Chapter 24.1

Question 1

Which of the following are the defining assumptions of the short run in macroeconomics?
A) Factor prices are exogenous, and technology and factor supplies are changing.
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 constant.
D) Factor prices adjust to output gaps, and technology and factor prices are changing.
E) Factor prices are exogenous, technology and factor prices are endogenous.

Answer 1

C

Question 2

Which of the following are the defining assumptions of the long run in macroeconomics?
A) Factor prices are exogenous, and technology and factor supplies are changing.
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 constant.
D) Factor prices have fully adjusted to output gaps, and technology and factor supplies are changing.
E) Factor prices are exogenous, technology and factor prices are exogenous.

Answer 2

D

Question 3

In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of
A) the short run.
B) the adjustment process.
C) the national accounts model.
D) the long run.
E) the business cycle model.

Answer 3

D

Question 4

Which of the following is a defining assumption of the AD/AS macro model in the short run?
A) factor supplies are assumed to be flexible
B) technology used in production is endogenous and variable
C) the level of potential output fluctuates with the price level
D) factor prices are assumed to be exogenous
E) firms cannot operate near their normal capacity

Answer 4

D

Question 5

In the basic AD/AS model, which of the following is a defining assumption of the adjustment process that takes the economy from the short run to the long run?
A) factor supplies are assumed to be varying
B) technology used in production is endogenous
C) the level of potential output is changing
D) factor prices respond to output gaps
E) firms cannot operate near their normal capacity

Answer 5

D

Question 6

Which of the following is a defining assumption of the AD/AS macro model in the long run?
A) factor supplies are assumed to be fixed
B) technology used in production is constant
C) the level of potential output is constant
D) factor prices are assumed to be fixed
E) changes in real GDP are determined by the changes in potential output

Answer 6

E

Question 7

When we study the adjustment process in macroeconomics, what assumption are we making about potential output, Y*?
A) potential output is adjusting to changes in factor prices
B) potential output is adjusting to changes in factor supplies
C) potential output is adjusting to changes in technology
D) potential output is constant
E) potential output is not relevant to the analysis of the adjustment process

Answer 7

D

Question 8

When we study the adjustment process in macroeconomics, we are analyzing the process by which
A) potential output is adjusting to changes in factor supplies
B) potential output is adjusting to changes in technology
C) real GDP returns to the level of potential output.
D) real GDP expands over time.
E) changes in technology affect the level of real GDP.

Answer 8

C

Question 9

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

Answer 9

A

Question 10

Which of the following best describes the concept of potential output?
A) The total output that can be produced when all factors of production (land, labour, and capital) are fully employed.
B) The total output that can be produced when the economy is in short-run economic equilibrium.
C) The total output that can be produced when all productive resources (land, labour, and capital) are used at their maximum capacity.
D) The total output that could be produced in the future when technological advances allow for a higher level of output.
E) The total output that could be produced if no productive resource (land, labour, and capital) was ever left idle.

Answer 10

A

Question 11

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

Answer 11

A

Question 12

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

Answer 12

C

Question 13

A recessionary output gap implies that
A) the demand for all factor services will be relatively low.
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) there is upward pressure on wages.
E) there is excess demand for most factors of production.

Answer 13

A

Question 14

An inflationary output gap would generate which of the following conditions in the economy?
A) Firms are making low profits.
B) Workers have relatively more bargaining power with employers.
C) There is an unusually small demand for labour.
D) There is downward pressure on wages.
E) There is much idle capacity.

Answer 14

B

Question 15

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

Answer 15

D

Question 16

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

Answer 16

E

Question 17

Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap?
A) falling prices
B) increasing investment
C) declining government purchases
D) rising wages
E) increasing tax rates

Answer 17

D

Question 18

Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap?
A) rising prices
B) decreasing investment
C) increasing government purchases
D) falling tax rates
E) decreasing wages

Answer 18

E

Question 19

If the short-run macroeconomic equilibrium occurs with real GDP less than Y*, the economy is
A) at its full-employment level of output.
B) experiencing a recessionary gap.
C) experiencing an inflationary gap.
D) threatened with an acceleration of inflation.
E) operating at full capacity.

Answer 19

B

Question 20

If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is
A) at its full-employment level of output.
B) experiencing a recessionary output gap.
C) experiencing an inflationary output gap.
D) threatened with a demand shock.
E) operating at full capacity.

Answer 20

C

Question 21

If wages rise faster than increases in labour productivity, then unit labour costs will
A) fall and the AS curve will shift left.
B) fall and the AS curve will shift right.
C) rise and the AS curve will shift left.
D) rise and the AS curve will shift right.
E) not change because only total labour costs change.

Answer 21

C

Question 22

A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices rise and the
A) AS curve shifts to the left.
B) AD curve shifts to the right.
C) AS curve shifts to the right very rapidly.
D) AD curve shifts to the left rapidly.
E) none of the above - the AS curve remains unchanged.

Answer 22

A

Question 23

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

Answer 23

B

Question 24

If the economy is experiencing an inflationary output gap, the adjustment process operates as follows:
A) wages do not adjust, but the AD curve shifts to the right.
B) wages fall, unit costs fall, and the AD curve shifts rightward.
C) wages rise, unit costs rise, and the AS curve shifts leftward.
D) wages rise, unit costs rise, and the AS curve shifts rightward.
E) wages fall, unit costs fall, and the AS curve shifts rightward.

Answer 24

C

Question 25

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

Answer 25

D

Question 26

Refer to Figure 24-1. If the economy is currently in a short-run equilibrium at Y0, the economy is experiencing
A) a recessionary output gap.
B) an inflationary output gap.
C) a labour shortage.
D) a long-run equilibrium.
E) potential output growth.

Answer 26

A

Question 27

Refer to Figure 24-1. If the economy is currently producing output of Y0, the economy’s automatic adjustment process will have the
A) AS curve shifting to the right until point A is reached.
B) vertical line at Y* shifting to the left until it gets to Y0.
C) AD curve shifting to the right until point B is reached.
D) economy remaining where it is.
E) level of potential output falling.

Answer 27

A

Question 28

Refer to Figure 24-1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the
A) economy will eventually move to point B.
B) economy will move only slowly toward point A as wages slowly adjust.
C) economy will quickly move to point A.
D) level of output will decrease below Y0.
E) AD curve will eventually shift to the right and return the economy to its full-employment level of output.

Answer 28

B

Question 29

Refer to Figure 24-2. If the economy is currently in a short-run equilibrium at  , the economy is experiencing
A) potential output growth.
B) a long-run equilibrium.
C) an excess supply of labour.
D) an inflationary output gap.
E) a recessionary output gap.

Answer 29

D

Question 30

Refer to Figure 24-2. Suppose the economy is in equilibrium at Y1. The economy’s automatic adjustment process will restore potential output, Y*, through
A) wage increases and a leftward shift of the AS curve.
B) wage increases and a rightward shift in the AS curve.
C) wage decreases and a rightward shift of the AD curve.
D) an increase in potential GDP to intersect both the AD and AS curves at B.
E) a leftward shift of the AD to intersect both the AS and potential GDP at A.

Answer 30

A

Question 31

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

Answer 31

C

Question 32

The Phillips curve provides a theoretical link between
A) the liquidity preference and investment demand schedules.
B) labour markets and foreign-exchange markets.
C) the goods market and productivity.
D) the goods market and the labour market.
E) inflation and the demand for money.

Answer 32

D

Question 33

Which of the following describes the distinction between the Phillips curve and the AS curve?
A) The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis.
B) 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.
C) 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.
D) 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.
E) There is no distinction: the two curves are essentially the same thing.

Answer 33

C

Question 34

If the economy in the short run is experiencing a recessionary gap, we are likely to see
A) severe and widespread labour shortages.
B) quickly rising output prices.
C) an increase in the number of workers receiving employment-insurance benefits.
D) the number of employment-insurance recipients the lowest ever.
E) consumers optimistic about the future.

Answer 34

C

Question 35

Which of the following statements about output gaps is true?
A) When actual GDP is below potential GDP, there is upward pressure on wages.
B) When actual GDP is below potential GDP, there is upward pressure on output prices.
C) When actual GDP is above potential GDP, there is downward pressure on wages.
D) When actual GDP is above potential GDP, there is downward pressure on output prices.
E) When actual GDP is above potential GDP, there is upward pressure on wages.

Answer 35

E

Question 36

Consider the basic AD/AS diagram. The vertical line at Y* shows the relationship between the price level and the amount of output ________ have adjusted to output gaps.
A) demanded by households after all factor prices
B) supplied by firms after all factor prices
C) demanded by households before all factor prices
D) supplied by firms before all factor prices
E) supplied by firms after all output prices

Answer 36

B

Question 37

As the macro economy adjusts from the short run to the long run,
A) wages and other factor prices adjust to close output gaps.
B) potential output is adjusting to close inflationary or recessionary gaps.
C) wages and other factor prices remain constant.
D) aggregate demand shocks cause deviations from potential output.
E) aggregate supply shocks cause deviations from potential output.

Answer 37

A

Question 38

Following any AD or AS shock, economists typically assume that the adjustment process continues until
A) the AD and AS curves intersect each other at the correct price level.
B) real GDP returns to Y.
C) factor prices have returned to their levels previous to the shock.
D) Y adjusts to its long-run equilibrium level.
E) the output gap is at a stable level.

Answer 38

B

Question 39

Refer to Table 24-1. Which of the economies is operating at its long-run equilibrium?
A) Economy A
B) Economy B
C) Economy C
D) Economy D
E) Economy E

Answer 39

C

Question 40

Refer to Table 24-1. Which of the economies are experiencing an inflationary gap?
A) Economies A and B
B) Economies B and C
C) Economies C and D
D) Economies D and E
E) none of the economies

Answer 40

D

Question 41

Refer to Table 24-1. Which of the following statements best describes the situation facing Economy B?
A) There is a recessionary gap of $40 billion and wages are falling slowly.
B) There is an inflationary gap of $40 billion and wages are rising.
C) There is a recessionary gap of $20 billion and wages are falling slowly.
D) There is no output gap and wages are stable.
E) There is an output gap of $20 billion and wages are rapidly adjusting.

Answer 41

C

Question 42

Refer to Table 24-1. Consider Economy E. Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy?
A) The AD curve has shifted to the right and the economy is in a short-run disequilibrium position.
B) The AS curve has shifted to the left and the economy is in a short-run disequilibrium position.
C) The intersection of the AD and AS curves is to the right of Y.
D) The intersection of the AD and AS curves is to the left of Y.
E) The intersection of the AD and AS curves coincide with the long-run aggregate supply curve.

Answer 42

C

Question 43

Refer to Table 24-1. How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E?
A) The size of the output gap is the same in Economies A and E, but wages are rising in A and falling in E.
B) The output gap is larger in Economy A, yet wages are changing more slowly.
C) The output gap is much larger in Economy E, so wages are changing at a faster rate.
D) The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E.
E) There is insufficient data with which to observe the adjustment asymmetry.

Answer 43

D

Question 44

Refer to Table 24-1. Which of the following statements explains why wages are rising in Economy E?
A) The inflationary gap generates lower profits for firms because workers are demanding higher wages.
B) The inflationary gap generates excess demand for labour, which causes wages to rise.
C) The aggregate supply curve is shifting to the right, which is causing wages to rise.
D) The aggregate demand curve is shifting to the right, causing wages to rise.
E) Potential output is rising, putting upward pressure on wages.

Answer 44

B

Question 45

Refer to Table 24-1. In which economy is there the most unused capacity?
A) Economy A
B) Economy B
C) Economy C
D) Economy D
E) Economy E

Answer 45

A

Question 46

Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level increases. We can conclude that \_\_\_\_\_\_\_\_ has increased and there is now a(n) \_\_\_\_\_\_\_\_ gap.
A) aggregate supply; inflationary
B) aggregate demand; recessionary
C) aggregate supply; recessionary
D) aggregate demand; inflationary

Answer 46

D

Question 47

Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate increases and the price level increases. We can conclude that \_\_\_\_\_\_\_\_ has decreased and there is now a(n) \_\_\_\_\_\_\_\_ gap.
A) aggregate supply; inflationary
B) aggregate demand; recessionary
C) aggregate supply; recessionary
D) aggregate demand; inflationary

Answer 47

C

Question 48

Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level decreases. We can conclude that \_\_\_\_\_\_\_\_ has increased and there is now a(n) \_\_\_\_\_\_\_\_ gap.
A) aggregate supply; inflationary
B) aggregate demand; recessionary
C) aggregate supply; recessionary
D) aggregate demand; inflationary

Answer 48

A

Question 49

Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate increases and the price level decreases. We can conclude that \_\_\_\_\_\_\_\_ has decreased and there is now a(n) \_\_\_\_\_\_\_\_ gap.
A) aggregate supply; inflationary
B) aggregate demand; recessionary
C) aggregate supply; recessionary
D) aggregate demand; inflationary

Answer 49

B

Question 50

Suppose the following conditions are present in the economy:
- firms are increasing output to meet strong demand for their goods
- workers are able to demand higher wages as firms try to bid workers away from other firms
Which of the following statements describes the adjustment that will happen in the AD/AS macro model?
A) There is an inflationary output gap; aggregate demand will continue to increase, causing the AD curve to shift to the right. The price level will rise until equilibrium is restored at .
B) The economy is in equilibrium at , but wages are rising. The AS curve will shift to the left until a new equilibrium is reached at a higher price level.
C) There is a recessionary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at .
D) There is an inflationary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at .
E) There is a recessionary output gap; aggregate demand will rise, causing the AD curve to shift to the right until equilibrium is restored at .

Answer 50

D

Question 51

Suppose the following conditions are present in the economy:
- firms are facing lower-than normal sales and have reduced output
-there is an excess supply of labour and firms are starting to reduce their workforces
Which of the following statements describes the adjustment that will happen in the AD/AS macro model?
A) Output is below potential; aggregate demand will fall, causing the AD curve to shift to the left. The price level will fall until equilibrium is restored at .
B) The economy is in equilibrium at , but wages are falling. The AS curve will shift to the right until a new equilibrium is reached at a lower price level.
C) Output is below potential; wages will eventually fall; the AS curve will slowly shift to the right until equilibrium is restored at .
D) Output is above potential; wages will fall, causing the AS curve to shift to the right until equilibrium is restored at .
E) Output is above potential; aggregate demand will fall, causing the AD curve to shift to the left until equilibrium is restored at .

Answer 51

C

Question 52

Consider the AD/AS macro model. An important asymmetry in the behaviour of the AS curve is that
A) prices are sticky but wages are not.
B) positive output gaps can persist for a long time without causing increases in wages and prices, whereas negative output gaps lead to immediate reductions in wages and prices.
C) negative output gaps can persist for a while without causing large decreases in wages and prices, whereas positive output gaps lead more quickly to increases in wages and prices.
D) wages are very flexible in the downward direction, but not in the upward direction.
E) wages and prices are equally sticky in both directions.

Answer 52

C

Question 53

Consider the AD/AS macro model. The wage-adjustment process is asymmetrical because
A) factor prices fluctuate more frequently than goods prices.
B) goods prices rise more quickly than factor prices.
C) employers delay wage increases in a boom but lay off workers quickly during a slump.
D) taxes rise quickly in a boom but do not fall during a slump.
E) wages rise quickly in a boom but fall slowly during a slump.

Answer 53

E

Question 54

Consider the AD/AS macro model. An important asymmetry in the behaviour of aggregate supply is the
A) changing slope of the aggregate demand curve.
B) difference between actual and potential output.
C) different relative sizes of inflationary versus recessionary gaps.
D) economy’s path of potential output as a result of labour force growth.
E) different speeds at which factor prices adjust to positive and negative output gaps.

Answer 54

E

Question 55

An economy may not quickly and automatically eliminate a recessionary output gap because wages
A) never change in response to changes in the demand for labour.
B) have a tendency to be sticky downward.
C) have a tendency to fall too quickly.
D) have a tendency to rise too quickly.
E) are flexible but prices have a tendency to be sticky downward.

Answer 55

B

Question 56

An adjustment “asymmetry” in aggregate supply is
A) the concave shape of the AS curve.
B) the convex shape of the AS curve.
C) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps).
D) the difference in speed of increases in factor prices versus wage rates.
E) the difference in speed of decreases in output levels.

Answer 56

C