would most likely have which effect?

A) It would shift the aggregate demand curve right.
B) It would shift the aggregate supply curve right.
C) It would shift the aggregate supply curve up.
D) It would shift the aggregate demand curve right and the aggregate supply curve up.

Question 26

In some industries market power gives producers the ability to:

A) shift its demand curve to the right.
B) shift their demand curves to the left.
C) set their prices.
D) achieve economies of scale.

Question 27

In commodity markets and industries with competitive structure, producers:

A) adjust output in response to price changes.
B) adjust price in response to output changes.
C) shift their demand curves to the right.
D) achieve economies of scale.

Question 28

At the intersection of the aggregate supply and aggregate demand curves, the economy is in:

A) short-run equilibrium but not necessarily at potential output.
B) at potential output but not necessarily short-run equilibrium.
C) in short-run equilibrium at potential output.
D) neither short-run equilibrium nor at potential output.

Question 29

Table 5.4: The following aggregate demand and supply schedules are for a hypothetical economy:


-Refer to Table 5.4. The equilibrium price level will be:

A) 150.
B) 200.
C) 250.
D) 300.

Question 30

Table 5.4: The following aggregate demand and supply schedules are for a hypothetical economy:


-Refer to Figure 5.3. If the equilibrium price level is P₁, then:

A) aggregate demand is AD₂.
B) the equilibrium output level is Y₃.
C) the equilibrium output level is Y₂.
D) producers will supply output level Y₁.

Question 31

An economy's AD function is Y = 1000 - 2P and AS function is P = 20 + 0.1Y. The short-run equilibrium Y is:

A) 1000.
B) 800.
C) 600.
D) None of the above.

Question 32

An economy's AD function is Y = 1000 - 2P and AS function is P = 20 + 0.1Y. The short-run equilibrium P is:

A) 200.
B) 100.
C) 50.
D) None of the above.

Question 33

An economy's AD function is Y = 1000 - 2P and AS function is P = 20 + 0.1Y. If the potential Y is 900, the recessionary gap would be:

A) 200.
B) 100.
C) 50.
D) None of the above.

Question 34

At the intersection of the short-run aggregate supply, aggregate demand, and the potential output line economy is in:

A) short-run equilibrium but not necessarily at potential output.
B) at potential output but not necessarily short-run equilibrium.
C) short-run equilibrium and at potential output.
D) neither short-run equilibrium nor at potential output.

Question 35

The potential output line is:

A) vertical because it shows that a higher price level will not bring about higher output.
B) vertical because it shows that a higher price level will bring about higher output.
C) horizontal because it shows that a higher price level will not bring about higher output.
D) horizontal because it shows that a higher price level will bring about higher output.

Question 36

The potential output line shows:

A) the maximum sustainable output that can be produced from the existing set of inputs.
B) the maximum output that can be produced based on existing aggregate demand.
C) the maximum sustainable output that can be produced at the current price level.
D) the maximum output that can be produced when markets are quantity adjusting.

Question 37

Potential output changes only when:

A) the price level changes.
B) government fiscal policy changes.
C) aggregate demand changes.
D) supply conditions change.

Question 38

The potential output line is vertical:

A) because the rate of inflation is steady in the long run.
B) because resource prices eventually catch up with product prices.
C) because product prices always increase at a faster rate than resource prices.
D) only when the money supply increases at the same rate as real GDP.

Question 39

Which of the following statements is true?

A) The short-run aggregate supply curve is downward sloping.
B) The short-run aggregate supply curve is vertical.
C) The potential output curve is vertical.
D) The potential output curve is sloping upward to the right.

Question 40

During the recessions of the early 1980s and 1990s:

A) Canada's actual real GDP was greater than potential GDP.
B) Canada's actual real GDP and potential GDP were equal.
C) Canada's actual real GDP was less than potential GDP.
D) Canada's potential GDP declined, while actual GDP increased.

Question 41

A recessionary gap refers to the:

A) amount by which the price level exceeds the equilibrium price level.
B) the amount by which actual GDP is less than potential GDP.
C) the amount by which actual GDP exceeds potential GDP.
D) increase in prices but not the output.

Question 42

If the economy suffers from a recessionary gap due to adverse demand shocks, then:

A) AD is stronger than the AD at the potential output.
B) AD and AS intersect at the potential output.
C) AS falls short of the potential output.
D) AD is weaker than the AD at the potential output.

Question 43

-Refer to Figure 5.4. The:

A) short-run aggregate supply curve is A.
B) short-run aggregate supply curve is B.
C) potential output curve is B.
D) potential output curve is D

Question 44

-Refer to Figure 5.4. If the price level rises above P₁ because of an increase in aggregate demand, the:

A) economy will move up along curve B and output will temporarily increase.
B) the potential output line C will shift upward.
C) aggregate supply curve B will automatically shift to the right.
D) economy's output first will decline, then increase, and finally return to Y.

Question 45

-Refer to figure 5.4. The potential output curve is:

A) A.
B) B.
C) C.
D) D.

Question 46

-Refer to Figure 5.4. The equilibrium in AD-AS model at potential output is shown by the intersection of the graphs:

A) A, B, and C.
B) A and B.
C) A and C.
D) A, B, and D.

Question 47

An inflationary gap is characterized by:

A) constant prices.
B) AD greater than AS at potential real GDP.
C) falling prices.
D) amount by which price level should increase to increase the total output level.

Question 48

The size of the inflationary gap is:

A) the amount by which full employment GDP is above the equilibrium GDP.
B) the amount by which the AD must increase to eliminate the gap.
C) the amount by which the AS must decrease to eliminate the gap.
D) the amount by which the equilibrium GDP is above the full employment GDP.

Question 49

-Refer to Figure 5.5. At the equilibrium level of price and real GDP this economy:

A) faces a recessionary gap.
B) has output is too high relative to its potential.
C) faces an inflationary gap.
D) is likely to experience significant inflation.

Question 50

-Refer to Figure 5.5. If the economy in the graph is at point Y₀, the output gap would be eliminated in the short run by:

A) an increase in AD.
B) an increase in AS.
C) a decrease in AD.
D) an increase in the price level.

Question 51

-Refer to Figure 5.6. At the equilibrium price and real GDP this economy:

A) faces a recessionary gap.
B) has output is too low relative to its potential.
C) faces an inflationary gap.
D) is not likely to experience significant inflationary pressures.

Question 52

Which of the following statements is false?

A) Recessionary gaps in Canada had been deeper and more persistent than the inflationary gaps during the period of 1982-2008.
B) Positive output gaps imply recessionary gaps.
C) Zero output gaps imply zero inflationary as well as and zero recessionary gaps.
D) Zero output gaps occur when actual GDP (Y) equals potential GDP (Y_P).

Question 53

If Y equals 900 and Y_P is 1000, then the GDP gap is:

A) +10%.
B) 0.9%.
C) -10%.
D) -0.9%.

Question 54

If aggregate demand exceeds potential output:

A) an economy's resources are over-utilized.
B) an economy's resources are under-utilized.
C) an economy's resources are fully employed.
D) the pattern of resource use cannot be determined without knowing short-run aggregate supply.

Question 55

If potential output exceeds aggregate demand:

A) an economy's resources are over-utilized.
B) an economy's resources are under-utilized.
C) an economy's resources are fully employed.
D) the pattern of resource use cannot be determined without knowing short-run aggregate supply.

Question 56

The equilibrium or natural unemployment rate:

A) is the unemployment rate when the economy is in short run equilibrium.
B) is the unemployment rate when the economy is at potential output.
C) is the unemployment rate when the economy has a recessionary gap.
D) is the unemployment rate when the economy has an inflationary gap.

Question 57

An unemployment rate greater than the natural rate means:

A) the economy is in equilibrium at potential output.
B) the economy is experiencing an inflationary gap.
C) the economy is not in short run equilibrium.
D) the economy is experiencing a recessionary gap.

Question 58

The relationship between changes in the level of real GDP and the unemployment rate is explained by:

A) potential GDP.
B) a recessionary gap.
C) Okun's law.
D) equilibrium real GDP

Question 59

According to Okun's law, if growth in actual GDP exceeds growth in potential GDP:

A) unemployment rates will increase
B) employment will fall
C) the natural unemployment rate will increase
D) the unemployment rate will fall

Question 60

Empirical evidence for Canada suggests that if actual GDP grows by 2 percent a year and potential GDP grows by 3 percent a year:

A) the unemployment rate will be unchanged.
B) the unemployment rate will fall by 1 percentage point.
C) the unemployment rate will rise by ½ of one percentage point.
D) the economy will experience and inflationary gap.

Question 61

Estimates in recent years put the natural unemployment rate in Canada at about:

A) 10%.
B) 5%.
C) 7%.
D) 2%.

Question 62

Assume that the natural rate of unemployment is 7%. Further assume that the growth of potential GDP is zero. If GDP gap is minus 6%, then according to Okun's Law:

A) the unemployment rate is 13%.
B) the unemployment rate is 10%.
C) the unemployment rate is 7%.
D) the unemployment rate is 3%.

Question 63

If equilibrium output is less than potential output, eventually the short-run aggregate supply curve will shift:

A) left and eliminate the recessionary gap.
B) right and eliminate the recessionary gap.
C) left and eliminate the inflationary gap.
D) right and eliminate the inflationary gap.

Question 64

If the Canadian economy is producing above its potential income, all of the following are likely to happen except:

A) production will continue to increase.
B) there will be a shortage of labour and raw materials.
C) prices will rise.
D) inventories will decline.

Question 65

-Refer to Figure 5.7. If the aggregate demand is AD₀:

A) the short-run aggregate supply curve will shift up in the long run to restore equilibrium.
B) the short-run aggregate supply curve will shift down in the long run to restore equilibrium.
C) the aggregate demand curve will shift up in the long run to restore equilibrium.
D) the aggregate demand curve will shift down in the long run to restore equilibrium.

Question 66

-Refer to Figure 5.7. If short run equilibrium is at P₁Y_1:

A) the short-run aggregate supply curve will shift up in the long run to restore equilibrium.
B) the short-run aggregate supply curve will shift down in the long run to restore equilibrium.
C) the aggregate demand curve will shift up in the long run to restore equilibrium.
D) the aggregate demand curve will shift down in the long run to restore equilibrium.

Question 67

-Refer to Figure 5.7. If short run equilibrium is at P₁Y₁:

A) input prices will fall and output will rise in the long run.
B) both input prices and output will fall in the long run.
C) input prices will rise and output will fall in the long run.
D) both input prices and output will rise in the long run.

Question 68

-Refer to Figure 5.7. If equilibrium is determined by AS and AD_1:

A) input prices will fall and output will rise in the long run.
B) both input prices and output will fall in the long run.
C) input prices will rise and output will fall in the long run.
D) both input prices and output will rise in the long run.

Question 69

The elimination of a recessionary gap without the help of a rightward shift of the aggregate demand:

A) would take an unacceptably long period of time.
B) would take 3-6 months.
C) would happen immediately.
D) would happen in a very short period of time.

Question 70

The elimination of an inflationary gap through the self adjusting properties of the AD/AS model would cause:

A) falling prices and falling employment.
B) rising prices and falling employment.
C) falling prices and rising employment.
D) rising prices and rising employment.

Question 71

The speed with which an economy adjusts to eliminate an income gap depends on:

A) the flexibility of wage rates and prices in the economy.
B) the slope of the AS curve.
C) the size of potential GDP.
D) the rate of net indirect taxation.

Question 72

Fiscal policy and/or monetary policy:

A) change aggregate demand to reduce or eliminate output gaps.
B) change government expenditure, taxes and government budgets.
C) change interest rates and money supply.
D) all of the above.

Question 73

Assume that the economy is currently in a recession phase. The self-adjustment mechanisms will lead to:

A) lower wages, lower factor prices, rightward shift of the AS curve and eventual rightward shift of the AD curve until recessionary gaps are removed.
B) lower wages, lower factor prices, rightward shift of the AS curve and downward movements across the given AD curve until recessionary gaps are removed.
C) higher GDP gap, lower wages and lower prices until potential GDP is reached.
D) lower prices, increases in the aggregate demand leading to the rightward shift of the AD curve untilrecessionary gaps are removed.

Question 74

The interest-rate effect is one of the shift-factors of AD curve.

Question 75

A rise in domestic prices relative to foreign prices with no change in exchange rates will tend to increase net exports and aggregate demand.

Question 76

An increase in net indirect taxes will shift the aggregate supply curve upwards to the left.

Question 77

A change in indirect taxes and environmental regulation will shift the aggregate supply to the left.

Question 78

Higher oil price will shift the aggregate supply curve upward.

Question 79

As the price level falls, the holders of money become richer with higher real purchasing power and as a result, they buy more. This is one reason why the aggregate demand curve is downward sloping.

Question 80

The aggregate supply curve is vertical when firms adjust quantity rather than price.