Chapter 24.2

Question 1

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) always reverse itself.
C) be negated in the long run, through the economy’s adjustment process.
D) result in a price level lower than that preceding the demand shock.
E) set off an endless cycle of price rises and increases in unemployment.

Answer 1

C

Question 2

Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, will be eliminated if
A) wages rise quickly.
B) the AS curve shifts upward.
C) wages and other factor prices fall sufficiently.
D) real national income decreases.
E) prices rise quickly.

Answer 2

C

Question 3

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

Answer 3

C

Question 4

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

Answer 4

E

Question 5

Suppose Canada’s economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in world demand for Canada’s goods. 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 and the price level both rise; real GDP returns to its original level with a higher price level
D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Answer 5

C

Question 6

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

Answer 6

A

Question 7

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 will ________.
A) decrease; decrease; decrease further; decrease further
B) decrease; decrease; decrease further; be restored to potential output
C) increase; increase; increase further; increase further
D) increase; decrease; increase further; be restored to potential output
E) increase; increase; increase further; be restored to potential output

Answer 7

E

Question 8

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

Answer 8

A

Question 9

Consider the basic AD/AS macro model in long-run equilibrium. A permanent expansionary AD shock has \_\_\_\_\_\_\_\_ price-level effect in the short run and \_\_\_\_\_\_\_\_ price-level effect in the long run. 
A) a positive; no 
B) a negative; no 
C) a positive; an even larger 
D) a positive; a smaller 
E) a negative; a positive

Answer 9

C

Question 10

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 and the price level both rise; real GDP returns to its original level with a higher price level
D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E) real GDP falls and the price level rises; real GDP and the price level return to their original levels

Answer 10

E

Question 11

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

Answer 11

D

Question 12

Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from   to  . The initial effect is 
A) a recessionary output gap of 100.
B) a recessionary output gap of 300.
C) a recessionary output gap of 550.
D) an inflationary output gap of 200.
E) an inflationary output gap of 100.

Answer 12

A

Question 13

Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from   to  . At the new short-run equilibrium, the price level is \_\_\_\_\_\_\_\_ and real GDP is \_\_\_\_\_\_\_\_. 
A) 90; 900
B) 110; 800
C) 60; 1000
D) 60; 700
E) 90; 1250

Answer 13

A

Question 14

Refer to Figure 24-3. Which of the following events could have shifted the AD curve from to ?
A) an increase in net exports
B) an increase in government purchases
C) an increase in desired investment
D) an increase in autonomous household saving
E) an increase in autonomous consumption

Answer 14

D

Question 15

Refer to Figure 24-3. After the negative aggregate demand shock shown in the diagram (from to ), which of the following describes the adjustment process that would return the economy to its long-run equilibrium?
A) Wages would eventually fall, causing the AD curve to shift to the right, returning to the original equilibrium at point A.
B) Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a new equilibrium at point E.
C) Wages would increase, causing the AS curve to shift to the right, reaching a new equilibrium at point E.
D) Wages would increase, causing the AD curve to shift to the right, returning to the original equilibrium at point A.
E) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D.

Answer 15

B

Question 16

Refer to Figure 24-3. Following the negative AD shock shown in the diagram (from   to  ), the adjustment process will take the economy to a long-run equilibrium where the price level is \_\_\_\_\_\_\_\_ and real GDP is \_\_\_\_\_\_\_\_. 
A) 110; 1000
B) 60; 1000
C) 90; 900
D) 110; 800
E) 90; 1250

Answer 16

B

Question 17

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

Answer 17

C

Question 18

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

Answer 18

A

Question 19

What is meant by the term “stagflation”?
A) the combination of falling real GDP and a rising price level
B) a persistent inflationary gap
C) a persistent recessionary gap
D) the sluggish downward wage adjustment in response to a recessionary gap
E) the combination of inflation and rising real GDP

Answer 19

A

Question 20

In the basic AD/AS macro model, which of the following events could cause a negative AS shock?
A) a large decrease in wages
B) a large increase in business confidence
C) a large decrease in the net tax rate
D) a widespread outbreak of a serious infectious disease
E) a large increase in labour productivity

Answer 20

D

Question 21

In the basic AD/AS macro model, which of the following events would cause stagflation?
A) a large decrease in wages
B) a large increase in business confidence
C) a large increase in the net tax rate
D) a large increase in the price of raw materials
E) a large increase in labour productivity

Answer 21

D

Question 22

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) decrease; decrease; decrease further; will decrease further
B) decrease; decrease; decrease further; will be restored to potential output
C) increase; decrease; decrease; will be restored to potential output
D) increase; decrease; increase further; will be restored to potential output
E) increase; increase; increase further; will be restored to potential output

Answer 22

C

Question 23

Refer to Figure 24-4. The initial effect of the positive AS shock shown in the diagram results in 
A) a recessionary output gap of 250.
B) a recessionary output gap of 450.
C) an inflationary output gap of 200.
D) an inflationary output gap of 300.
E) an inflationary output gap of 550.

Answer 23

C

Question 24

Refer to Figure 24-4. The positive aggregate supply shock shown in the diagram results in a new short-run equilibrium where the price level is \_\_\_\_\_\_\_\_ and real GDP is \_\_\_\_\_\_\_\_. 
A) 60; 1000 
B) 60; 1300 
C) 90; 750 
D) 90; 1200 
E) 110; 1300

Answer 24

D

Question 25

Refer to Figure 24-4. After the positive aggregate supply shock shown in the diagram, which of the following would shift the AS curve leftward during the economy’s adjustment process?
A) an increase in factor supplies
B) an increase in the unemployment rate
C) a decrease in wages and other factor prices
D) an increase in labour productivity
E) an increase in wages and other factor prices

Answer 25

E

Question 26

Refer to Figure 24-4. Following the positive AS shock shown in the diagram, the adjustment process will take the economy to a long-run equilibrium where the price level is \_\_\_\_\_\_\_\_ and real GDP is \_\_\_\_\_\_\_\_. 
A) 60; 1000 
B) 60; 1300 
C) 90; 750 
D) 90; 1200 
E) 110; 1000

Answer 26

E

Question 27

Consider the basic AD/AS macro model, initially in a long-run equilibrium. A positive AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________.
A) decrease; decrease; decrease further; will decrease further
B) decrease; increase; decrease further; will be restored to potential output
C) decrease; increase; return to its initial level; will be restored to potential output
D) increase; increase; decrease; will be restored to potential output
E) increase; increase; return to its initial level; will be restored to potential output

Answer 27

C

Question 28

The curve that is sometimes called the “long-run aggregate supply curve” (vertical Y*) relates the aggregate price level to real GDP
A) in the short run.
B) when wages are in adjustment but prices are unstable.
C) when national income is at less than potential income.
D) when technology is allowed to change.
E) after factor prices have fully adjusted to eliminate output gaps.

Answer 28

E

Question 29

What economists sometimes call the "long-run aggregate supply curve" is 
A) vertical.
B) horizontal.
C) nonlinear.
D) negatively sloped.
E) positively sloped.

Answer 29

A

Question 30

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) changes in the capital stock.
B) wages and other factor prices to adjust.
C) changes in technology to occur.
D) changes in the size of the resource base to occur.
E) population to increase.

Answer 30

B

Question 31

The “long-run aggregate supply curve,” vertical at Y*, shows that
A) potential output will rise as prices rise.
B) potential output will fall as prices rise.
C) potential output is compatible with any price level.
D) potential output is compatible with one particular price level.
E) prices will always rise in the long run.

Answer 31

C

Question 32

Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP
A) and the price level are determined by aggregate demand.
B) and the price level are determined by “long-run aggregate supply.”
C) is determined by aggregate demand and the price level by potential output.
D) is determined by potential output and the price level by aggregate demand.
E) is determined by AD and the price level is determined by the AS curve

Answer 32

D

Question 33

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

Answer 33

A

Question 34

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

Answer 34

D

Question 35

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

Answer 35

D

Question 36

Refer to Figure 24-5. The economy is not in long-run equilibrium at E1 because the
A) AD1 curve will shift back to AD0 due to an increase in the price level.
B) AD1 curve will shift back to the left due to a fall in current consumption.
C) AS will shift to the left due to an increase in wages.
D) AS will shift to the left due to an increase in the price level.
E) AS will shift to the right due to a decrease in the price level.

Answer 36

C

Question 37

Refer to Figure 24-5. Following a positive demand shock that takes the economy from E0 to E1, the movement of the economy from E1 to E2 indicates that
A) a demand shock can keep real GDP above potential output permanently.
B) an increase in the price level causes the AS curve to shift to the left.
C) an increase in the price level causes the AD curve to shift to the left.
D) the economy cannot return to potential output without government intervention.
E) the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

Answer 37

E

Question 38

Refer to Figure 24-5. If the economy is currently in equilibrium at E3, the concept of asymmetrical adjustment of the AS curve suggests that
A) the economy will attain potential output faster if there is no intervention by the government.
B) a decrease in the price level will induce a rightward shift of AS.
C) the return of the economy to potential output may be very slow without government intervention.
D) the economy will never return to potential output.
E) the price level is constant regardless of the level of equilibrium income.

Answer 38

C

Question 39

Consider the AD/AS macro model. The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in
A) the AS curve.
B) potential GDP.
C) either the AS curve or potential GDP.
D) either the AD or AS curves.
E) the intersection of the AD and AS curves.

Answer 39

B

Question 40

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

Answer 40

C

Question 41

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

Answer 41

C

Question 42

Consider the AD/AS macro model. The main source of increases in material living standards over the long term is the
A) maintenance of a continuous inflationary gap.
B) continual avoidance of recessionary gaps.
C) continuous outward shift of aggregate demand.
D) continual increase in potential national income.
E) positive slope of the aggregate supply curve.

Answer 42

D

Question 43

In the basic AD/AS macro model, permanent increases in real GDP are possible only if
A) potential output is increasing.
B) the correct fiscal policy is implemented.
C) the economy’s automatic stabilizers are allowed to operate.
D) the aggregate supply curve is vertical.
E) aggregate demand responds positively to demand shocks.

Answer 43

A

Question 44

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

Answer 44

C

Question 45

When an economy experiences sustained growth in real GDP,
A) actual GDP is greater than potential GDP.
B) actual GDP is less than potential GDP.
C) potential GDP is likely to be increasing.
D) factor prices are likely to be decreasing.
E) wage rates will decrease slowly as factor-utilization rates decrease

Answer 45

C

Question 46

Which of the following provides the best explanation for why GDP may increase over long periods of time?
A) increase in capital stock
B) increase in emigration
C) increase in mortality rates
D) increase in interest rates
E) increase in unemployment

Answer 46

A