Question 1

If a consumer buys less gasoline because gas prices increased by 10 percent, even though all other prices have also increased by 10 percent, then

Accepted Answer

A)  the consumer is paying too close attention to changes in relative prices. 
B)  wages and prices are too flexible. 
C)  the consumer has been fooled by money illusion. 
D)  inflation is not a problem in the economy.

Question 2

A recessionary gap results when

Accepted Answer

A)  aggregate demand is below the level consistent with full employment. 
B)  aggregate demand is above the level consistent with full employment. 
C)  aggregate supply and aggregate demand are not in short-run equilibrium. 
D)  aggregate supply decreases.

Question 3

An unexpected event that causes the aggregate demand curve to shift inward or outward is an

Accepted Answer

A)  aggregate demand shock. 
B)  aggregate supply shock. 
C)  aggregate supply increase. 
D)  aggregate supply decrease.

Question 4

A recessionary gap is the amount by which

Accepted Answer

A)  total planned real expenditures exceed total planned production in the long run. 
B)  the short-run equilibrium level nominal GDP is above the short-run real GDP. 
C)  the short-run equilibrium level nominal GDP is below the short-run real GDP. 
D)  the short-run equilibrium level of real GDP is below the full-employment level of real GDP.

Question 5

Why is there NO persistent unemployment in the classical model?

Accepted Answer

A)  The wage level adjusts to eliminate unemployment. 
B)  The interest rate adjusts to eliminate unemployment. 
C)  The rate of economic growth is always high enough to allow those who want to work at current wages to find jobs. 
D)  Unionization creates job security for workers.

Question 6

In the Keynesian model, to understand the determination of income and employment it is necessary to understand

Accepted Answer

A)  how aggregate supply is determined. 
B)  how aggregate demand is determined. 
C)  how long-run aggregate supply is determined. 
D)  how interest rates are determined.

Question 7

Keynesian economists argue that

Accepted Answer

A)  equilibrium real GDP is demand-determined. 
B)  equilibrium real GDP is supply-determined. 
C)  equilibrium real GDP can be reached only in a theoretical economy. 
D)  reaching equilibrium real GDP always results in inflation.

Question 8

The simple Keynesian model assumes that

Accepted Answer

A)  gross private domestic investment exceeds net investment by the capital consumption allowance. 
B)  prices, especially the price of wages, are "sticky downward." 
C)  there will never be any excess capacity in the short run. 
D)  aggregate demand will always equal aggregate supply.

Question 9

In the short run, if aggregate demand shifts to the left while the position of the short-run aggregate supply curve does NOT change, then

Accepted Answer

A)  the level of economic activity rises. 
B)  a recessionary gap occurs. 
C)  there is no change in real GDP and the price level. 
D)  an inflationary gap occurs.

Question 10

There is a distinction between the long-run aggregate supply (LRAS) curve and the short-run aggregate supply (SRAS) curve. In the long run,

Accepted Answer

A)  technology is fixed, but not in the short run. 
B)  the price level is constant in the long run, but fluctuates in the short run. 
C)  the aggregate supply curve is horizontal, while in the short run it is upward sloping. 
D)  all adjustments to changes in the price level have been made, but in the short run all changes in the price level do not occur.

Question 11

A consumer who buys more coffee when the price of coffee falls 5 percent, while all other prices fell 5 percent too, is

Accepted Answer

A)  suffering from money illusion. 
B)  worrying too much about a coming recession. 
C)  behaving in accordance with classical economic theory. 
D)  paying too much attention to changes in relative prices.

Question 12

According to the classical model, investment

Accepted Answer

A)  is a function of real GDP. 
B)  is a function of the nominal GDP. 
C)  is inversely related to the interest rate. 
D)  is influenced by the money illusion at low income levels.

Question 13

An individual who suffers from money illusion will

Accepted Answer

A)  feel that a doubling of prices and income improves his economic position. 
B)  concentrate on relative prices. 
C)  never be fooled by the impact of price changes on the purchasing power of income. 
D)  try to use counterfeit money.

Question 14

-Refer to the above figure. Which of the graphs is consistent with the Keynesian short-run aggregate supply curve?

Accepted Answer

A)  Graph A 
B)  Graph B 
C)  Graph C 
D)  Graph D

Question 15

Which statement best characterizes the classical economists' view of saving and investment?

Accepted Answer

A)  Saving equals investment 
B)  Saving exceeds investment 
C)  Saving is less than investment 
D)  Saving and investment are not related to one another

Question 16

For several years, the U.S. unemployment rate has been below the European unemployment rate. Offer a Keynesian explanation for this.

Accepted Answer

The answer of For several years, the U.S. unemployment rate...

Question 17

A permanent reduction in international trade barriers would

Accepted Answer

A)  decrease long-run aggregate supply. 
B)  increase long-run aggregate supply. 
C)  decrease aggregate demand. 
D)  increase aggregate demand.

Question 18

An assumption of the classical model is that

Accepted Answer

A)  money illusion is widespread. 
B)  people make decisions based on nominal prices rather than real prices. 
C)  prices are flexible while wages are inflexible. 
D)  people are motivated by self-interest.

Question 19

In the classical model, what is the result of an increase in aggregate demand?

Accepted Answer

A)  Real GDP increases, and the price level remains constant. 
B)  Real GDP decreases, and the price level remains constant. 
C)  The price level increases, and real GDP remains constant. 
D)  The price level decreases, and real GDP remains constant.

Question 20

The long-run aggregate supply curve is vertical at $10 trillion, but the short-run aggregate supply curve intersects the aggregate demand curve at $12 trillion. From this, we know that

Accepted Answer

A)  the economy is operating below full capacity in the short run, and will have to adjust by hiring more workers, thus reducing unemployment. 
B)  the price level is too high. The only way long-run equilibrium can be restored is to lower the price level. 
C)  adjustments will have to occur so that the long-run aggregate supply equals $12 trillion. 
D)  adjustments will have to occur so that the short-run aggregate supply intersects the aggregate demand curve at $10 trillion.

Exam 11: Classical and Keynesian Macro Analyses