Lesson 6

The amount of output (real GDP) that an economy can produce when using its resources, such as capital and labor, at normal rates

potential output

A period in which the economy is growing at a rate significantly below normal

recession

A positive output gap, which occurs when potential output exceeds actual output

recessionary gap

At potential output, ________.

the inflation rate (or price level) remains constant

In Okunland, the unemployment rate is 6% and the natural unemployment rate is 4%. If potential output is $1000, Okun's law predicts actual output is ________.term-7

$960

An extremely severe or protracted great recession

depression

In the short-run, it is assumed ______.

firms adjust output to meet demand

The unemployment rate is zero at potential output.

F

The equation of exchange

M*V=P*Y

Frictional unemployment is _____. A. voluntary unemployment B. long-term C. NOT part of the natural unemployment rate D. greater than cyclical unemployment E. also called structural unemployment

A

If the natural rate of unemployment equals 5%, the frictional rate of unemployment equals 2%, and the cyclical rate of unemployment equals 3%, then the actual rate of unemployment equals _____%. A. 8 B. 10 C. 7 D. 6 E. 5

A

In Macroland, a country that operates according to Okun's law, potential real GDP is equal to $800 billion while the actual rate of unemployment is 4% and the natural rate of unemployment is 6%. Macroland has an actual real output level of $_____ billion. A. 832 B. 752 C. 816 D. 768 E. 784

A

In the long-run, starting from full employment, an increase in the money supply results in _____. A. no change in the level of output B. an increase in the level of output C. a drop in the level of output D. no change in the price level E. an increase in the level of consumption

A

A recession occurs when _____. A. planned spending is high B. actual output equals potential output, but potential output is not growing or falling. C. and only when actual output is below potential output D. potential output is less than actual output E. actual output equals potential output

B A recession occurs either when actual output is below potential or when actual output equals potential output, but potential output is not growing or contracting.

In the long-run, starting from full employment, an increase in the money supply results in _____. A. an increase in the level of output B. a decrease in the level of output C. an increase in the price level D. a decrease in the price level E. an increase in the growth rate of potential output

C

Recessions tend to _____. A. bring about lower unemployment rates B. bring about higher inflation rates C. be preceded by increases in the inflation rate D. be preceded by higher unemployment rates E. be preceded by lower interest rates

C

The velocity of money is defined as _____. A. P + Y - M B. (M/P)*Y C. P*Y/M D. P + Y - N E. P*M/Y

C

A positive output gap occurs when _____. A. the cyclical unemployment rate is zero B. actual output is above potential ouput C. the natural unemployment rate is zero D. there is a recessionary gap E. all of the other choices occur

D

If the actual rate of unemployment equals 9 percent when the frictional rate of unemployment equals 2 percent, and the structural rate of unemployment equals 3 percent, then the cyclical rate of unemployment is _____%. A. 5 B. 14 C. 7 D. 4 E. 6

D

Recessions cannot occur when output is at potential output.

F

An expansionary gap implies resources are _____. A. not being fully utilized and the unemployment rate is above the natural rate of unemployment. B. being utilized at above-normal rates and the unemployment rate would be above the natural rate of unemployment. C. not being fully utilized and the unemployment rate would be below the natural rate of unemployment. D. being utilized at above-normal rates and cyclical unemployment is positive. E. being utilized at above-normal rates and cyclical unemployment is negative.

E

If output is at potential output, then _____. A. there are overall shortages B. there are overall surpluses C. the inflation rate is increasing D. the inflation rate is decreasing E. resources are being used at normal rates

E

In the model of the economy used in the course, long-run output is determined by _____. A. actual output B. demand C. spending D. government expenditures E. potential output

E

An increase in the money supply raises price in the short-run.

F

Frictional unemployment is long-term in nature.

F

An output gap in the course is defined as _____. A. Y - Y* B. Y* - Y C. Y/Y* D. Y*/Y E. Y + Y*

B

In the short run starting from full employment, an increase in the money supply results in _____. A. an increase in the price level B. an increase in the level of output C. a decrease in the price level D. a decrease in the level of output E. an increase in potential output

B

The unemployment resulting from a recession is called _____ unemployment. A. structural B. cyclical C. natural D. frictional E. recessionary

B

2. A trough is _____. A. the beginning of a recession B. the end of an expansion C. where the maximum inflation rate occurs D. the beginning of an expansion E. where stagflation occurs

D

The difference between the actual unemployment rate and the natural rate of unemployment _____. A. is always positive B. is structural unemployment C. is never negative D. is frictional unemployment E. is negative when there is an expansionary gap

E

The firm behavior known as “meeting the demand †refers to _____. A. firms adjusting prices in response to changes in demand B. firms adjusting prices to ensure that the quantity supplied equals the quantity demanded C. firms changing prices to reduce the output gap D. economy-wide spending changes determining prices E. firms adjusting output in the short run at a preset price

E

In Macroland, a country that operates according to Okun's law, if the cyclical unemployment rate is 2.5% and potential output (GDP) equals $9,000 billion, the actual or equilibrium level of output would equal _____ billion. A. $8,775 B. $9,225 C. $9,000 D. $9,450 E. $8,550

E Start by finding the output gap, which is positive here since cyclical unemployment is positive. A gap is defined equal to Y* - Y, or potential output minus actual output, measuring how much actual output is below potential output. Therefore, actual output will be found by subtracting the gap from potential output. Okun's law tells us the output gap is twice the cyclical unemployment rate multiplied by potential output, or is 5% of $9,000 billion, or $450 billion. As a consequence, actual output is $450 billion below potential output, or $9,000 billion - $450 billion, or $8550 billion. With actual output at $8550 billion and potential output at $9000 billion, this recessionary gap will be the difference or $450 billion confirming that a gap is equal to Y* - Y

Recessions are often preceded by a decrease in inflation.

F

Structural unemployment is zero when output is at potential output.

F

The long-run aggregate supply curve is horizontal.

F

Each one percentage point of cyclical unemployment is associated with an output gap equal to 2 percent of potential output

Okun's law

A business cycle expansion begins at a trough.

T

A recessionary gap is positive.

T

Cyclical unemployment is negative during an inflationary gap.

T

Expansions normally last longer than recessions.

T

In the short-run, firms meet demand by adjusting output rather than price.

T

Long-run output is determined by potential output.

T

The cyclical unemployment rate is equal to the difference between the actual unemployment rate and the natural unemployment rate.

T

The equation of exchange can be expressed as _________.

V=P*Y/M

A particularly strong and long expansion is called a(n) _____.

boom

A particularly strong and protracted expansion

boom

The actual unemployment rate minus the natural unemployment rate

cyclical unemployment rate

A period in which the economy is growing at a rate that is significantly above normal

expansion

A negative output gap, which occurs when actual output is above potential output

expansionary (inflationary) gap

A positive output gap _______.

has positive cyclical unemployment

The part of the total unemployment rate that is attributable to frictional and structural unemployment

natural rate of unemployment

The difference between the economy’s potential output and its actual output at some point in time

output gap

The beginning or a recession, the high point of economic activity prior to a downturn

peak

A recession ends at a(n) _____.

trough

The end of a recession, the low point of economic activity prior to a recovery

trough

Nominal GDP divided by the quantity of money

velocity of money