Lecture 10

Question 1

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; 1300
B) 60; 1000
C) 110; 1000
D) 90; 1200
E) 90; 750

Answer 1

C) 110; 1000

Question 2

Consider the AD/AS macro model. The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in

A) potential GDP.
B) either the AD or AS curves.
C) the intersection of the AD and AS curves.
D) either the AS curve or potential GDP.
E) the AS curve.

Answer 2

A) potential GDP

Question 3

The Phillips curve describes the relationship between

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

Answer 3

C) unemployment and the rate of change of wages.

Question 4

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 wages and other factor prices
B) a decrease in wages and other factor prices
C) an increase in the unemployment rate
D) an increase in factor supplies
E) an increase in labour productivity

Answer 4

A) an increase in wages and other factor prices

Question 5

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

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

Answer 5

A) be negated in the long run, through the economy’s adjustment process.

Question 6

An inflationary output gap implies that

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

Answer 6

A) the economy’s resources are being used beyond their normal capacity.

Question 7

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 fall too quickly.
C) have a tendency to be sticky downward.
D) are flexible but prices have a tendency to be sticky downward.
E) have a tendency to rise too quickly.

Answer 7

C) have a tendency to be sticky downward.

Question 8

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 450.
B) a recessionary output gap of 250.
C) an inflationary output gap of 200.
D) an inflationary output gap of 550.
E) an inflationary output gap of 300.

Answer 8

C) an inflationary output gap of 200.

Question 9

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

Answer 9

C) Factor prices are exogenous, and technology and factor supplies are constant.

Question 10

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

Answer 10

C) a positive; no

Question 11

In the basic AD/AS macro model, permanent increases in real GDP are possible only if

A) the correct fiscal policy is implemented.
B) the aggregate supply curve is vertical.
C) the economy’s automatic stabilizers are allowed to operate.
D) potential output is increasing.
E) aggregate demand responds positively to demand shocks.

Answer 11

D) potential output is increasing.

Question 12

Consider the AD/AS macro model. An important asymmetry in the behaviour of the AS curve is that

A) 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.
B) wages and prices are equally sticky in both directions.
C) wages are very flexible in the downward direction, but not in the upward direction.
D) prices are sticky but wages are not.
E) 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.

Answer 12

E) 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.

Question 13

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 13

B) aggregate demand; recessionary

Question 14

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

A) nonlinear.
B) horizontal.
C) positively sloped.
D) negatively sloped.
E) vertical.

Answer 14

E) vertical.

Question 15

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

Answer 15

C) decrease real output and increase the price level.

Question 16

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) the level of potential output is changing
B) factor prices respond to output gaps
C) factor supplies are assumed to be varying
D) firms cannot operate near their normal capacity
E) technology used in production is endogenous

Answer 16

B) factor prices respond to output gaps

Question 17

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

Answer 17

C) leftward; the aggregate supply curve

Question 18

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; 1200
D) 90; 750
E) 110; 1300

Answer 18

C) 90; 1200

Question 19

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

Answer 19

D) rise and the AS curve will shift left.

Question 20

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 20

D) aggregate demand; inflationary

Question 21

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 falls and the price level rises; real GDP is below its original level with a higher price level
B) real GDP and the price level both fall; real GDP is below its original level with a lower 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 and the price level both rise; real GDP is above its original level with a higher price level

Answer 21

C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level

Question 22

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

Answer 22

E) wages rise, unit costs rise, and the AS curve shifts leftward.

Question 23

What is meant by the term “stagflation”?

A) a persistent inflationary gap
B) a persistent recessionary gap
C) the combination of inflation and rising real GDP
D) the sluggish downward wage adjustment in response to a recessionary gap
E) the combination of falling real GDP and a rising price level

Answer 23

E) the combination of falling real GDP and a rising price level

Question 24

Which of the following are the defining assumptions of the long run in macroeconomics?

A) Factor prices adjust to output gaps, and technology and factor supplies are constant.
B) Factor prices are exogenous, technology and factor prices are exogenous.
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 have fully adjusted to output gaps, and technology and factor supplies are changing.

Answer 24

E) Factor prices have fully adjusted to output gaps, and technology and factor supplies are changing.