Question 1

Fiscal policy refers to the

Accepted Answer

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

Question 2

Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of

Accepted Answer

A) gross tuning. 
B) an execution lag. 
C) automatic fiscal stabilizers. 
D) a decision lag. 
E) fine tuning.

Question 3

In macroeconomic analysis, the assumption that potential output (Y*)is changing is a characteristic of

Accepted Answer

A) the adjustment process. 
B) the national accounts model. 
C) the business cycle model. 
D) the long run. 
E) the short run.

Question 4

Which of the following characteristics define the short run in macroeconomics?

Accepted Answer

A) Factor prices are exogenous, technology and factor prices are endogenous. 
B) Factor prices adjust to output gaps, and technology and factor supplies are constant. 
C) Factor prices are exogenous, and technology and factor supplies are changing. 
D) Factor prices are exogenous, and technology and factor supplies are constant. 
E) Factor prices adjust to output gaps, and technology and factor prices are changing.

Question 5

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

Question 6

The "asymmetry" in the behaviour of aggregate supply refers to the

Accepted Answer

A) different speeds at which the economy adjusts to positive and negative output gaps. 
B) different relative sizes of inflationary versus recessionary gaps. 
C) economy's path toward potential output. 
D) difference between actual and potential output. 
E) changing slope of the aggregate demand curve.

Question 7

Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of

Accepted Answer

A) automatic fiscal stabilizers. 
B) a decision lag. 
C) fine tuning. 
D) gross tuning. 
E) an execution lag.

Question 8

Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long- run effects on potential output?

Accepted Answer

A) The growth rate of potential output may be reduced due to the crowding out of investment. 
B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy. 
C) The level of potential output is fixed and will not be affected by fiscal policy. 
D) The growth rate of potential output will rise due to the higher level of aggregate demand. 
E) Potential output will drop below its starting point because of the crowding out of investment.

Question 9

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 the

Accepted Answer

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

Question 10

An inflationary output gap would generate which of the following conditions in the economy?

Accepted Answer

A) There is an unusually small demand for labour. 
B) Workers have a relatively large amount of bargaining power with employers. 
C) Firms are making low profits. 
D) There is much idle capacity. 
E) There is downward pressure on wages.

Question 11

What economists sometimes call the "long- run aggregate supply curve" is

Accepted Answer

A) vertical. 
B) negatively sloped. 
C) horizontal. 
D) positively sloped. 
E) non-linear.

Question 12

The wage- adjustment process is asymmetrical because

Accepted Answer

A) employers delay wage increases in a boom but lay off workers quickly during a slump. 
B) wages rise quickly in a boom but fall slowly during a slump. 
C) factor prices fluctuate more frequently than goods prices. 
D) goods prices rise more quickly than factor prices. 
E) taxes rise quickly in a boom but do not fall during a slump.

Question 13

An adjustment "asymmetry" in the aggregate supply curve is shown by

Accepted Answer

A) the difference in speed of decreases in output levels.. 
B) its concave shape. 
C) its convex shape. 
D) the difference in speed of increases in factor prices versus wage rates.. 
E) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps).

Question 14

The experience of many economies suggests that

Accepted Answer

A) upward pressures on wages are largely ineffective in booms. 
B) downward pressure on wages during slumps is not as intense as upward pressure on wages during booms. 
C) slumps and booms are not common; the economy is usually in equilibrium at potential output. 
D) unit labour costs fall quickly during booms. 
E) downward pressure on wages during slumps results in sharply increased labour costs.

Question 15

Consider the global recession that began in late 2008. In terms of the AD/AS model, which of the following statements best describes the macroeconomic effect on Canada's economy?

Accepted Answer

A) Potential GDP fell, which reduced actual national income. 
B) The AS curve shifted to the left due to increased factor prices, which created a recessionary gap. 
C) The AD curve shifted to the right due to reduced demand for Canadian exports, which created a recessionary gap. 
D) The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap. 
E) The AS curve shifted to the right due to increased factor prices, which created a recessionary gap.

Question 16

In the basic AD/AS model, which of the following is a defining characteristic of the adjustment process that takes the economy from the short run to the long run?

Accepted Answer

A) factor prices are assumed to respond to output gaps 
B) firms cannot operate near their normal capacity 
C) technology used in production is endogenous 
D) the level of potential output fluctuates with the price level 
E) factor supplies are assumed to be varying

Question 17

An inflationary output gap occurs when

Accepted Answer

A) potential GDP exceeds actual GDP. 
B) demand for labour services is very low. 
C) equilibrium national income is below potential national income. 
D) actual GDP exceeds potential GDP. 
E) nominal GDP exceeds real GDP.

Question 18

The associated with fiscal policy make(s) tuning difficult to implement successfully.

Accepted Answer

A) execution lag; gross 
B) execution and decision lags; fine 
C) execution lag; fine 
D) decision lag; fine 
E) decision lag; gross

Question 19

Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a shift in .

Accepted Answer

A) leftward; AS 
B) leftward; AD 
C) leftward; Y* 
D) rightward; AD 
E) rightward; AS

Question 20

In the basic AD/AS macro model, permanent increases in real GDP are possible only if

Accepted Answer

A) the economy's automatic stabilizers are allowed to operate. 
B) potential output is increasing. 
C) the correct fiscal policy is implemented. 
D) aggregate demand responds positively to demand shocks. 
E) the aggregate supply curve is vertical.

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