Question 1

FIGURE 24-5
-Refer to Figure 24-5. If the economy is currently in equilibrium at E3, the concept of asymmetrical adjustment of the AS curve suggests that

Accepted Answer

A)  the economy will attain potential output faster if there is no intervention by the government. 
B)  a decrease in the price level will induce a rightward shift of AS. 
C)  the return of the economy to potential output may be very slow without government intervention. 
D)  the economy will never return to potential output. 
E)  the price level is constant regardless of the level of equilibrium income.

Question 2

The ʺlong-run aggregate supply curve,ʺ vertical at Y*, shows that

Accepted Answer

A)  potential output will rise as prices rise. 
B)  potential output will fall as prices rise. 
C)  potential output is compatible with any price level. 
D)  potential output is compatible with one particular price level. 
E)  prices will always rise in the long run.

Question 3

The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.
  FIGURE 24-4
-Refer to Figure 24-4. The positive aggregate supply shock shown in the diagram results in a new short -run equilibrium where the price level is and real GDP is .

Accepted Answer

A)  60; 1000 
B)  60; 1300 
C)  90; 750 
D)  90; 1200 
E)  110; 1300

Question 4

Fiscal policy refers to the

Accepted Answer

A)  governmentʹs attempts to maintain a vertical AS curve so as to stabilize output. 
B)  governmentʹs use of spending and taxing policies to influence equilibrium real GDP. 
C)  governmentʹs use of trade-related policy tools to influence the net export function, thereby influencing GDP. 
D)  business sectorʹs influence on investment and GDP. 
E)  householdsʹ attempts to change saving to encourage growth.

Question 5

FIGURE 24-5
-Refer to Figure 24-5. Following a positive demand shock that takes the economy from E0 to E1, the movement of the economy from E1 to E2 indicates that

Accepted Answer

A)  a demand shock can keep real GDP above potential output permanently. 
B)  an increase in the price level causes the AS curve to shift to the left. 
C)  an increase in the price level causes the AD curve to shift to the left. 
D)  the economy cannot return to potential output without government intervention. 
E)  the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

Question 6

The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.
  FIGURE 24-3
-Refer to Figure 24-3. Following the negative AD shock shown in the diagram from AD1 to AD2), the adjustment process will take the economy to a long-run equilibrium where the price level is and real GDP is .

Accepted Answer

A)  110; 1000 
B)  60; 1000 
C)  90; 900 
D)  110; 800 
E)  90; 1250

Question 7

Consider a simple macro model with demand-determined output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?

Accepted Answer

A)  MPC = 0.8, t = 0.2, m = 0.3 
B)  MPC = 0.7, t = 0.3, m = 0.2 
C)  MPC = 0.7, t = 0.1, m = 0.4 
D)  MPC = 0.9, t = 0.2, m = 0.4 
E)  MPC = 0.8, t = 0.1, m = 0.2

Question 8

Consider the basic AD/AS macro model in long -run equilibrium. An expansionary AD shock would have
Output effect in the short run and output effect in the long run.

Accepted Answer

A)  a positive; no 
B)  a positive; a positive 
C)  no; a positive 
D)  no; no 
E)  not enough information to know

Question 9

Consider a simple macro model with demand-determined output. Which of the following parameters will produce the most stable real GDP in the face of autonomous expenditure shocks?

Accepted Answer

A)  MPC = 0.8, t = 0.2, m = 0.3 
B)  MPC = 0.7, t = 0.3, m = 0.2 
C)  MPC = 0.7, t = 0.1, m = 0.4 
D)  MPC = 0.9, t = 0.2, m = 0.4 
E)  MPC = 0.8, t = 0.1, m = 0.2

Question 10

Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts leftward unexpectedly, the fiscal policy may be , and real GDP may
Potential GDP.

Accepted Answer

A)  too weak; stay below 
B)  too weak; rise above 
C)  too strong; stay below 
D)  too strong; rise above 
E)  appropriate; equal

Question 11

FIGURE 24-2
-Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for attaining potential output Y*) is an)

Accepted Answer

A)  increase in personal and corporate tax rates. 
B)  increase in government spending. 
C)  increase in current consumption. 
D)  decrease in personal and corporate taxes. 
E)  decrease in current imports.

Question 12

Consider the basic AD/AS macro model in long -run equilibrium. An expansionary AD shock will the price level and output in the short run. In the long run, the price level will and output will
)

Accepted Answer

A)  decrease; decrease; decrease further; decrease further 
B)  decrease; decrease; decrease further; be restored to potential output 
C)  increase; increase; increase further; increase further 
D)  increase; decrease; increase further; be restored to potential output 
E)  increase; increase; increase further; be restored to potential output

Question 13

The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.  TABLE 24-1
-Refer to Table 24-1. Consider Economy E. Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy?

Accepted Answer

A)  The AD curve has shifted to the right and the economy is in a short-run disequilibrium position. 
B)  The AS curve has shifted to the left and the economy is in a short-run disequilibrium position. 
C)  The intersection of the AD and AS curves is to the right of Y*. 
D)  The intersection of the AD and AS curves is to the left of Y*. 
E)  The intersection of the AD and AS curves coincide with the long-run aggregate supply curve.

Question 14

If the short-run macroeconomic equilibrium occurs with real GDP less than Y*, the economy is

Accepted Answer

A)  at its full-employment level of output. 
B)  experiencing a recessionary gap. 
C)  experiencing an inflationary gap. 
D)  threatened with an acceleration of inflation. 
E)  operating at full capacity.

Question 15

Which of the following statements about fiscal policy is the best example of ʺgross tuningʺ?

Accepted Answer

A)  The government continuously alters its spending and taxing plans to hold real GDP at potential. 
B)  The government cuts taxes to remove a large and persistent recessionary gap. 
C)  The government increases its spending to reduce an inflationary gap. 
D)  The government decreases tax rates to decrease an inflationary gap. 
E)  The government uses automatic stabilizers to reduce any output gaps.

Question 16

Consider the AD/AS macro model. The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in

Accepted Answer

A)  the AS curve. 
B)  potential GDP. 
C)  either the AS curve or potential GDP. 
D)  either the AD or AS curves. 
E)  the intersection of the AD and AS curves.

Question 17

Suppose the economy has a high level of unemployment and a low level of aggregate output. Which of the following policies could the government implement to alleviate these conditions?

Accepted Answer

A)  an expansionary fiscal policy that increases tax rates 
B)  a contractionary fiscal policy that increases government purchases 
C)  automatic fiscal stabilizers 
D)  a contractionary fiscal policy that increases tax rates 
E)  an expansionary fiscal policy that increases government purchases

Question 18

FIGURE 24-1
-Refer to Figure 24-1. If the economy is currently producing output of Y0, the economyʹs automatic adjustment process will have the

Accepted Answer

A)  AS curve shifting to the right until point A is reached. 
B)  vertical line at Y* shifting to the left until it gets to Y0. 
C)  AD curve shifting to the right until point B is reached. 
D)  economy remaining where it is. 
E)  level of potential output falling.

Question 19

Consider the AD/AS model. Since output in the long run is determined by Y*, the only role of the AD curve is to determine the price level. This is true because

Accepted Answer

A)  Y* is independent of the price level. 
B)  the aggregate demand curve is vertical. 
C)  the aggregate demand curve is horizontal. 
D)  Y* depends on the price level. 
E)  the AS curve is upward sloping.

Question 20

What is meant by the term ʺstagflationʺ?

Accepted Answer

A)  the combination of falling real GDP and a rising price level 
B)  a persistent inflationary gap 
C)  a persistent recessionary gap 
D)  the sluggish downward wage adjustment in response to a recessionary gap 
E)  the combination of inflation and rising real GDP

Exam 24: From the Short Run to the Long Run: the Adjustment of Factor Prices

FIGURE 24-5 -Refer to Figure 24-5. If the economy is currently in equilibrium at E3, the concept of asymmetrical adjustment of the AS curve suggests that

The ʺlong-run aggregate supply curve,ʺ vertical at Y*, shows that

The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A. FIGURE 24-4 -Refer to Figure 24-4. The positive aggregate supply shock shown in the diagram results in a new short -run equilibrium where the price level is and real GDP is .

Fiscal policy refers to the

FIGURE 24-5 -Refer to Figure 24-5. Following a positive demand shock that takes the economy from E0 to E1, the movement of the economy from E1 to E2 indicates that

Consider a simple macro model with demand-determined output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?

Consider the basic AD/AS macro model in long -run equilibrium. An expansionary AD shock would have Output effect in the short run and output effect in the long run.

Consider a simple macro model with demand-determined output. Which of the following parameters will produce the most stable real GDP in the face of autonomous expenditure shocks?

Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts leftward unexpectedly, the fiscal policy may be , and real GDP may Potential GDP.

FIGURE 24-2 -Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for attaining potential output Y*) is an)

Consider the basic AD/AS macro model in long -run equilibrium. An expansionary AD shock will the price level and output in the short run. In the long run, the price level will and output will )