Question 1

The study of short- run cyclical fluctuations usually assumes, for simplicity, that there are no changes in

Accepted Answer

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

Question 2

Consider an AD/AS model in long- run equilibrium. An output gap, caused by a leftward shift of the AD curve, would be eliminated if

Accepted Answer

A) wages and other factor prices fell quickly. 
B) the AS curve shifted upward. 
C) real national income decreased. 
D) wages rose quickly. 
E) prices rose quickly.

Question 3

If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by

Accepted Answer

A) the aggregate expenditure curve shifting upward. 
B) the aggregate demand curve shifting to the left. 
C) the aggregate supply curve shifting to the left. 
D) a point to the right of the aggregate supply curve at potential GDP. 
E) the intersection of the AD and AS curves at potential output.

Question 4

An inflationary output gap is characterized by

Accepted Answer

A) constant prices. 
B) real GDP falling below potential output. 
C) falling prices. 
D) real GDP exceeding potential output. 
E) real output that varies one- for- one with aggregate demand.

Question 5

The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to their saving, but in aggregate this behaviour causes a recession.

Accepted Answer

A) increase; more severe 
B) increase; shorter 
C) decrease; less severe 
D) increase; less severe 
E) decrease, more severe

Question 6

What is sometimes called the "long- run aggregate supply curve" relates the aggregate price level to real GDP

Accepted Answer

A) when technology is allowed to change. 
B) in the short run. 
C) after factor prices have fully adjusted to eliminate output gaps. 
D) when wages are in adjustment but prices are unstable. 
E) when national income is at less than potential income.

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

Question 8

Consider the basic AD/AS macro model in long- run equilibrium. A negative AS shock will the price level and output in the short run. In the long run, the price level will
And output .

Accepted Answer

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

Question 9

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 .

Accepted Answer

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

Question 10

An important automatic fiscal stabilizer in Canada is

Accepted Answer

A) the income- tax system. 
B) the marginal propensity to import. 
C) government purchases of goods and services. 
D) the exchange rate. 
E) the marginal propensity to consume.

Question 11

Which of the following statements about fiscal policy is the best description of "fine tuning"?

Accepted Answer

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

Question 12

Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the the output gap being suffered, an argument supporting _ .

Accepted Answer

A) smaller; crowding out 
B) larger; fine tuning 
C) smaller; fine tuning 
D) larger; gross tuning 
E) larger; crowding out

Question 13

Automatic fiscal stabilizers the impact of demand or supply shocks on the economy since government's net tax revenues during booms and during recessions.

Accepted Answer

A) dampen; decrease; increase 
B) magnify; decrease; increase 
C) magnify; increase; decrease 
D) dampen; increase; decrease 
E) does not affect; are constant; are constant

Question 14

What is sometimes called the "long- run aggregate supply curve" shows the relationship between the price level and aggregate supply over a time period long enough to permit

Accepted Answer

A) population to increase. 
B) changes in technology to occur. 
C) changes in the size of the resource base to occur. 
D) wages and other factor prices to adjust. 
E) changes in the capital stock.

Question 15

Consider the basic AD/AS macro model, initially in a long- run equilibrium. A positive AS shock will the price level and output in the short run. In the long run, the price level will and output .

Accepted Answer

A) increase; increase; return to its initial level; will be restored to potential output 
B) increase; increase; decrease; will be restored to potential output 
C) decrease; increase; decrease further; will be restored to potential output 
D) decrease; decrease; decrease further; will decrease further 
E) decrease; increase; return to its initial level; will be restored to potential output

Question 16

An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment _ and, as a result, the future growth rate of .

Accepted Answer

A) is crowded out; potential output is reduced 
B) increases; aggregate demand increases 
C) is crowded out; corporate tax revenue is reduced 
D) rises to an unsustainable level; real GDP is reduced 
E) increases; net exports increases

Question 17

Suppose Canada's economy is in a long- run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, . In the long run, .

Accepted Answer

A) real GDP and the price level both rise; real GDP returns to its original level with a higher price level 
B) real GDP rises and the price level falls; real GDP and the price level return to their original levels 
C) real GDP and the price level both fall; real GDP is below its original level with a lower price level 
D) real GDP falls and the price level rises; real GDP is below its original level with a higher price level 
E) real GDP and the price level both rise; real GDP is above its original level with a higher price level

Question 18

The "long- run aggregate supply curve", vertical at Y* , shows that

Accepted Answer

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

Question 19

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

Question 20

Consider the simplest macro model with demand- determined output. Other things being equal, the the value of the simple multiplier, the stable is real GDP in response to shocks to autonomous spending

Accepted Answer

A) smaller; less 
B) larger; less 
C) smaller; more 
D) both B and C are correct 
E) larger; more

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