Deck 8: Potential Gdp and the Natural Unemployment Rate

Question 1

Potential GDP is the level of

A) real GDP that the economy would produce if it was at full employment.
B) nominal GDP that the economy would produce if it was at full employment.
C) real GDP that the economy would produce if there was no inflation.
D) nominal GDP that the economy would produce if there was no inflation.
E) real GDP that the economy would produce if there was no unemployment.

Answer 1

A

Question 2

The Lucas Wedge shows

A) the negative impact a slowdown in real GDP growth has on potential GDP.
B) the increased impact of government spending on real GDP.
C) the negative impact inflation has on consumer spending.
D) the positive impact lower taxes have on real GDP.
E) whether a country needs to slow its real GDP growth rate.

Answer 2

A

Question 3

If the economy is fully employed, which of the following is true?

A) The price level equals 100.
B) Real and nominal GDP are equal.
C) Real and potential GDP are equal.
D) The unemployment rate is zero.
E) Real GDP cannot increase.

Answer 3

C

Question 4

The level of real GDP the economy produces at full employment is

A) an unattainable level.
B) potential GDP.
C) never reached in reality.
D) called the Lucas level.
E) the maximum amount of GDP that can ever be produced.

Question 5

Suppose an economist stated that Brazil had achieved its potential GDP 2008.This would imply that at this level of real GDP, Brazil experienced

A) peak in its business cycle in 2008.
B) unemployment equal to zero.
C) inflation equal to zero.
D) full employment.
E) a negative Okun gap.

Question 6

According the Keynesian macroeconomic model, which of the following was responsible for starting the Great Depression?

A) Too little private spending.
B) Too little government spending.
C) High taxes.
D) Decreases in the quantity of money.
E) Decreases in technology.

Question 7

Potential GDP is

A) the same as real GDP.
B) the same as nominal GDP.
C) another name for the Lucas wedge.
D) the level of output produced when the economy is fully employed.
E) shows that the Okun gap vastly exceeds the Lucas wedge.

Question 8

Suppose that Australia has fully employed all of its resources. This situation means that Australia

A) is operating at its potential GDP.
B) is growing at a faster rate than the United States.
C) has a negative Okun Gap.
D) has a positive Lucas Wedge.
E) is experiencing zero unemployment.

Question 9

Potential GDP is the level of

A) GDP that is impossible to achieve.
B) real GDP that the economy could produce at full employment.
C) nominal GDP that is smaller than the real GDP.
D) GDP that fluctuates around actual GDP.
E) GDP that would be produced if all workers were fully employed and there was no unemployment.

Question 10

The level of real GDP that the economy produces at full employment is called

A) real GDP.
B) nominal GDP.
C) potential GDP.
D) sustainable GDP.
E) total GDP.

Question 11

The Monetarist model expands the Keynesian model by proposing that

A) decreases in the quantity of money lead to higher interest rates.
B) the government should lower taxes promote economic growth.
C) decreases in tax rates generate higher consumption.
D) decreases in the growth rate of the quantity of money trigger expansions by controlling inflation.
E) markets should be left alone to determine the optimal outcome.

Question 12

The Lucas Wedge is estimated to

A) to total over $284,000 per person as a result of the slowdown in the growth rate of real GDP.
B) have reached about $13,000 per person in the last year.
C) be about 2 percent of real GDP per year.
D) be negative due to the severe recession in 2008-2009.
E) be positive in some years and negative in others.

Question 13

The Keynesian macroeconomic model states that

A) the economy is inherently unstable and government intervention is required to maintain continued economic growth.
B) markets work efficiently to produce the best macroeconomic outcomes.
C) fluctuations in the quantity of money are responsible for most economic recessions.
D) changes in technology generate business cycles.
E) the economy is fairly stable.

Question 14

Which of the following would have the biggest payoff?

A) Restoring real GDP growth to its 1960s growth rate.
B) Eliminating the Okun Gap.
C) Increasing the Okun Gap.
D) Making the Okun Gap equal the Lucas Wedge.
E) Increasing the Lucas Wedge.

Question 15

The Classical macroeconomic model proposes that

A) government intervention is required to help the economy reach its potential.
B) real GDP equals potential GDP as long as inflation equals zero.
C) changes in the quantity of money are critical in driving economic growth.
D) markets work efficiently to produce the best macroeconomic outcomes.
E) socialism produces the most efficient economic outcomes for a society.

Question 16

If New Zealand is operating at potential GDP, which of the following is true?
I) New Zealand only has frictional and structural unemployment.
Ii) There is no inflation in New Zealand.
Iii) New Zealand has positive net exports.

A) i, ii and iii.
B) i only.
C) i and ii.
D) i and iii.
E) ii only.

Question 17

Which of the following ideas reflect the Monetarist macroeconomic model?
I) The Monetarist model supports the Classical model, in general.
Ii) Decreases in the growth rate of the quantity of money trigger recessions.
Iii) Government intervention is an appropriate tool to steady the economy.

A) i and ii.
B) i only.
C) i, ii and iii.
D) ii and iii.
E) i and iii.

Question 18

The idea that potential GDP is the sustainable upper limit of production means that

A) real GDP may be temporarily larger than potential GDP, but not permanently.
B) the economy is operating environmentally efficiently.
C) real GDP may be temporarily less than potential GDP.
D) inflation must always occur in a growing economy.
E) unemployment can only temporarily be zero in a healthy economy.

Question 19

Potential GDP is

A) equal to the maximum amount of goods and services that can be produced at any given time.
B) another name for real GDP.
C) the level of output produced when the economy is fully employed.
D) a measure of the short term fluctuations in real GDP.
E) another name for nominal GDP.

Question 20

The level of real GDP the economy produces at full employment is called

A) possible GDP.
B) nominal GDP.
C) potential GDP.
D) maximum GDP.
E) Lucas GDP.

Question 21

Suppose Germany's economy is experiencing full employment. This means that, in Germany,

A) the unemployment rate is equal to zero.
B) real GDP is equal to potential GDP.
C) real GDP is greater than potential GDP.
D) potential GDP is greater than real GDP.
E) real GDP equals nominal GDP.

Question 22

The ________ describes the relationship between the amount of labor employed and real GDP.

A) production function.
B) production possibilities frontier.
C) Lucas wedge.
D) inflation rate.
E) Okun gap.

Question 23

At any given time, which factor of production is NOT fixed?

A) labor
B) technology
C) entrepreneurship
D) land
E) money

Question 24

The production function describes the relationship between

A) the real wage and the quantity of labor supplied.
B) real GDP and the quantity of labor employed.
C) real and potential GDP.
D) real and nominal GDP.
E) potential GDP and the real wage rate.

Question 25

The production function is a relationship between the amount of labor employed and

A) the maximum quantity of real GDP that can be produced.
B) the maximum quantity of nominal GDP that can be produced.
C) the wage rate paid to the workers.
D) all other resources at different levels of employment.
E) the amount of labor workers supply.

Question 26

The amount of real GDP produced at any one time depends on i) a fixed amount of capital
Ii) a fixed level of technology
Iii) decisions people make about leisure versus working

A) ii only.
B) ii and iii.
C) i and ii.
D) i only.
E) i, ii and iii.

Question 27

As an economic expansion approaches its peak, it is very likely that real GDP will

A) exceed nominal GDP.
B) exceed potential GDP.
C) equal nominal GDP but not potential GDP.
D) be less than potential GDP.
E) equal nominal GDP and equal potential GDP.

Question 28

Diminishing returns means that

A) each additional unit of labor produces successively less real GDP.
B) hiring more labor results in less real GDP.
C) each extra unit of real GDP produced requires less labor.
D) each additional unit of labor produces successively more real GDP.
E) hiring more labor must lower the real wage rate.

Question 29

The sustainable upper limit of real GDP is a level of GDP that is

A) greater than potential GDP, but by how much greater is unknown and controversial.
B) less than potential GDP, but by how much less is unknown and controversial.
C) potential GDP.
D) determined only by what is the full employment equilibrium in the labor market.
E) None of the above answers is correct because there is no sustainable upper limit to real GDP because real GDP can always be increased.

Question 30

Over the business cycle, real GDP fluctuates around

A) the business cycle trough.
B) the business cycle peak.
C) nominal GDP.
D) potential GDP.
E) the Lucas wedge.

Question 31

Choose which statement is most correct.

A) Real GDP can never exceed potential GDP.
B) Real GDP must always equal potential GDP.
C) At times, real GDP can exceed potential GDP.
D) Nominal GDP can never exceed potential GDP.
E) Nominal GDP must always equal potential GDP.

Question 32

Which of the following is true?

A) Real GDP fluctuates around potential GDP.
B) Potential GDP fluctuates around nominal GDP.
C) Nominal GDP fluctuates around real GDP.
D) Real GDP never equals potential GDP.
E) The Okun gaps are much larger than the Lucas wedge.

Question 33

A country reports that its actual real GDP is greater than its potential GDP.It must be that

A) an error was made when calculating actual real GDP.
B) the price level is increasing.
C) more workers decided to quit work in order to enjoy leisure time.
D) the excess by which real GDP exceeds potential GDP is only temporary and eventually real GDP will decrease to be equal to potential GDP.
E) None of the above answers is correct because it is impossible for a country's real GDP to exceed its potential GDP.

Question 34

During a business cycle recession, it is very likely that real GDP will

A) exceed nominal GDP.
B) be less than potential GDP.
C) equal nominal GDP but not equal potential GDP.
D) equal nominal GDP and equal potential GDP.
E) be greater than potential GDP.

Question 35

A country's potential GDP is determined, in part, by

A) the equilibrium price level.
B) demand and supply in the labor market.
C) the Lucas wedge.
D) actual real GDP.
E) the Okun gap.

Question 36

Which of the following statement or statements are correct about potential GDP?
I) Actual real GDP equals potential GDP when the economy is at full employment.
Ii) Real GDP can be less than potential GDP.
Iii) When real GDP equals potential GDP, it also equals nominal GDP.

A) i only
B) ii only
C) ii and iii
D) i and ii
E) i, ii, and iii

Question 37

At full employment, actual ________ equals ________.

A) nominal GDP; potential GDP
B) real GDP; potential GDP
C) real GDP; nominal GDP
D) potential GDP; nominal GDP
E) unemployment; zero

Question 38

To determine GDP from the production function, we need to know

A) the quantity of labor employed.
B) the quantity of labor available for work.
C) the unemployment rate.
D) the quantity of labor supplied by firms.
E) the real wage rate.

Question 39

The production function displays

A) increasing returns.
B) real returns.
C) diminishing returns.
D) average returns.
E) normal returns.

Question 40

The production function shows that potential GDP increases when the

A) price level rises.
B) price level falls.
C) inflation rate falls.
D) quantity of labor employed increases.
E) the wage rate falls.

Question 41

The idea that the production function exhibits _______implies that ________.

A) diminishing returns; the Lucas Wedge increases at output increases.
B) diminishing returns; each additional unit of labor employed generates an ever-decreasing amount of real GDP.
C) increasing returns; potential GDP is always increasing.
D) increasing returns; output should increase steadily as technology grows.
E) constant returns; each additional unit of labor employed generates an increasing amount of real GDP.

Question 42

As the quantity of labor employed increases, the production functions exhibits a

A) positive, linear relationship.
B) positive relationship, with each additional unit of labor producing less additional real GDP.
C) positive relationship, with each additional unit of labor producing more additional real GDP.
D) negative, linear relationship.
E) U-shaped curve.

Question 43

The above figure shows a nation's production function.Point A is

A) attainable if the economy is inefficient.
B) unattainable given the state of the economy.
C) attainable if the nation uses resources efficiently.
D) the maximum amount of real GDP the nation can produce.
E) the labor market equilibrium quantity of employment and real GDP.

Question 44

The above figure that most accurately shows a production function is

A) Figure A.
B) Figure B.
C) Figure C.
D) Figure D.
E) Both Figure A and Figure B; Figure A for an economy with an excess of labor and Figure B for an economy with a shortage of labor.

Question 45

If adding an initial 100 billion labor hours per year increases real GDP by $3 trillion, diminishing returns informs us that an additional 100 billion labor hours per year will increase real GDP by

A) exactly $3 trillion.
B) less than $3 trillion.
C) more than $3 trillion.
D) either exactly $3 trillion or by less than $3 trillion, depending on whether the real wage rate remains constant or rises.
E) some amount but there is not enough information to tell by how much.

Question 46

Diminishing returns, so that each additional hour of labor employed produces successively smaller additional amounts of real GDP, exist because

A) labor is not very productive.
B) extra labor produces more output.
C) all other factors are held fixed.
D) the price level rises as more workers are employed.
E) additional workers are paid higher wage rates.

Question 47

The production function shows that as employment increases, real GDP

A) increases at an increasing rate.
B) increases at a decreasing rate.
C) increases at a constant rate.
D) decreases at a decreasing rate.
E) increases until it reaches potential GDP and then it starts to decrease.

Question 48

A reason a nation faces diminishing returns along a production function is because

A) unemployment always exists.
B) potential GDP is fixed.
C) the quantity of physical capital is fixed.
D) full employment is not possible.
E) the wage rate is fixed while moving along the production function.

Question 49

Diminishing returns along a production function means that each additional hour of labor employed

A) produces a successively smaller additional amount of real GDP.
B) produces a successively larger additional amount of real GDP.
C) produces a constant additional amount of real GDP.
D) does not produce any additional real GDP.
E) forces the real wage rate to rise.

Question 50

Based on the production function in the above figure, which of the following is an attainable combination of labor and real GDP?
I) 300 billion hours of labor and real GDP of $15 trillion
Ii) 300 billion hours of labor and real GDP of $6 trillion
Iii) 100 billion hours of labor and real GDP of $12 trillion

A) i only
B) ii only
C) iii only
D) ii and iii
E) i and ii

Question 51

_______ in the United States ________ in most European countries.

A) Potential GDP; is greater than potential GDP.
B) Real wages; are greater than real wages.
C) The Okun Gap; is equal to the Okun Gap.
D) The Lucas Wedge; is greater than the Lucas Wedge.
E) Both A and B are true.

Question 52

Employing an additional 1 billion hours of labor increases real GDP by $12 billion.Employing another 1 billion hours beyond the first 1 billion increases real GDP by $11 billion.Hence we can conclude from this information that as employment increases, real GDP

A) increases at an increasing rate.
B) decreases at an increasing rate.
C) decreases at a decreasing rate.
D) increases at a decreasing rate.
E) falls from $12 billion to $11 trillion as more workers are hired.

Question 53

The gap in potential GDP in the United States versus Europe can be explained by

A) the fact that U.S.labor is more productive than European labor.
B) prices are higher in the United States.
C) the Okun Gap is larger in the United States.
D) the fact that income taxes are higher in the United States.
E) equilibrium employment is higher in Europe.

Question 54

The idea of "diminishing returns" means that real GDP ________ as the quantity of labor increases.

A) increases at a slower rate
B) decreases at a slower rate
C) increases at a faster rate
D) decreases at a faster rate
E) does not change

Question 55

As more labor is hired, moving along the production function diminishing returns occur because

A) workers are overworked and so their productivity decreases.
B) the wage rate paid is too low and so workers decrease their work effort.
C) there are fixed quantities of other resources.
D) the real wage rate must increase in order to hire additional workers.
E) real GDP increases more rapidly the more workers are hired.

Question 56

The above figure shows a nation's production function.Point B is

A) unattainable.
B) attainable if the nation uses resources inefficiently.
C) attainable if the nation uses resources efficiently.
D) the maximum amount of real GDP the nation can ever produce.
E) Both answers C and D are correct.

Question 57

The above figure shows a nation's production function.Point C is

A) unattainable given the nation's resource level.
B) attainable if the nation uses resources efficiently.
C) attainable if the nation uses resources inefficiently.
D) the maximum amount of real GDP the nation can produce.
E) the labor market equilibrium point.

Question 58

According to the production function, as the quantity of labor employed increases, real GDP increases

A) at an increasing rate.
B) at a decreasing rate.
C) at a constant rate.
D) and then eventually decreases.
E) until it reaches potential GDP and then it no longer changes.

Question 59

The table above gives a nation's production function.Which of the following is NOT an attainable combination of real GDP and labor?

A) Real GDP of $4.0 trillion and labor of 90 billion hours per year.
B) Real GDP of $4.7 trillion and labor of 110 billion hours per year.
C) Real GDP of $4.0 trillion and labor of 70 billion hours per year.
D) Real GDP of $5.2 trillion and labor of 90 billion hours per year.
E) Real GDP of $5.5 trillion and labor of 150 billion hours per year.

Question 60

As additional units of labor hours are employed, holding all other factors constant, along the production function,

A) real GDP increases at an increasing rate.
B) nominal GDP decreases at an increasing rate.
C) real GDP increases at a decreasing rate.
D) real GDP increase at a constant rate.
E) real GDP initially decreases and then starts to increase.

Question 61

The Bubby Gum factory produces bubble gum.Joanne is one of the employees, and she produces 10 packs of bubble gum per hour.Joanne's money wage rate is $12 per hour.If a packet of bubble gum sells for $1.00, then

A) Joanne is creating a $2.00 per hour loss for the firm.
B) Joanne is creating a $2.00 per hour profit for the firm.
C) the Bubby Gum company should decrease the price of the bubble gum so it sells more and makes a larger profit.
D) the Bubby Gum company should pay Joanne more.
E) The Bubby Gum company should increase its demand for labor.

Question 62

Suppose the price of a product is $4 and the nominal wage that the firm must pay is $20.Then the firm's real wage is

A) $20.
B) $80.
C) $5.
D) $0.20
E) $4.

Question 63

An increase in the real wage rate ________ the quantity of labor demanded and ________ the quantity of labor supplied.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) does not change; does not change

Question 64

A firm's demand for labor depends on the

A) nominal wage rate because it pays workers in dollars.
B) real wage rate, which equals the nominal wage divided by the price level.
C) real wage rate, which equals the nominal wage divided by the hours worked.
D) nominal wage rate, which equals the real wage divided by the price level.
E) supply of labor.

Question 65

The demand for labor curve is

A) a vertical line because firms have to hire labor.
B) upward sloping, showing that as the real wage rate increases, more workers are hired.
C) a horizontal line because we assume that the real wage rate is fixed.
D) downward sloping, showing that the quantity of labor demanded increases when the real wage falls.
E) U-shaped.

Question 66

Firms hire more labor as long as

A) the real wage rate is less than the additional output the labor produces.
B) the real wage rate is greater than the additional output the labor produces.
C) extra labor will produce more output.
D) the nominal wage rate exceeds the real wage rate.
E) the nominal wage rate is less than the real wage rate.

Question 67

If the real wage rate decreases from $9.00 per hour to $8.00 per hour, the

A) quantity demanded of labor increases.
B) demand for labor increases.
C) quantity supplied of labor increases.
D) supply of labor increases.
E) equilibrium quantity of employment must decrease.

Question 68

The lower the real wage rate, the

A) fewer workers firms can profitably hire.
B) more workers firms can profitably hire.
C) more workers will supply labor.
D) higher the nominal wage rate.
E) larger the quantity of labor supplied.

Question 69

The benefit to the firm of hiring another worker is

A) the nominal wage.
B) the price level.
C) the real wage.
D) the extra output produced by the worker.
E) measured as the height of the production function.

Question 70

Hershey Chocolate Factory pays a money wage rate equal to $30 per hour and sells its candy bars for $1.50 each.Hershey Chocolate Factory should hire labor until an additional unit of labor produces ________ candy bars an hour.

A) 45
B) 1.5
C) 20
D) 30
E) 10

Question 71

The quantity of labor demanded by a firm depends upon

A) the nominal wage rate not the real wage rate.
B) the real wage rate not the nominal wage rate.
C) both the real wage rate and the nominal wage rate.
D) neither the real wage rate nor the nominal wage rate.
E) either the real wage rate or the nominal wage rate, depending whether the price level is increasing or decreasing.

Question 72

The real wage rate is the ________ divided by the ________.

A) quantity of labor demanded; quantity of labor supplied
B) nominal wage rate; price level
C) quantity of labor supplied; quantity of labor demanded
D) nominal wage rate; inflation rate
E) equilibrium quantity of employment; potential GDP

Question 73

As long as an additional worker hired by a firm produces

A) more output than the real wage rate, the firm will hire that worker.
B) more output than the real wage rate, the firm will not hire that worker.
C) less output than the real wage rate, the firm will hire that worker.
D) some output, the firm will hire that worker.
E) more output than the nominal wage rate, the firm will hire that worker.

Question 74

The demand for labor reflects the point that the

A) lower the real wage rate, the greater the quantity of labor demanded.
B) higher the real wage rate, the greater the quantity of labor demanded.
C) real wage rate does not effect the quantity demanded of labor.
D) nominal wage rate and not the real wage rate determines the quantity of labor demanded.
E) demand for labor depends on the supply of labor.

Question 75

When all other influences on firms' hiring plans remain the same, the

A) lower the real wage rate, the greater is the quantity of labor supplied
B) higher the real wage rate, the greater is the quantity of labor demanded.
C) lower the real wage rate, the smaller is the quantity of labor demanded.
D) lower the real wage rate, the greater is the quantity of labor demanded.
E) None of the above answers is correct because firm's hiring decisions depend on how profitable hiring a worker is, which depends on how much added profit the worker can create.

Question 76

The quantity of labor demanded is the labor hours all

A) firms plan to hire at a given real wage rate.
B) firms plan to hire at a given nominal wage rate.
C) employees plan to work at a given real wage rate.
D) employees plan to work at a given nominal wage rate.
E) Both answers A and C are correct.

Question 77

Suppose that the Australian economy initially uses 50 billion hours of labor to produce $5 trillion of real GDP. If 50 billion more hours are employed and Australia's real GDP increases by $4 trillion more,

A) Australia's production function exhibits diminishing returns.
B) Australia's production function exhibits increasing returns.
C) Australia has an Okun Wedge of $1 trillion.
D) Australia has positive Lucas wedge.
E) Australia's production possibility frontier has a positive slope.

Question 78

The total labor hours that all the firms in the economy plan to hire during a given time period at one particular real wage rate is the

A) demand for labor.
B) quantity of labor demanded.
C) supply of labor.
D) quantity of labor supplied.
E) quantity of jobs supplied.

Question 79

The Bubby Gum factory produces bubble gum.Joanne is one of the employees, and she produce 10 packs of bubble gum per hour.Joanne's money wage rate is $12 per hour.Based on this information, the Bubby Gum company should

A) keep Joanne because she creates a profit for the firm.
B) fire Joanne because she creates a loss for the firm.
C) decrease Joanne's wage rate because she is paid too much.
D) increase its demand for labor.
E) None of the above answers are correct because more information about Joanne's real wage is needed to decide what to do with Joanne.

Question 80

A firm hires labor up to the point where the

A) real wage rate equals the nominal wage rate.
B) additional hour of labor produces extra output that equals the real wage rate.
C) additional hour of labor produces extra output that equals the nominal wage rate.
D) firm can sell the extra output.
E) real wage rate exceeds the nominal wage rate.