Lecture 10

Question 1

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

B) allow a stable expansion of real income over time.

C) set off an endless cycle of price rises and increases in unemployment.

D) result in a price level lower than that preceding the demand shock.

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

Answer 1

E

Question 2

An economy may not quickly and automatically eliminate a recessionary output gap because wages
A) have a tendency to fall too quickly.

B) never change in response to changes in the demand for labour.

C) are flexible but prices have a tendency to be sticky downward.

D) have a tendency to rise too quickly.

E) have a tendency to be sticky downward.

Answer 2

E

Question 3

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) 90; 1200

C) 90; 750

D) 60; 1300

E) 110; 1000

Answer 3

E

Question 4

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 have fully adjusted to output gaps, and technology and factor supplies are changing.

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

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

E) Factor prices adjust to output gaps, and technology and factor supplies are constant.

Answer 4

B

Question 5

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 5

D

Question 6

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 the unemployment rate

B) a decrease in wages and other factor prices

C) an increase in factor supplies

D) an increase in labour productivity

E) an increase in wages and other factor prices

Answer 6

E

Question 7

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) firms cannot operate near their normal capacity

C) technology used in production is endogenous

D) the level of potential output is changing

E) factor prices respond to output gaps

Answer 7

E

Question 8

Refer to Figure 24-4. The initial effect of the positive AS shock shown in the diagram results in
A) an inflationary output gap of 300.

B) an inflationary output gap of 200.

C) an inflationary output gap of 550.

D) a recessionary output gap of 450.

E) a recessionary output gap of 250.

Answer 8

B

Question 9

Consider the AD/AS macro model. An important asymmetry in the behaviour of the AS curve is that
A) wages are very flexible in the downward direction, but not in the upward direction.

B) 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.

C) prices are sticky but wages are not.

D) 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.

E) wages and prices are equally sticky in both directions.

Answer 9

B

Question 10

The Phillips curve describes the relationship between
A) the output gap and potential GDP.

B) aggregate expenditure and aggregate demand.

C) the money supply and interest rates.

D) unemployment and the rate of change of wages.

E) inflation and interest rates.

Answer 10

D

Question 11

What economists sometimes call the “long-run aggregate supply curve” is
A) horizontal.

B) positively sloped.

C) vertical.

D) nonlinear.

E) negatively sloped.

Answer 11

C

Question 12

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 12

D

Question 13

What is meant by the term “stagflation”?

A) the sluggish downward wage adjustment in response to a recessionary gap

B) a persistent recessionary gap

C) the combination of inflation and rising real GDP

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

E) a persistent inflationary gap

Answer 13

D

Question 14

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) 110; 1300

B) 90; 1200

C) 60; 1300

D) 90; 750

E) 60; 1000

Answer 14

B

Question 15

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 15

C

Question 16

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) increase real output and decrease the price level.

B) decrease real output and decrease the price level.

C) decrease real output and increase the price level.

D) leave real output unaffected and increase the price level.

E) decrease real output and leave the price level unchanged.

Answer 16

C

Question 17

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 are exogenous, technology and factor prices are endogenous.

C) Factor prices adjust to output gaps, and technology and factor supplies are constant.

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.

Answer 17

D

Question 18

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 18

B

Question 19

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 supply curve

B) rightward; the aggregate demand curve

C) leftward; the aggregate demand curve

D) rightward; Y*

E) rightward; the aggregate supply curve

Answer 19

A

Question 20

An inflationary output gap implies that

A) there is excess supply of most factors of production.

B) the demand for all factor services will be relatively low.

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.

Answer 20

D

Question 21

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 AS curve.

D) either the AS curve or potential GDP.

E) the intersection of the AD and AS curves.

Answer 21

A

Question 22

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 22

A

Question 23

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 rises and the price level falls; real GDP returns to 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 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 returns to its original level with a higher price level

Answer 23

E

Question 24

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

A) wages fall, unit costs fall, and the AD curve shifts rightward.

B) wages do not adjust, but the AD curve shifts to the right.

C) wages fall, unit costs fall, and the AS curve shifts rightward.

D) wages rise, unit costs rise, and the AS curve shifts rightward.

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

Answer 24

E