ECON Chapter 11 test bank

The classical model assumes that wages and prices A. are always completely flexible. B. are flexible in the long run but not in the short run. C. are flexible downwards but not flexible upwards. D. are flexible upwards but not flexible downwards.

are always completely flexible.

A​ short-lived change in production input prices will A. shift SRAS and LRAS. B. not shift SRAS or LRAS. C. shift LRAS but not SRAS. D. shift SRAS but not LRAS.

shift SRAS but not LRAS.

Say's law asserts that A. permanent shortages are normal occurrences in a market economy. B. permanent surpluses are normal occurrences in a market economy. C. demand creates its own supply. D. supply creates its own demand.

supply creates its own demand.

According to the classical​ economists, A. increasing government spending is the most reliable method of restoring full employment. B. unemployment is caused by too little spending. C. the amount households plan to save is determined primarily by their wage. D. the interest rate will ensure that the amount households plan to save will equal the amount businesses desire to invest.

the interest rate will ensure that the amount households plan to save will equal the amount businesses desire to invest.

According to classical​ economists, aggregate demand primarily determines A. total production in the economy. B. the price level. C. aggregate supply at full employment. D. levels of national output and income.

the price level.

Modern Keynesian analysis assumes that the​ short-run aggregate supply curve is A. vertical. B. upward sloping. C. horizontal. D. downward sloping.

upward sloping.

According to the classical​ model, if an excess quantity of labor is supplied at a particular wage​ level, full employment will be maintained because A. the equilibrium wage rate will rise to stimulate spending. B. wages will fall rapidly to permit businesses to continue hiring everyone who wants to work. C. the government will establish special work programs. D. the government will step in and stimulate spending.

wages will fall rapidly to permit businesses to continue hiring everyone who wants to work.

The extent to which real GDP responds to changes in the price level along the​ short-run aggregate supply curve is largely determined by A. the speed with which input prices adjust and people become more fully informed. B. the ability of firms to hire additional​ inputs, particularly workers. C. the ability of firms to use existing workers and capital more intensively. D. All of the above. This is the correct answer.E. B and C only.

All of the above.

Which of the following will occur when aggregate supply remains stable but aggregate demand increases in the short​ run? A. The price level falls. B. A recessionary gap is created. C. An inflationary gap is created. D. The unemployment rate rises.

An inflationary gap is created.

The Modern Keynesian​ short-run aggregate supply curve is best described by which of the following​ statements? A. It is very flat at low levels of real​ GDP; increases slightly as real GDP​ grows; and becomes horizontal at full employment. B. It is very steep at low levels of real​ GDP; decreases slightly as real GDP​ grows; and becomes horizontal at full employment. C. It is very flat at low levels of real​ GDP; increases slightly as real GDP​ grows; and becomes very steep as real GDP surpasses full employment. D. It is very steep at low levels of real​ GDP; decreases slightly as real GDP​ grows; and becomes very flat as real GDP surpasses full employment.

It is very flat at low levels of real​ GDP; increases slightly as real GDP​ grows; and becomes very steep as real GDP surpasses full employment.

Which of the following is a possible explanation for sticky​ prices? A. Labor contracts cause wages to be fixed over the contract period. This is the correct answer.B. It is illegal for firms to lower prices without the consent of the courts. C. All firms act as a cartel and maintain a constant​ non-competitive price. D. Lack of union power to lower prices on products allows firms to maintain higher priced goods.

Labor contracts cause wages to be fixed over the contract period.

In modern Keynesian​ analysis, a decrease in aggregate demand will result in A. a decrease in both the price level and output. B. a decrease in the price level and no change in output. C. an increase in the price level and a decrease in output. D. an increase in both the price level and output. E. a decrease in output and no change in the price level.

a decrease in both the price level and output.

In the Classical​ Model, a decrease in aggregate demand will result in A. an increase in both the price level and output. B. a decrease in the price level and no change in output. C. a decrease in both the price level and output. D. a decrease in output and no change in the price level. E. an increase in the price level and a decrease in output.

a decrease in the price level and no change in output.

Suppose that the rental rate of machinery decreased temporarily. The result of this would be best described by A. a decrease in the​ short-run aggregate supply curve only. B. an increase in both the​ short-run aggregate supply and long run aggregate supply curves. C. a decrease in both the​ short-run aggregate supply and​ long-run aggregate supply curves. D. an increase in the​ short-run aggregate supply curve only.

an increase in the​ short-run aggregate supply curve only

Refer to the economy shown in the graph to the right. Suppose that there is an increase in wages. The​ short-run effect of this change on the economy is A. a rightward shift of the SRAS​ curve, and​ cost-push inflation. B. a rightward shift of the AD​ curve, and​ demand-pull inflation. C. a leftward shift of the SRAS​ curve, and​ cost-push inflation. D. a leftward shift of the AD​ curve, and​ demand-pull inflation. E. ​none; changes in prices have no effect on the economy in the short run.

a leftward shift of the SRAS​ curve, and​ cost-push inflation.

According to​ Keynes, when there is excess capacity in an​ economy, the equilibrium level of real GDP per year is determined by A. ​long-run aggregate supply. B. the price level. C. ​short-run aggregate supply. D. aggregate demand.

aggregate demand.

Suppose that there is a​ temporary, but significant increase in oil prices in an economy with an​ upward-sloping SRAS curve. As a policy response to this​ short-lived but sudden increase in oil​ prices, a central bank A. has no responsibility to stabilize the real GDP. B. can stabilize both the price level and the real GDP simultaneously. C. cannot stabilize both the price level and the real GDP simultaneously. D. can stabilize neither the price level nor the real GDP.

cannot stabilize both the price level and the real GDP simultaneously.

Cost-push inflation is caused by persistent A. decreases in​ short-run aggregate supply. B. increases in aggregate demand. C. increases in​ short-run aggregate supply. D. decreases in aggregate demand.

decreases in​ short-run aggregate supply.

The model of​ long-run equilibrium A. is the same as the Classical Model. B. and the Classical Model are based on totally different assumptions. C. is the same as the Keynesian Model. D. assumes that markets always clear but the Classical Model assumes that markets sometimes may not clear.

is the same as the Classical Model.

When aggregate demand increases in the modern Keynesian model of the​ short-run aggregate supply​ curve, A. price increases and real GDP increases. B. price increases and real GDP is unchanged. C. price is unchanged and real GDP increases. D. Any of the above could be true.

price increases and real GDP increases.

Classical economists thought that A. flexible wages and prices were the principal causes of recessions. B. the Great Depression confirmed their view of the business cycle. C. government policies and spending were needed to keep the economy at full employment. D. ​price, wage, and interest rate flexibility can quickly cure any tendencies for a recession.

price, wage, and interest rate flexibility can quickly cure any tendencies for a recession.