Deck 25: The Difference Between Short-Run and Long-Run Macroeconomics

Question 1

Consider a small economy where factor supply is 1000 units, the factor utilization rate is 0.9 and a simple measure of productivity (GDP per factor employed)is $80. This economy's GDP is

A)$72 000
B)$7200
C)$88 888
D)$90 000
E)$80 000

Answer 1

A

Question 2

In the short run, aggregate demand and aggregate supply shocks cause output gaps, which in turn, cause fluctuations in

A)productivity.
B)the natural rate of unemployment.
C)factor supply.
D)the normal factor utilization rate.
E)the factor utilization rate.

Answer 2

E

Question 3

The level of aggregate output is determined in the short run by but in the long run by the level of .

A)the output gap; factor productivity
B)the AD and AS curves; Y*
C)the AS curve; potential output
D)the AD curve; interest rates
E)the AD and AS curves; factor utilization

Answer 3

B

Question 4

Other things being equal, a country with a high national saving rate may have a long- run growth rate because more saving increases the .

A)high; availability of funds, thus lowering the interest rate
B)high; wealth of people and increases future consumption
C)low; unemployment and decreases wages in the long run
D)high; interest rate and encourages more investment
E)low; consumption in the long run

Question 5

Which of the following provides the best explanation for why GDP may increase over long periods of time?

A)increase in mortality rates
B)increase in interest rates
C)increase in emigration
D)increase in unemployment
E)increase in capital stock

Question 6

Consider the equation GDP = F × (F_E/F)× (GDP/F_E). Which component describes the amount of output produced per unit of input employed?

A)F
B)F_E C)(GDP/F_E)
D)(F_E/F)
E)GDP

Question 7

Consider the basic AD/AS model. In the short run, a shift of the aggregate supply curve would lead to a change in real GDP by mostly changing

A)the level of investment.
B)the prices of factors of production.
C)the productivity of capital.
D)the amount of labour employed.
E)the amount of land (natural resources)available to the economy.

Question 8

GDP can be represented by the equation: GDP = F x (Fe/F)x (GDP/Fe), where F represents the total factor supply and Fe represents the number of employed factors. The term (GDP/Fe)represents

A)factor utilization.
B)average factor productivity.
C)income per person.
D)output per capital.
E)factor supply per level of output.

Question 9

An estimate for the value of potential GDP can be generated by observing and recording

A)the economy's total supply of factors, their normal rates of utilization, and factor productivity.
B)the economy's total output, its total cost and demand for that output.
C)the economy's total supply of factors, the costs of those factors, and their productivity.
D)the total available capacity for production in the Canadian economy.
E)the level of actual GDP when the unemployment rate is zero.

Question 10

Suppose that real GDP in an economy is $750 000 and real GDP per worker is $250. If the employment rate in this economy is 80 percent, then there are

A)600 000 people in the labour force in this economy.
B)150 000 people in the labour force in this economy.
C)3000 people in the labour force in this economy.
D)33 000 people in the labour force in this economy.
E)3750 people in the labour force in this economy.

Question 11

Many economists argue that Japan's remarkable long- run growth rate between 1950 and 1990 was largely due to Japan's

A)skilled labour force that developed over those forty years.
B)high consumption rate for high quality electronic products.
C)high national saving rate.
D)excessive amounts of money invested into research and development.
E)restrictive trade barriers which eliminated foreign competition.

Question 12

Which of the following may increase real GDP in the short run but may actually decrease the long- run growth rate of GDP?

A)increase in factor- utilization rates in the short run
B)increase in the unemployment rate
C)increase in factor supplies
D)decrease in households' desired saving
E)decrease in factor productivity

Question 13

Changes in any of the following variables contribute to changes in GDP. Which one typically changes most over short periods of time?

A)the labour- force participation rate
B)the number of workers who are available to work and the output produced per worker
C)the number of workers who are available to work
D)the number of employed workers as a portion of the number of workers available to work
E)the output produced per worker

Question 14

A low factor- utilization rate describes _ in factor markets, which causes factor prices to and shifts the aggregate supply curve to the .

A)excess supply; fall; left
B)excess supply; rise; right
C)excess demand; fall; right
D)excess demand; rise; right
E)excess supply; fall; right

Question 15

GDP can be represented by the equation: GDP = L x [E/L] x [GDP/E] where L is the total supply of labour and E is the level of employment. In this equation, the term [GDP/E] represents

A)the ratio of the population unemployed.
B)the productivity of labour.
C)one minus the unemployment rate.
D)output per unit of capital.
E)the unemployment rate.

Question 16

Suppose GDP in an economy is $144 000 , the unemployment rate is 10 percent and there are 8000 people in the labour force. Calculate the GDP per worker for this economy.

A)$10
B)$14.40
C)$18
D)$20
E)$80

Question 17

The average rate of productivity growth in Canada over the past few decades has been about

A)15 percent per year.
B)0.2 percent per year.
C)1.5 percent per year.
D)25 percent per year.
E)5 percent per year.

Question 18

GDP can be represented by the equation: GDP = F x (Fe/F)x (GDP/Fe). In this equation, the term (Fe/F)represents

A)the factor- utilization rate.
B)output per capital.
C)factor supply per level of output.
D)factor productivity.
E)income per person.

Question 19

Inflationary gaps are typically associated with

A)excess supply of factors and lower- than- normal factor- utilization rates.
B)excess supply of factors and normal factor- utilization rates.
C)excess demand for factors and lower- than- normal factor- utilization rates.
D)excess demand for factors and higher- than normal factor- utilization rates.
E)excess supply of factors and higher- than- normal factor- utilization rates.

Question 20

Consider a small economy where factor supply is 4000 units, the factor utilization rate is 0.8 and a simple measure of productivity (GDP per factor employed)is $50. This economy's GDP is

A)$200 000
B)$320 000
C)$160 000
D)$40 000
E)$500 000

Question 21

In Canada, the labour- force participation rate is about

A)92 percent.
B)66 percent.
C)76 percent.
D)90 percent.
E)86 percent.

Question 22

In the long run, changes to real GDP are most likely to be caused by an increase in

A)factor prices.
B)factor productivity.
C)interest rates.
D)desired consumption.
E)factor- utilization rates.

Question 23

Relatively small annual changes in factor productivity are

A)thought to be an important cause of long- run economic growth.
B)always cancelled out by changes in the growth in factor supplies.
C)the only important source of changes in potential GDP.
D)easy to calculate across many industries.
E)not important to long- run growth but are the dominant source of short- run changes in GDP.

Question 24

A former Governor of the Bank of Canada argued that high interest rates tend to accompany high inflation because inflation

A)reduces banks' profits who then respond by lowering their lending rates.
B)erodes the value of the dollar and therefore lenders need to be compensated through higher interest rates.
C)causes the Canadian dollar to appreciate which again fuels inflation even more.
D)lowers short term interest rates and acts as an incentive to borrow money.
E)increases housing prices so younger Canadians are made worse off.

Question 25

For the economy as a whole, changes in the factor- utilization rate are associated with short- run fluctuations in output because

A)it is cheaper for firms to let their inventories accumulate than to employ more workers.
B)factor prices can only fully adjust in the long run.
C)firms cannot change their prices in the short run.
D)potential output is affected by the factor- utilization rate in the short run.
E)the short- run fluctuations in factor supplies and productivity cancel each other out.

Question 26

GDP can be represented by the equation: GDP = F x (Fe/F)x (GDP/Fe). This equation tells us that real aggregate output can be expressed as factor

A)price times the utilization rate times GDP per capita.
B)utilization times equilibrium factor price times factor productivity.
C)supply times the equilibrium factor price times GDP per capita.
D)supply times the factor- utilization rate times factor productivity.
E)supply times equilibrium factor price times factor productivity.

Question 27

When accounting for changes in real GDP, changes in the factor- utilization rate are most important in the

A)long run because firms adapt to wage changes and hire more workers.
B)short run because firms immediately build new plants to satisfy changes in demand.
C)long run because firms need time to hire more workers or acquire additional capital.
D)short run because firms need time to adjust their price lists.
E)short run because firms react to changes in demand by increasing production from existing facilities.

Question 28

Which of the following statements describes a possible self- fulfilling prophesy in the short run involving households' behaviour? A belief of an impending recession leads households

A)to increase their registration in post- secondary institutions to reduce their risk of being unemployed.
B)to increase their desired saving.
C)to increase their desired consumption.
D)to decrease their desired saving.
E)to increase the autonomous portion of their desired consumption..

Question 29

An economy's stock of capital increases directly because of

A)a decrease in business cycles.
B)a positive flow of investment.
C)high levels of immigration.
D)an increase in interest rates.
E)low levels of saving.

Question 30

A former governor of the Bank of Canada argued that interest rates must be increased in order to reduce inflation, and this would ultimately result in lower interest rates. This apparent contradiction can be explained by noting that

A)increasing interest rates increases inflation in the short run, but decreases inflation in the long run.
B)higher interest rates in the short run put downward pressure on inflation which, in turn, lowers demand for borrowed funds, thus decreasing interest rates in the long run.
C)higher interest rates promote saving which increases the supply of funds for lending and, other things constant, drives the "price" of borrowing down.
D)the Governor of the Bank of Canada is typically a patronage appointment with little formal training or knowledge of economic theory.
E)interest rates move in cycles and therefore tend to rise before they fall.

Question 31

GDP can be represented by the equation: GDP = L x [E/L] x [GDP/E]. In this equation, the term [E/L] represents

A)the ratio of the population unemployed.
B)the level of employment at a given period of time.
C)the labour force.
D)the productivity of labour.
E)one minus the unemployment rate.

Question 32

Potential GDP is defined as the level of aggregate output at which

A)there is only cyclical and frictional unemployment, and capital equipment is being used at 100 percent capacity.
B)all factors of production are employed at their "normal" utilization rates.
C)the unemployment rate is zero.
D)there is only cyclical and structural unemployment.
E)all factors of production are employed at 100 percent capacity.

Question 33

In the long run, many economists argue that fiscal policy is ineffective because it has little effect on

A)potential GDP.
B)the inflation rate.
C)the price level.
D)nominal GDP.
E)nominal interest rates.

Question 34

In the long run, increases in potential GDP are possible only if there is

A)growth in the supply of available factors or growth in factor productivity.
B)continuous growth in the saving rate.
C)an increase in the unemployment rate.
D)an increase in the general price level.
E)no government interference with the market system.

Question 35

On the basis of both theory and empirical evidence, most economists believe that changes in fiscal policy have

A)powerful effects on real GDP and factor prices both in the short run and in the long run.
B)important short- run effects on real GDP and factor utilization but are less effective in changing potential GDP in the long run.
C)no effect on factor utilization in the short run or on factor prices in the long run.
D)long- run effects on potential GDP but have little impact on short- run real GDP.
E)major effects on the incentive to save in the short run.

Question 36

A decrease in long- run real GDP (potential GDP)would be most likely caused by a (an)

A)increase in factor- utilization rates.
B)increase in unemployment rates.
C)decrease in unemployment rates.
D)decrease in interest rates.
E)decrease in factor productivity.

Question 37

Changes in factor- utilization rates are considered important for explaining short- run changes in real GDP because

A)additions to the labour force occur more frequently than changes in the utilization rate .
B)changes to the capital stock are almost impossible to make in the short run.
C)the employment ratio of labour and the amount of excess capacity respond quickly to changes in aggregate demand or supply.
D)land and capital can change only in the short run.
E)wages increase and decrease rapidly in the short run, dampening the effect of factor utilization.

Question 38

A characteristic of the short run in macroeconomics is that

A)actual GDP is always growing at the same rate as potential GDP.
B)the output gap opens or closes as the economy moves through the phases of the business cycle.
C)the output gap is constant because the capital stock cannot change.
D)actual GDP is always less than potential GDP.
E)actual GDP is always greater than potential GDP.

Question 39

Fiscal and monetary policies typically affect the short- run level of GDP because they cause shifts in the but they will not generally have any long- run effects on real GDP unless they affect .

A)AD curve; the level of potential output
B)AS curve; factor- utilization rates
C)AS curve; factor supplies or factor productivity
D)AD curve; factor- utilization rates
E)AD curve; the unemployment rate

Question 40

Suppose there are 7000 people in the labour force of an economy and the unemployment rate is 6 percent. If GDP per worker in this economy is $15, then GDP is equal to

A)$6300.
B)$12 800.
C)$35 000.
D)$98 700.
E)$105 000.

Question 41

Consider an economy in long- run equilibrium where factor supply is 2.5 million units, the factor utilization rate is 0.85 and a simple measure of productivity (GDP per factor employed)is $200. Now suppose that, other things being equal, the productivity measure rises to $210. The effect of this change will be

A)an increase in this economy's potential output, and an adjustment back to its original level after factor prices have adjusted.
B)a rightward shift of the aggregate supply curve, and an adjustment back to Y*.
C)an inflationary gap caused by simultaneous rightward shifts of the aggregate demand and aggregate supply curves.
D)an increase in this economy's potential output in the long run.
E)a rightward shift of the aggregate demand curve due to the increased wealth of the private sector.

Question 42

Consider the equation GDP = F × (F_E/F)× (GDP/F_E). If the economy enters a recessionary gap because of a negative aggregate demand shock, the equation changes in which of the following ways?

A)the value of F_E/F falls as workers are laid off and equipment is used less intensively.
B)the value of F_E/F rises as the rate of unemployment rises.
C)the value of GDP/F_E falls as workers are laid off and equipment is used less intensively.
D)there are no short- run changes in this case.
E)the value of F falls as the rate of unemployment rises.

Question 43

GDP can be represented by the equation: GDP = F x (Fe/F)x (GDP/Fe). The term Fe represents

A)the factor- utilization rate.
B)factor productivity.
C)income per person.
D)output per capital.
E)the number of employed factors.

Question 44

The utilization rate for physical capital is called the

A)physical utilization rate.
B)normal utilization rate.
C)stock of capital utilization rate.
D)capacity utilization rate.
E)investment utilization rate.

Question 45

The study of the short run in macroeconomics focuses

A)equally on potential GDP and actual GDP.
B)primarily on changes to potential GDP.
C)primarily on changes to the output gap with less emphasis on changes to potential GDP.
D)primarily on changes to potential GDP with less emphasis on changes in actual GDP.
E)primarily on changes to actual GDP with no interest in the output gap.

Question 46

The study of the long run in macroeconomics focuses

A)primarily on changes to the output gap, with a constant level of potential output.
B)primarily on the supply of factors of production.
C)equally on potential GDP and actual GDP.
D)primarily on changes to potential GDP.
E)on changes to actual GDP but not on changes in potential GDP.

Question 47

Consider an economy where factor supply is 2.5 million units, the factor utilization rate is 0.85 and a simple measure of productivity (GDP per factor employed)is $200. This economy's GDP is

A)$2.125 million
B)$425 million
C)$200 million
D)$500 million
E)$525 million

Question 48

A decrease in short- run real GDP that leaves potential GDP unaffected would be most likely caused by a (an)

A)decrease in factor- utilization rates.
B)decrease in interest rates.
C)increase in factor productivity.
D)decrease in unemployment rates.
E)none of the above are likely to cause a reduction in real GDP.

Question 49

Long- run increases in real national income can generally be traced to

A)excess of demand in the labour market that increases employment.
B)growing availability of factors and/or growing factor productivity.
C)growing demand that lead to increases in output and prices.
D)growing demand which causes continuous growth in consumer spending.
E)growing supply because higher wages will increase the participation rate.

Question 50

For the economy as a whole, high rates of factor utilization are associated with

A)increasing unemployment rates.
B)downward pressure on wage rates.
C)downward shifts in the AS curve.
D)excess demand in factor markets.
E)excess supply in factor markets.

Question 51

In the short run, changes in real GDP are primarily determined by changes in factor- utilization rates which, in turn, are due to changes in

A)aggregate demand only.
B)aggregate supply only.
C)aggregate supply because when firms increase prices they are then willing to produce more.
D)aggregate demand because increases in demand will lead to increases in output.
E)both aggregate demand and aggregate supply.

Question 52

Changes in factor supplies have little influence on short- run GDP growth but are important to long- run growth in output because

A)additions to the labour force and capital stock happen only gradually over time.
B)land cannot be changed in the short run.
C)it is almost impossible to change the capital stock in the short run.
D)wages increase rapidly in the short run, thus dampening the growth of employment.
E)only aggregate demand is observed in the short run.

Question 53

Consider the equation GDP = F × (F_E/F)× (GDP/F_E). Which component describes the fraction of the available factors actually employed at any time?

A)(GDP/F_E)
B)(F_E/F)
C)GDP
D)F
E)F_E

Question 54

the productivity of factors of production.

A)3 only
B)1 only
C)2 only
D)2 and 3
E)1, 2, and 3

Question 55

Long- run increases in potential GDP would most likely be caused by a (an)

A)decrease in saving in the short run.
B)increased availability of key factors of production.
C)decrease in factor- utilization rates.
D)increases in the prices of factors of production such as wages or interest rates.
E)decrease in factor productivity.

Question 56

Which of the following policies is most likely to have an effect on GDP in the long run?

A)increase consumption
B)increase government purchases
C)increase labour productivity
D)reduce unemployment rates
E)change factor utilization rates

Question 57

An increase in potential GDP would most likely be caused by a (an)

A)increase in interest rates.
B)increase in factor productivity.
C)decrease in factor- utilization rates.
D)decrease in saving in the short run.
E)increase in the unemployment rate.

Question 58

On the basis of both theory and empirical evidence, most economists believe that changes in monetary policy have

A)important long- run effects by changing real interest rates.
B)no effect on real GDP or inflation in the long run.
C)no effect on real GDP or factor utilization in the short run.
D)no long- run effect on real GDP but a substantial long- run effect on inflation.
E)powerful effects on real GDP and factor prices both in the short run and in the long run.

Question 59

Since 1985, Canada's potential GDP has been

A)volatile, but with an upward trend.
B)rising steadily.
C)relatively stable.
D)falling steadily.
E)volatile, but with a downward trend.

Question 60

Economists can estimate the value of potential GDP by observing the amounts of available

A)inputs, their normal rates of utilization, and productivity.
B)inputs, their productivity, and demand.
C)inputs, their costs, and productivity.
D)output, its normal rates of utilization, and productivity.
E)output, its cost, and demand.

Question 61

When an economy experiences sustained growth in real GDP,

A)potential GDP is likely to be increasing.
B)wage rates will decrease slowly as factor- utilization rates decrease.
C)factor prices are likely to be decreasing.
D)actual GDP is greater than potential GDP.
E)actual GDP is less than potential GDP.

Question 62

An economy's current GDP is $100 billion, the labour force is composed of 2.2 million people, and 2 million people are employed. What is the economy's (approximate)labour productivity?

A)$5000
B)$50 000
C)0.91
D)0.45
E)$50

Question 63

GDP can be represented by the equation: GDP = F x (Fe/F)x (GDP/Fe). This equation tells us that any change in real GDP can be decomposed into changes in

A)factor supply, productivity and factor- utilization rates.
B)factor supply, productivity and the investment rate by businesses.
C)factor price, productivity and the investment rate by businesses.
D)factor price, productivity and factor- utilization rates.
E)factor supply, productivity and per capita consumption by households.

Question 64

An economy's current GDP is $100 billion, the labour force is composed of 2.2 million people, and 2 million people are employed. What is this economy's labour utilization rate?

A)0.91
B)0.2
C)0.45
D)4.4
E)0.22

Question 65

Consider the equation: GDP = L x [E/L] x [GDP/E] where L is the supply of labour and E is the level of employment. In this equation, the term [E/L] represents the

A)capital- utilization rate.
B)number of people employed.
C)the ratio of the population unemployed.
D)productivity of labour.
E)labour employment rate.