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

Question 1

Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap?

A)rising prices
B)increasing government purchases
C)decreasing investment
D)falling tax rates
E)decreasing wages

Answer 1

E

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

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.

Answer 2

A

Question 3

The Phillips curve describes the relationship between

A)inflation and interest rates.
B)aggregate expenditure and aggregate demand.
C)unemployment and the rate of change of wages.
D)the money supply and interest rates.
E)the output gap and potential GDP.

Answer 3

C

Question 4

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

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

Question 5

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 .

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 6

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

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

Question 7

In the long run in the AD/AS macro model we can say that

A)both real GDP and the price level are determined by Y*.
B)long- run real GDP is determined by Y* and the long- run price level by the AD curve.
C)long- run real GDP is determined by aggregate demand and the price level is determined solely by the AS curve.
D)both real GDP and the price level are determined by aggregate demand.
E)real GDP is determined by aggregate demand and the price level by Y*.

Question 8

If the economy is experiencing an inflationary output gap, the adjustment process operates as follows:

A)wages rise, unit costs rise, and the AS curve shifts leftward.
B)wages fall, unit costs fall, and the AS curve shifts rightward.
C)wages fall, unit costs rise, and the AS curve shifts leftward.
D)wages fall, unit costs fall, and the AD curve shifts rightward.
E)wages do not adjust, but the AD curve shifts to the right.

Question 9

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.

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

Question 10

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 .

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

Question 11

An inflationary output gap is characterized by

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 12

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

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 13

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

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 14

If the economy in the short run is experiencing a recessionary gap, we are likely to see

A)many workers receiving employment- insurance benefits.
B)rising output prices.
C)consumers optimistic about the future.
D)the number of employment- insurance recipients the lowest ever.
E)severe labour shortages.

Question 15

As the macro economy adjusts from the short run to the long run,

A)wages and other factor prices remain constant.
B)wages and other factor prices adjust to close output gaps.
C)aggregate supply shocks cause deviations from potential output.
D)aggregate demand shocks cause deviations from potential output.
E)potential output is adjusting to close inflationary or recessionary gaps.

Question 16

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

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

Question 17

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?

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 18

Consider an economy with a relatively steep AS curve. If the AD curve shifts to the left, then the price level will and national output will .

A)increase slightly; significantly decrease
B)increase slightly; significantly increase
C)increase sharply; increase slightly
D)fall sharply; decrease slightly.
E)fall sharply; will not change.

Question 19

If wages rise faster than increases in labour productivity, then unit labour costs will

A)not change because only total labour costs change.
B)rise and the AS curve will shift right.
C)fall and the AS curve will shift left.
D)fall and the AS curve will shift right.
E)rise and the AS curve will shift left.

Question 20

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

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 21

Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP

A)is determined by aggregate demand and the price level by potential output.
B)and the price level are determined by "long- run aggregate supply".
C)is determined by AD and the price level is determined by the AS curve.
D)and the price level are determined by aggregate demand.
E)is determined by potential output and the price level by aggregate demand.

Question 22

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

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 23

As a global recession began in late 2008, the governments of all major economies searched for policy responses to dampen the effects of the recession. In general, governments were aiming to

A)shift the AD curve to the left by decreasing tax rates.
B)shift the AD curve to the right through large increases in government spending.
C)increase potential GDP.
D)shift the AS curve to the right through large increases in government spending.
E)shift the AS curve to the left by increasing wage rates.

Question 24

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

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 25

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

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 26

The Phillips curve provides a theoretical link between

A)inflation and the demand for money.
B)the goods market and the labour market.
C)the liquidity preference and investment demand schedules.
D)the goods market and productivity.
E)labour markets and foreign- exchange markets.

Question 27

The growth rate of potential output might be decreased by an expansionary fiscal policy if

A)the policy crowds out private investment.
B)public investment has high productivity.
C)the simple multiplier is small.
D)the composition of output is not altered.
E)the budget deficits are persistent.

Question 28

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 .

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 29

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

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

Question 30

An inflationary output gap occurs when

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 31

Which of the following describes the distinction between the Phillips curve and the AS curve?

A)There is no distinction: the two curves are essentially the same thing.
B)The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis.
C)The AS curve has the rate of price inflation on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis.
D)The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of change in the interest rate on the vertical axis.
E)The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis.

Question 32

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

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 33

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

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

Question 34

Income taxes in Canada can be considered to be automatic stabilizers because tax

A)revenues increase when income increases, thereby offsetting some of the increase in aggregate demand.
B)revenues are changed through discretionary fiscal policy to keep the budget balanced.
C)structures can be changed when the Minister of Finance brings down a budget.
D)revenues decrease when income increases, thereby intensifying the increase in aggregate demand.
E)revenues are changed through discretionary fiscal policy to create surpluses in recessions.

Question 35

Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will

A)allow a stable expansion of real income over time.
B)be negated in the long run, through the economy's adjustment process.
C)result in a price level lower than that preceding the demand shock.
D)always reverse itself.
E)set off an endless cycle of price rises and increases in unemployment.

Question 36

The economy's output gap is defined as the

A)difference between actual national income and desired aggregate expenditure.
B)result of economic growth.
C)difference between nominal GDP and real GDP.
D)level of total output that would be produced if capacity utilization is at its normal rate.
E)difference between actual GDP and potential GDP.

Question 37

Which of the following statements about output gaps is true?

A)When actual GDP is above potential GDP, there is upward pressure on wages.
B)When actual GDP is above potential GDP, there is downward pressure on output prices.
C)When actual GDP is above potential GDP, there is downward pressure on wages.
D)When actual GDP is below potential GDP, there is upward pressure on wages.
E)When actual GDP is below potential GDP, there is upward pressure on output prices.

Question 38

A common assumption among macroeconomists is that when real GDP is less than potential output, factor prices adjust and the

A)AS curve shifts to the left fairly rapidly.
B)AS curve shifts to the right very rapidly.
C)AS curve shifts to the right only very slowly.
D)AD curve shifts to the left rapidly.
E)none of the above -- the AS curve remains unchanged.

Question 39

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.

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

Question 40

A recessionary output gap implies that

A)there is excess demand for most factors of production .
B)the intersection of AD and AS occurs where real GDP exceeds potential output.
C)the economy's resources are being used at more than their normal capacity.
D)the demand for all factor services will be relatively low.
E)there is upward pressure on wages.

Question 41

Following any AD or AS shock, economists typically assume that the adjustment process continues until

A)the output gap is at a stable level.
B)factor prices have returned to their levels previous to the shock.
C)Y* adjusts to its long- run equilibrium level.
D)the AD and AS curves intersect each other at the correct price level.
E)real GDP returns to Y*.

Question 42

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 .

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 43

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

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 44

The experience of many economies suggests that

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 45

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?

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 46

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, .

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 47

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

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

Question 48

Suppose that the government announces temporary tax cuts to stimulate consumers' consumption expenditures but the impact of this tax change on consumption is observed to be very small. This outcome might be explained by the fact that

A)this economy is suffering from the paradox of thrift.
B)the government has little credibility.
C)this economy is already at its long- run equilibrium.
D)the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their "lifetime" income.
E)the impact of the policy is dampened by the automatic fiscal stabilizers.

Question 49

Consider a simple macro model with demand- determined output. Which of the following parameters will produce the strongest automatic stabilizer?

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

Question 50

Suppose the economy begins in a long- run equilibrium with Y = Y*. A permanent increase in aggregate demand will have its short- run effect on real GDP reversed in the long run with a shift of _ .

A)leftward; the aggregate demand curve
B)rightward; the aggregate demand curve
C)leftward; the aggregate supply curve
D)rightward; the aggregate supply curve
E)rightward; Y*

Question 51

The paradox of thrift does not exist in the long run because

A)aggregate supply has an impact on real GDP only in the short run.
B)changes in aggregate demand have no impact on real GDP in the long run.
C)potential output is determined by changes in the price level.
D)not everyone increases saving in the long run.
E)everyone increases consumption in the long run.

Question 52

Consider the AD/AS model after factor prices have fully adjusted to output gaps. An increase in the level of potential output, with aggregate demand constant, will

A)decrease real GDP and the price level.
B)decrease real GDP and raise the price level.
C)increase real GDP and lower the price level.
D)affect only the price level.
E)affect only the level of real GDP.

Question 53

If the short- run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is

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

Question 54

Suppose Canada's economy is in a long- run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, _ . In the long run, _ .

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

Question 55

A recessionary output gap is characterized by

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

Question 56

In any decision about stimulating the economy with a fiscal expansion (increasing government purchases), the government must weigh the short- run benefits of against the long- run costs of .

A)increased economic activity; lower economic growth
B)increased potential output; a higher price level
C)a higher price level; unemployment
D)increased real GDP; higher economic growth
E)a higher price level; lower real GDP

Question 57

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

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 58

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

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 59

Fiscal policy refers to the

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 60

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?

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 61

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?

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 62

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

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 63

Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap?

A)declining government purchases
B)rising wages
C)falling prices
D)increasing investment
E)increasing tax rates

Question 64

"Automatic fiscal stabilization" in the economy refers to

A)all discretionary fiscal policies.
B)the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap.
C)the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap.
D)the properties of government spending and taxation that cause the simple multiplier to be increased.
E)the properties of government spending and taxation that cause the simple multiplier to be reduced.

Question 65

A reduction in the net tax rate might lead to an increase in the growth rate of potential output if

A)households are not forward looking.
B)the tax cuts stimulate private investment.
C)firms are operating at their normal capacity.
D)the marginal propensity to consume is large.
E)the simple multiplier is large.

Question 66

The "asymmetry" in the behaviour of the AS curve implies that

A)unemployment can persist for a while without causing large decreases in wages and prices.
B)wages are very flexible in the downward direction.
C)wages and prices are equally sticky in both directions.
D)booms can persist for a long time without causing increases in wages and prices.
E)prices are sticky but wages are not.

Question 67

An important automatic fiscal stabilizer in Canada is

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 68

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?

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 69

An inflationary output gap implies that

A)the demand for all factor services will be relatively low.
B)there is excess supply of most factors of production .
C)there is a pressure for wages to decrease.
D)the economy's resources are being used beyond their normal capacity.
E)the intersection of AD and AS occurs at real GDP below potential output.

Question 70

Automatic fiscal stabilizers are most helpful in

A)making discretionary fiscal policy effective.
B)reducing the intensity of business cycles.
C)removing persistent output gaps.
D)promoting economic growth.
E)eliminating price fluctuations in the economy.

Question 71

Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will

A)decrease real output and leave the price level unchanged.
B)leave real output unaffected and increase the price level.
C)decrease real output and decrease the price level.
D)decrease real output and increase the price level.
E)increase real output and decrease the price level.

Question 72

Which of the following is a defining characteristic of the AD/AS macro model in the long run?

A)the level of potential output is constant
B)technology used in production is constant
C)factor supplies are assumed to be fixed
D)factor prices are assumed to be fixed
E)changes in real GDP are determined by the changes in potential output

Question 73

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

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

Question 74

An economy may not quickly and automatically eliminate a recessionary output gap because wages

A)have a tendency to rise too quickly.
B)have a tendency to be sticky downward.
C)never change in response to changes in the demand for labour.
D)are flexible but prices have a tendency to be sticky downward.
E)have a tendency to fall too quickly.

Question 75

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

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 76

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

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

Question 77

The main source of increases in material living standards over the long term is the

A)continual increase in potential national income.
B)continuous outward shift of aggregate demand.
C)positive slope of the aggregate supply curve.
D)maintenance of a continuous inflationary gap.
E)continual avoidance of recessionary gaps.

Question 78

Consider an economy with a relatively steep AS curve. If there is a shift to the right in the AD curve, there will be a _ in the price level and _ in national output.

A)large increase; a small decrease
B)small increase; a large increase
C)large increase; a small increase
D)large increase; no change
E)small increase; a large decrease

Question 79

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 right unexpectedly, the fiscal policy may be , and real GDP may _ _ potential GDP.

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

Question 80

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

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