Deck 11: Aggregate Supply

Question 1

The expected price level is significant because

A) it is the equilibrium price level in the short run
B) it determines the actual price level in the short run
C) it determines the actual price level in the long run
D) firms and resource owners make long-term agreements based on the expected price level
E) the difference between the expected and actual price levels is equal to the actual inflation rate

Answer 1

firms and resource owners make long-term agreements based on the expected price level

Question 2

The real wage represents the

A) quantity of goods and services a worker can purchase in exchange for work time
B) dollar value of the goods and services a worker can purchase in exchange for working
C) nominal wage minus taxes paid on wages
D) actual amount of income a worker receives after deductions for such things as taxes,insurance,and the like
E) nominal wage times the price level

Answer 2

quantity of goods and services a worker can purchase in exchange for work time

Question 3

Aggregate supply reflects billions of production decisions made by

A) consumers when they decide which products to purchase
B) households and firms,because they each demand goods and services
C) the largest firms and largest households
D) households,which demand resources,and firms,which supply resources
E) resource suppliers and firms

Answer 3

resource suppliers and firms

Question 4

At the potential level of output,there is no seasonal unemployment.

Question 5

Which of the following is true of the short-run aggregate supply curve?

A) It shows the relation between the inflation rate and the quantity of aggregate output firms supply,other things constant.
B) It shows the relation between the price of labor and the aggregate quantity of labor workers supply,other things constant.
C) It shows the relation between the interest rate and the quantity of capital goods firms supply,other things constant.
D) It shows the relation between the price level and the quantity of aggregate output firms supply,other things constant.
E) It displays an inverse relationship between the price level and real GDP.

Question 6

Aggregate supply is the relationship between aggregate demand and the quantities of aggregate output firms are willing and able to produce,other things constant.

Question 7

The potential output of an economy is the level of output produced when the

A) real wage equals the nominal wage
B) price level is constant
C) expected real wage equals the inflation rate
D) expected price level equals the unemployment rate
E) expected price level equals the actual price level

Question 8

Which of the following is true about real and nominal wages?

A) The nominal wage will be constant only if the inflation rate is constant.
B) The real wage will be constant only if the inflation rate is constant.
C) Changes in the nominal wage will be the same as changes in the real wage only if the price level is constant.
D) The real wage will be constant only if the price level is constant.
E) The real wage will be constant only if the nominal wage is constant.

Question 9

At the potential level of output,there is no structural unemployment.

Question 10

Suppose that the real wage remained unchanged between year 1 and 2 but the nominal wage increased from $20 to $24.What is true about the price level?

A) It rose by 20 percent.
B) It rose by 25 percent.
C) It remained unchanged.
D) It fell by 10 percent.
E) It fell by 20 percent.

Question 11

Suppose that the real wage remained unchanged between year 1 and 2 but the nominal wage was $20 in year 1 and $18 in year 2.What is true about the price level?

A) It rose by 20 percent.
B) It rose by 25 percent.
C) It remained unchanged.
D) It fell by 10 percent.
E) It fell by 20 percent.

Question 12

A nominal wage is

A) not above the legal minimum
B) always above the legal minimum
C) measured in terms of goods and services it can buy
D) measured in current dollars rather than in constant dollars
E) measured in constant dollars rather than in current dollars

Question 13

The natural rate of unemployment includes frictional,cyclical,and structural unemployment.

Question 14

Compensation is usually negotiated in terms of the nominal wage because wage agreements are based on expected price levels.

Question 15

Which of the following is true about real and nominal wages?

A) In periods of low inflation,real wages are constant and nominal wages decline.
B) If the price level is high,real wages will fall.
C) If the price level is high,nominal wages will fall.
D) If there is inflation,real wages will change if nominal wages are constant.
E) If there is a constant inflation rate,real wages will not change unless nominal wages do.

Question 16

Aggregate supply expresses the relationship between

A) the price level in the economy and the aggregate output firms will produce,other things constant
B) the price level and the aggregate amount people will buy at that price level
C) the price level and the potential amount of output that could be produced
D) the quantity of output that will be produced and sold in one year
E) the actual output and the potential output of the economy

Question 17

If the price level rises by 4 percent and the nominal wage rises 6 percent,the real wage

A) falls by 2 percent
B) falls by 10 percent
C) rises by 2 percent
D) rises by 10 percent
E) remains constant

Question 18

The nominal wage represents

A) the quantity of goods and services a worker can purchase in exchange for work time
B) the dollar value of the goods and services a worker can purchase in exchange for work time
C) real wages minus taxes paid on wages
D) the most accurate measure for comparing employee standard of living across time
E) real wages divided by the price level

Question 19

If the price level rises by 5 percent and the nominal wage rises 3 percent,the real wage

A) falls by 2 percent
B) falls by 8 percent
C) rises by 2 percent
D) rises by 8 percent
E) remains constant

Question 20

Potential output is the amount produced when

A) firms' and workers' expectations about the price level are realized
B) the actual price level is higher than workers expected
C) firms and workers have the same expectations about the price level
D) the actual price level remains constant
E) the actual price level is higher than firms expected

Question 21

If the economy were at its potential output level,which of the following would not be true?

A) The actual unemployment rate would be greater than the natural rate.
B) The labor market would be in equilibrium.
C) There would be some seasonal unemployment.
D) There would be some frictional unemployment.
E) There would be some structural unemployment.

Question 22

In the long run,but not in the short run,

A) output is fixed
B) prices can change but the level of output is fixed
C) some resource prices are fixed
D) prices are fixed but the output level can change
E) both prices and output are fixed

Question 23

Suppose this year's inflation rate is 4 percent,which is greater than the 2 percent everyone expected.Which of the following is true?

A) real GDP will increase
B) the unemployment rate will probably rise
C) potential output will remain the same
D) the short-run aggregate supply curve will shift to the right
E) there will be a leftward movement along a given short-run aggregate supply curve

Question 24

In the long run,but not in the short run,

A) cyclical unemployment can exist
B) structural unemployment can exist
C) frictional unemployment can exist
D) the actual rate of unemployment equals the natural rate of unemployment
E) actual output can exceed potential output

Question 25

If an economy is at its potential output level,which of the following is not true?

A) The economy is at its full-employment output level.
B) Unemployment is at the natural level.
C) The price level is zero.
D) The output level being produced can be sustained indefinitely given the economy's resources and technology.
E) The only unemployment is frictional,structural,or seasonal.

Question 26

When the economy is at its potential output level,which of the following is not true?

A) Firms' and workers' expectations about the price level are realized.
B) The nominal wage is a good measure of the expected real wage.
C) The unemployment rate is about 4 to 6 percent.
D) The economy is producing its maximum sustainable output.
E) The actual price level is greater than the expected price level.

Question 27

In the short run,but not in the long run,

A) actual output can equal potential output
B) cyclical unemployment can exist
C) structural unemployment can exist
D) frictional unemployment can exist
E) real and nominal GDP can differ

Question 28

If the economy were at its potential output level,which of the following is not true?

A) The actual unemployment rate would equal the natural rate.
B) There would be some cyclical unemployment.
C) There would be some seasonal unemployment.
D) There would be some frictional unemployment.
E) There would be some structural unemployment.

Question 29

The long-run equilibrium price level is the price level the economy is expected to reach when the

A) economy produces its potential output
B) Fed has stabilized interest rates
C) federal budget is balanced
D) discount rate equals the prime rate
E) inflation rate is zero

Question 30

When the economy is at its potential output level,which of the following is not true?

A) Firms' and workers' expectations about the price level are realized.
B) The nominal wage is a good measure of the expected real wage.
C) The unemployment rate is about 2 percent.
D) The economy is producing its maximum sustainable output.
E) The actual price level equals the expected price level.

Question 31

When the economy is at its potential output level,which of the following is not true?

A) Firms' and workers' expectations about the price level are realized.
B) The nominal wage is a very poor measure of the expected real wage.
C) The unemployment rate is about 4 to 6 percent.
D) The economy is producing its maximum sustainable output.
E) The actual price level equals the expected price level.

Question 32

Potential output will decrease if

A) there is an increase in the price level
B) there is a decrease in the price level
C) there is technological change that increases labor productivity
D) workers choose shorter work schedules in order to enjoy more leisure time
E) the nation's capital stock increases

Question 33

Potential output depends on all of the following except one.Which is the exception?

A) the supply of labor
B) labor productivity
C) household choices regarding labor and leisure
D) the technology in current use
E) the number of consumers in the market

Question 34

When the economy is at its potential output level,which of the following is not true?

A) Firms' and workers' expectations about the price level are realized.
B) The nominal wage is a good measure of the expected real wage.
C) The unemployment rate is about 4 to 6 percent.
D) The economy is producing the maximum output it can produce in short periods of time; however,such a fast pace could not be maintained for long.
E) The actual price level equals the expected price level.

Question 35

When the economy is at its potential output level,which of the following is not true?

A) Firms' and workers' expectations about the price level are not accurate.
B) The nominal wage is a good measure of the expected real wage.
C) The unemployment rate is about 4 to 6 percent.
D) The economy is producing its maximum sustainable output.
E) The actual price level equals the expected price level.

Question 36

Which of the following types of unemployment can exist in an economy that is at its potential output level?

A) cyclical unemployment only
B) structural unemployment only
C) frictional,cyclical,and seasonal unemployment only
D) frictional,seasonal,and structural unemployment only
E) there will be no unemployment in an economy that is at the potential output level

Question 37

If the economy were at its potential output level,which of the following would not be true?

A) The actual unemployment rate would equal the natural rate.
B) The labor market would be in equilibrium.
C) There would be some seasonal unemployment.
D) There would be some frictional unemployment.
E) Structural unemployment would be equal to zero.

Question 38

If the economy were at its potential output level,which of the following would not be true?

A) The actual unemployment rate would equal the natural rate.
B) The labor market would be in equilibrium.
C) There would be some seasonal unemployment.
D) Frictional unemployment would be zero.
E) There would be some structural unemployment.

Question 39

If the actual price level is less than the expected price level reflected in long-term contracts,firm owners will find production more profitable than they had expected.

Question 40

If workers are willing to work more hours when the nominal wage increases,what can be said about the economic rationality of their decision?

A) The decision is not economically rational,since it should be based on the real wage only.
B) The decision could be rational if workers thought that the inflation rate would fall in the future.
C) The decision could be rational if workers thought that the real wage had fallen.
D) The decision could be rational if workers thought that the nominal wage and the real wage were equal.
E) The decision is rational no matter what happens to the real wage.

Question 41

If nominal wage rates increase by 2 percent per year and the price level increases by 5 percent per year,real wages will

A) increase by 3 percent per year
B) increase by 5 percent per year
C) increase by 2 percent per year
D) decrease by 5 percent per year
E) decrease by 3 percent per year

Question 42

A rising price level in the short run may create an incentive for firms to increase production because

A) costs of production will increase
B) total sales revenue will decrease
C) profits will increase
D) costs of production will increase faster than total revenue
E) output prices are generally not fixed by contract whereas resource prices are

Question 43

A wage rate above what is necessary to attract a sufficient number of workers is known as a(n)

A) inefficient wage
B) market-clearing wage
C) efficiency wage
D) marginal productivity wage
E) minimum wage

Question 44

Between 1994 and 2004,Jack's salary increased from $100,000 to $200,000 per year and the price index increased from 100 to 300 during the same period.Which of the following statements best describes Jack's situation?

A) his real income and money income have both increased
B) his real income increased and money income decreased
C) his real income and money income both decreased
D) his real income decreased and money income increased
E) his real income and money income remained unchanged

Question 45

If the actual price level exceeds the expected price level reflected in long-term contracts,

A) firms will find production more profitable than they had expected and will decrease the quantity of output supplied
B) firms will find production less profitable than they had expected and will decrease the quantity of output supplied
C) firms will find production less profitable than they had expected and will increase the quantity of output supplied
D) resource owners,because they are making a lower profit than they had expected,will decrease the quantity of output supplied
E) unemployment will decrease

Question 46

If the inflation rate is 4 percent a year and everyone expected 2 percent a year,then the potential level of real GDP will increase.

Question 47

The short run is a period of time

A) when there is an expansionary gap and firms run their plants only for short periods
B) of one year or less
C) when there is a contractionary gap
D) during which resource buyers and sellers cannot adjust fully to changes in the price level
E) when resource buyers and sellers can adjust fully to changes in the price level

Question 48

If nominal wage rates increase by 5 percent per year and the price level increases by 3 percent per year,which of the following is correct?

A) real wages increase by 2 percent per year
B) real wages increase by 3 percent per year
C) real wages decrease by 3 percent per year
D) real wages decrease by 2 percent per year
E) real wages remain constant

Question 49

If the actual price level is less than the expected price level reflected in long-term contracts,

A) firms will find production more profitable than they had expected and will increase the quantity of output supplied
B) firms will find production less profitable than they had expected and will decrease the quantity of output supplied
C) firms,because they are making less profit than they had expected,will increase the quantity of output supplied
D) resource owners,because they are making a lower profit than they had expected,will decrease the quantity of output supplied
E) unemployment will increase

Question 50

If the price level turns out to be higher than expected,

A) businesses increase production
B) the potential output level increases
C) initially,the short-run aggregate supply curve shifts rightward; later,there is an upward movement along that curve
D) initially,the short-run aggregate supply curve shifts rightward; later,there is a downward movement along that curve
E) a contractionary gap develops

Question 51

Fixed resource prices help explain why firms

A) increase output in the short run when the price level increases
B) keep production levels constant in the short run when the price level decreases
C) sell output in the short run at fixed prices
D) increase output in the long run when the price level increases
E) decrease production when nominal wages fall in the long run

Question 52

In constructing a short-run aggregate supply curve,we assume that the goal of business is to

A) maximize sales revenue
B) maximize profit
C) maximize growth in assets
D) maximize growth in sales
E) minimize cost

Question 53

Because some resource prices are assumed to be constant in the short run,

A) the aggregate supply curve is horizontal in the short run
B) the aggregate supply curve is vertical in the short run
C) costs do not increase as much as output prices do when the price level rises
D) an increase in price per unit is the same thing as a decrease in profit per unit
E) firms' total costs of production decrease as output increases

Question 54

Among the reasons firms find it profitable to expand output in the short run when the price level is rising faster than expected is that

A) all firms' costs are contractually fixed
B) prices for firms' output are rising with the price level
C) firms are interested in minimizing cost per unit,not total profits
D) all firms' costs are variable
E) the quantity of resources available to the economy is fixed

Question 55

If the actual price level is higher than the expected price level,the economy will expand in the short run.

Question 56

Real wages are nominal wages adjusted for price changes.

Question 57

Given implicit or explicit resource price agreements,if the actual price level is below the expected price level,the

A) economy will move rightward along the short-run aggregate supply curve
B) economy will move leftward along the short-run aggregate supply curve
C) short-run aggregate supply curve will shift to the left
D) long-run aggregate supply curve will become steeper
E) short-run aggregate supply curve will become flatter

Question 58

If the actual price level exceeds the expected price level reflected in long-term contracts,

A) firms will find production more profitable than they had expected and will increase the quantity of output supplied
B) firms will find production less profitable than they had expected and will decrease the quantity of output supplied
C) firms will find production more profitable than they had expected and will decrease the quantity of output supplied
D) resource owners,because they are making a lower profit than they had expected,will decrease the quantity of output supplied
E) unemployment will increase

Question 59

If the actual price level is lower than the expected price level,the economy will contract in the short run.

Question 60

In constructing the short-run aggregate supply curve,we define the short run as the period in which

A) the price level is constant
B) output is fixed
C) profit is constant
D) the costs of some resources are fixed
E) the economic growth rate is less than 4 percent

Question 61

Increases in the costs of production will shift the short-run aggregate supply curve to the left.

Question 62

In the short run,but not in the long run,

A) output is fixed
B) prices are fixed
C) prices can change but output is fixed
D) some resource prices are fixed
E) the aggregate supply curve is vertical

Question 63

Exhibit 11-1

Given aggregate demand and aggregate supply schedule #3 in Exhibit 11-1,the equilibrium level of output and price level are

A) output $7.0,price level 110
B) output $6.5,price level 120
C) output $6.0,price level 130
D) output $5.0,price level 150
E) output $5.5,price level 140

Question 64

Exhibit 11-1

Given aggregate demand and aggregate supply schedule #1 in Exhibit 11-1,the equilibrium level of output is

A) $5.0
B) $5.5
C) $6.0
D) $6.5
E) $7.0

Question 65

Exhibit 11-1

Given aggregate demand and aggregate supply schedule #1 in Exhibit 11-1,the equilibrium price level is

A) 110
B) 120
C) 130
D) 140
E) 150

Question 66

The actual price level is assumed to be constant along a given short-run aggregate supply curve.

Question 67

In the short run,the price level is determined solely by aggregate supply.

Question 68

The expected price level is assumed to be constant along a given short-run aggregate supply curve.

Question 69

Exhibit 11-1

Given aggregate demand and aggregate supply schedule #2 in Exhibit 11-1,the equilibrium output level and price level are

A) output $7.0,price level 110
B) output $6.5,price level 120
C) output $6.0,price level 130
D) output $5.5,price level 140
E) output $5.0,price level 150

Question 70

The aggregate supply curve reflects the relationship between the

A) price of a particular good and the quantity supplied by all firms producing that good
B) price of a particular good and the quantity supplied by the aggregate economy
C) price level and the quantity of all goods supplied in the economy
D) price level and the quantity purchased of all goods in the economy
E) price level and investment spending

Question 71

Which of the following is not assumed to be constant along a short-run aggregate supply curve?

A) the actual price level
B) the state of technology
C) the size and quality of the labor force
D) the expected price level
E) the size and quality of the capital stock

Question 72

For the purpose of aggregate supply analysis,the long run is the period of time during which

A) aggregate supply adjusts to equal aggregate demand
B) excess aggregate supply is bought
C) excess aggregate demand is fulfilled
D) real wages are constant
E) all resource prices can be varied

Question 73

Increases in the costs of producing each level of output will cause a rightward shift of the short-run aggregate supply curve.

Question 74

If the price level turns out to be lower than expected,

A) businesses cut back production
B) the potential output level decreases
C) initially,the short-run aggregate supply curve shifts leftward; later,there is a downward movement along that curve
D) initially,the short-run aggregate supply curve shifts leftward; later,there is an upward movement along that curve
E) an expansionary gap develops

Question 75

The short-run aggregate supply curve slopes upward because quantity supplied

A) increases when cost per unit falls
B) decreases when cost per unit falls
C) increases when the price level increases
D) increases when GDP decreases
E) decreases as profit per unit increases

Question 76

In the short run,there is a positive relationship between

A) inflation and unemployment
B) inflation and real GDP
C) the actual price level and aggregate quantity supplied
D) the actual price level and unemployment
E) the actual price level and consumption spending

Question 77

Wage agreements may cause costs to be __________ flexible than prices so that __________ in the price level cause __________ in aggregate quantity supplied.

A) less; decreases; decreases
B) less; increases; increases
C) less; decreases; increases
D) more; decreases; increases
E) more; increases; increases

Question 78

If the expected price level falls below the actual price level,

A) the inflation rate must be negative
B) the inflation rate must be positive
C) production becomes less attractive to firms
D) production becomes more attractive to firms
E) the short-run aggregate supply curve is negatively sloped

Question 79

Suppose that the actual and expected price levels are initially equal,and that the expected price level falls.Which of the following will occur over the long run? (Hint: Recall the actual price level is on the vertical axis.)

A) The economy will move rightward along the short-run aggregate supply curve.
B) The economy will move leftward along the short-run aggregate supply curve.
C) The short-run aggregate supply curve will shift to the right.
D) The short-run aggregate supply curve will shift to the left.
E) The short-run aggregate supply curve will become flatter.

Question 80

The steepness of the short-run aggregate supply curve depends primarily on

A) the length of time for which resource prices are fixed
B) the length of time for which output prices are fixed
C) the difference between the expected and the actual price levels
D) how quickly employment increases as output expands
E) how quickly production costs increase as output expands