Question 1

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 increases. We can conclude that has increased and there is now a(n) _ gap.

Accepted Answer

A)  aggregate demand; recessionary
B)  aggregate supply; recessionary
C)  aggregate demand; inflationary
D)  aggregate supply; inflationaryE) All of the above
F) A) and B)

Question 2

The Phillips curve provides a theoretical link between

Accepted Answer

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.F) B) and D)
G) A) and B)

Question 3

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

Accepted Answer

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.F) A) and B)
G) None of the above

Question 4

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 .

Accepted Answer

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 GDPF) A) and B)
G) B) and E)

Question 5

"Automatic fiscal stabilization" in the economy refers to

Accepted Answer

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.F) C) and E)
G) B) and C)

Question 6

Consider the basic AD/AS macro model in long- run equilibrium. An expansionary AD shock has price- level effect in the short run and price- level effect in the long run.

Accepted Answer

A)  a positive; no
B)  a negative; a positive
C)  a negative; no
D)  a positive; an even larger
E)  a positive; a smallerF) C) and D)
G) D) and E)

Question 7

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

Accepted Answer

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.F) A) and E)
G) All of the above

Question 8

Automatic fiscal stabilizers are most helpful in

Accepted Answer

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.F) A) and B)
G) B) and E)

Question 9

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 .

Accepted Answer

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.F) A) and D)
G) C) and E)

Question 10

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.

Accepted Answer

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

Question 11

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

Accepted Answer

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.F) B) and E)
G) A) and E)

Question 12

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, .

Accepted Answer

A)  real GDP and the price level both rise; real GDP is above its original level with a higher price level
B)  real GDP and the price level both rise; real GDP returns to 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 rises and the price level falls; real GDP returns to its original level with a lower price levelF) All of the above
G) C) and D)

Question 13

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

Accepted Answer

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.F) C) and E)
G) B) and D)

Question 14

The economy's output gap is defined as the

Accepted Answer

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.F) A) and B)
G) A) and C)

Question 15

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

Accepted Answer

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.F) A) and C)
G) A) and B)

Question 16

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

Accepted Answer

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.F) All of the above
G) A) and B)

Question 17

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

Accepted Answer

A)  declining government purchases
B)  rising wages
C)  falling prices
D)  increasing investment
E)  increasing tax ratesF) A) and B)
G) All of the above

Question 18

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

Accepted Answer

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.F) A) and B)
G) A) and C)

Question 19

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

Accepted Answer

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*.F) A) and E)
G) B) and D)

Question 20

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, .

Accepted Answer

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 levelF) None of the above
G) A) and D)

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

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, .

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

The economy's output gap is defined as the

Correct AnswerverifiedShow Answer

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, .

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Automatic fiscal stabilizers are most helpful in

Correct AnswerverifiedShow Answer

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 increases. We can conclude that has increased and there is now a(n) _ gap.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Consider the basic AD/AS macro model in long- run equilibrium. An expansionary AD shock has price- level effect in the short run and price- level effect in the long run.

Correct AnswerverifiedShow Answer

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 .

Correct AnswerverifiedShow Answer

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 .

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The Phillips curve provides a theoretical link between

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

"Automatic fiscal stabilization" in the economy refers to

Correct AnswerverifiedShow Answer

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