question
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 wage changes on the vertical axis.
C. 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.
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.
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 wage changes on the vertical axis.
C. 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.
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
B. 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.
question
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. affect only the level of real GDP.
C. decrease real GDP and the price level.
D. increase real GDP and lower the price level.
E. decrease real GDP and raise the price level.
A. affect only the price level.
B. affect only the level of real GDP.
C. decrease real GDP and the price level.
D. increase real GDP and lower the price level.
E. decrease real GDP and raise the price level.
answer
D. increase real GDP and lower the price level.
question
Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap?
A. increasing investment
B. rising wages
C. falling prices
D. increasing tax rates
E. declining government purchases
A. increasing investment
B. rising wages
C. falling prices
D. increasing tax rates
E. declining government purchases
answer
B. rising wages
question
Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy because
1) the multiplier effects associated with fiscal policy take a long time;
2) changes in government spending and taxation are too small in relation to the size of the economy to have much effect;
3) there are long and uncertain lags in implementing fiscal policy.
A. 1 only
B. 2 only
C. 3 only
D. 1 and 2
E. 1 and 3
1) the multiplier effects associated with fiscal policy take a long time;
2) changes in government spending and taxation are too small in relation to the size of the economy to have much effect;
3) there are long and uncertain lags in implementing fiscal policy.
A. 1 only
B. 2 only
C. 3 only
D. 1 and 2
E. 1 and 3
answer
E. 1 and 3
question
Consider a simple macro model with demand−determined
output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?
A. MPC = 0.8, t = 0.2, m = 0.3
B. MPC = 0.7, t = 0.1, m = 0.4
C. MPC = 0.7, t = 0.3, m = 0.2
D. MPC = 0.8, t = 0.1, m = 0.2
E. MPC = 0.9, t = 0.2, m = 0.4
output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?
A. MPC = 0.8, t = 0.2, m = 0.3
B. MPC = 0.7, t = 0.1, m = 0.4
C. MPC = 0.7, t = 0.3, m = 0.2
D. MPC = 0.8, t = 0.1, m = 0.2
E. MPC = 0.9, t = 0.2, m = 0.4
answer
D. MPC = 0.8, t = 0.1, m = 0.2
question
Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap?
A. decreasing investment
B. falling tax rates
C. rising prices
D. increasing government purchases
E. decreasing wages
A. decreasing investment
B. falling tax rates
C. rising prices
D. increasing government purchases
E. decreasing wages
answer
E. decreasing wages
question
An economy may not quickly and automatically eliminate a recessionary output gap because wages
A. have a tendency to rise 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 be sticky downward.
E. have a tendency to fall too quickly.
A. have a tendency to rise 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 be sticky downward.
E. have a tendency to fall too quickly.
answer
D. have a tendency to be sticky downward.
question
Which of the following is occurring as the macro economy is adjusting from the short run to the long run?
A. Potential output is adjusting to close inflationary or recessionary gaps.
B. Aggregate demand shocks are causing deviations from potential output.
C. Wages and other factor prices remain constant.
D. Wages and other factor prices are adjusting to close output gaps.
E. Aggregate supply shocks are causing deviations from potential output.
A. Potential output is adjusting to close inflationary or recessionary gaps.
B. Aggregate demand shocks are causing deviations from potential output.
C. Wages and other factor prices remain constant.
D. Wages and other factor prices are adjusting to close output gaps.
E. Aggregate supply shocks are causing deviations from potential output.
answer
D. Wages and other factor prices are adjusting to close output gaps.
question
If the economy is experiencing an inflationary output gap, the adjustment process operates as follows:
A. Wages fall, unit costs fall, and the AS curve shifts rightward.
B. Wages rise, unit costs rise, and the AS curve shifts rightward.
C. Wages do not adjust, but the AD curve shifts to the right.
D. Wages fall, unit costs fall, and the AD curve shifts rightward.
E. Wages rise, unit costs rise, and the AS curve shifts leftward.
A. Wages fall, unit costs fall, and the AS curve shifts rightward.
B. Wages rise, unit costs rise, and the AS curve shifts rightward.
C. Wages do not adjust, but the AD curve shifts to the right.
D. Wages fall, unit costs fall, and the AD curve shifts rightward.
E. Wages rise, unit costs rise, and the AS curve shifts leftward.
answer
E. Wages rise, unit costs rise, and the AS curve shifts leftward.
question
Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP. One disadvantage of this policy is that
A. further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer.
B. the level of private investment decreases, which opens up a recessionary gap.
C. the level of private investment increases, which will destabilize the level of real GDP.
D. the effect of economic shocks on government revenues becomes more volatile, while the economy becomes more stable.
E. the effect of the automatic stabilizer is reduced and the economy will be more unstable.
A. further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer.
B. the level of private investment decreases, which opens up a recessionary gap.
C. the level of private investment increases, which will destabilize the level of real GDP.
D. the effect of economic shocks on government revenues becomes more volatile, while the economy becomes more stable.
E. the effect of the automatic stabilizer is reduced and the economy will be more unstable.
answer
E. the effect of the automatic stabilizer is reduced and the economy will be more unstable.
question
Which of the following is occurring when an economy is experiencing sustained growth in real GDP?
A. actual GDP is less than potential GDP
B. factor prices are likely to be decreasing
C. potential GDP is likely to be increasing
D. wage rates will decrease slowly as factor−utilization rates decrease
E. actual GDP is greater than potential GDP
A. actual GDP is less than potential GDP
B. factor prices are likely to be decreasing
C. potential GDP is likely to be increasing
D. wage rates will decrease slowly as factor−utilization rates decrease
E. actual GDP is greater than potential GDP
answer
C. potential GDP is likely to be increasing
question
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. real GDP and the price level both fall; real GDP is at its original level with a lower price level
B. real GDP falls and the price level rises; real GDP is below 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 and the price level both fall; real GDP is above its original level with a higher price level
A. real GDP and the price level both fall; real GDP is at its original level with a lower price level
B. real GDP falls and the price level rises; real GDP is below 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 and the price level both fall; real GDP is above its original level with a higher price level
answer
A. real GDP and the price level both fall; real GDP is at its original level with a lower price level
question
How do we define the economy's output gap?
A. the difference between actual GDP and potential GDP
B. the change in real GDP that results from economic growth
C. the level of total output that would be produced if capacity utilization is at its normal rate
D. the difference between nominal GDP and real GDP
E. the difference between actual national income and desired aggregate expenditure
A. the difference between actual GDP and potential GDP
B. the change in real GDP that results from economic growth
C. the level of total output that would be produced if capacity utilization is at its normal rate
D. the difference between nominal GDP and real GDP
E. the difference between actual national income and desired aggregate expenditure
answer
A. the difference between actual GDP and potential GDP
question
Which of the following is occurring as the macro economy is adjusting from the short run to the long run?
A. Potential output is adjusting to close inflationary or recessionary gaps.
B. Aggregate demand shocks are causing deviations from potential output.
C. Wages and other factor prices are adjusting to close output gaps.
D. Aggregate supply shocks are causing deviations from potential output.
E. Wages and other factor prices remain constant.
A. Potential output is adjusting to close inflationary or recessionary gaps.
B. Aggregate demand shocks are causing deviations from potential output.
C. Wages and other factor prices are adjusting to close output gaps.
D. Aggregate supply shocks are causing deviations from potential output.
E. Wages and other factor prices remain constant.
answer
C. Wages and other factor prices are adjusting to close output gaps.
question
One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that
A. the recovery will be slower, thereby causing less disruption.
B. price level will rise higher than otherwise.
C. inflation will not be as stimulated.
D. the recovery is likely to be more rapid.
E. the economy will overshoot potential GDP and a boom will be underway.
A. the recovery will be slower, thereby causing less disruption.
B. price level will rise higher than otherwise.
C. inflation will not be as stimulated.
D. the recovery is likely to be more rapid.
E. the economy will overshoot potential GDP and a boom will be underway.
answer
D. the recovery is likely to be more rapid.
question
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
A. aggregate supply; inflationary
B. aggregate demand; recessionary
C. aggregate supply; recessionary
D. aggregate demand; inflationary
answer
D. aggregate demand; inflationary
question
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. large increase; no change
B. small increase; a large increase
C. small increase; a large decrease
D. large increase; a small decrease
E. large increase; a small increase
A. large increase; no change
B. small increase; a large increase
C. small increase; a large decrease
D. large increase; a small decrease
E. large increase; a small increase
answer
E. large increase; a small increase
question
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. Technology used in production is endogenous.
B. Factor supplies are assumed to be varying.
C. The level of potential output is changing.
D. Firms cannot operate near their normal capacity.
E. Factor prices respond to output gaps.
A. Technology used in production is endogenous.
B. Factor supplies are assumed to be varying.
C. The level of potential output is changing.
D. Firms cannot operate near their normal capacity.
E. Factor prices respond to output gaps.
answer
E. Factor prices respond to output gaps.
question
Net tax revenues that rise with national income act as an automatic stabilizer by ________ the marginal propensity to spend and thereby causing the simple multiplier to ________.
A. decreasing; increase
B. decreasing; equal one
C. increasing; decrease
D. increasing; increase
E. decreasing; decrease
A. decreasing; increase
B. decreasing; equal one
C. increasing; decrease
D. increasing; increase
E. decreasing; decrease
answer
E. decreasing; decrease
question
Automatic fiscal stabilizers are most helpful in
A. making discretionary fiscal policy effective.
B. removing persistent output gaps.
C. promoting economic growth.
D. reducing the intensity of business cycles.
E. eliminating price fluctuations in the economy.
A. making discretionary fiscal policy effective.
B. removing persistent output gaps.
C. promoting economic growth.
D. reducing the intensity of business cycles.
E. eliminating price fluctuations in the economy.
answer
D. reducing the intensity of business cycles.
question
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. operating at full capacity.
C. experiencing a recessionary gap.
D. experiencing an inflationary gap.
E. threatened with an acceleration of inflation.
A. at its full−employment level of output.
B. operating at full capacity.
C. experiencing a recessionary gap.
D. experiencing an inflationary gap.
E. threatened with an acceleration of inflation.
answer
C. experiencing a recessionary gap.
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