ECON Chapters 9, 10, 11
By how much would government purchases have to change if the government wanted to increase income by $1,000 and the MPC were 0.9?
$100
In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 11-1, what would be the short-run equilibrium level of real GDP and the price level?
$300 and 40
Which of the following is likely to occur if the actual output produced in an economy is less than the economy's potential output?
A recessionary gap and an unemployment rate that is higher than the natural rate of unemployment
If fiscal policy is used to close an expansionary gap, the
AD curve shifts leftward and the price level decreases
Which of the following did classical economists believe caused depressions and high unemployment?
All of the answers are correct
Which of the following occurs as macroeconomic output expands in the short run?
All of the answers are correct
Which of the following is true about real and nominal wages?
Changes in the nominal wage will be the same as changes in the real wage only if the price level is constant
Which of the following is true in the long run if an economy experiences an expansionary gap?
Cost of production rises, and the short-run aggregate supply curve shifts leftward.
Discretionary fiscal policy works by shifting the short-run aggregate supply curve.
False
If the inflation rate is 4 percent a year and everyone expected 2 percent a year, then the potential level of real GDP will increase.
False
The graph in Exhibit 10-4, when aggregate supply is AS, the equilibrium output and price level will be Y2 and P2.
False
The natural rate of unemployment includes frictional, cyclical, and structural unemployment.
False
Unemployment insurance is an example of governmental discretionary fiscal policy.
False
Which of the following is true in the short run?
Firms benefit from a higher than expected price level.
Which of the following is likely to be true if the actual price level in an economy exceeds the expected price level?
Firms will utilize their unused production capacity and increase production beyond the potential level in the short run
If the economy were at its potential output level, which of the following would not be true?
Frictional unemployment would be zero.
Which of the following is true of an expansionary gap?
In the long run, this gap will close when resource suppliers negotiate higher resource payments.
Which of the following is true in the long run?
The actual price level and the expected price level are equal
Which of the following is true if the aggregate demand is greater than expected, for any given aggregate supply curve?
The actual price level is higher than the expected level in the short run, and output exceeds the potential level
Which of the following is true when an economy is in long-run equilibrium?
The economy's actual output equals its potential output
Which of the following is true in the long run?
The equilibrium output equals the potential output and the equilibrium price level depends on the aggregate demand curve
Which of the following is true in the long run?
The long-run aggregate supply curve is vertical.
When the economy is at its potential output level, which of the following is not true?
The nominal wage is a very poor measure of the expected real wage
When the economy is at its potential output level, which of the following is not true?
The unemployment rate is about 2 percent.
Which of the following is not true about classical economists?
They sought government intervention in markets to promote fairness.
An increase in short-run aggregate supply could decrease nominal GDP.
True
Government transfer payments are a good example of an automatic stabilizer.
True
Real wages are nominal wages adjusted for price changes.
True
_____ if nominal wages are sticky in the downward direction.
Unemployment may persist for long periods of time
Fiscal policy focuses on manipulating
aggregate demand to smooth out business fluctuations
A technological breakthrough with widespread practical applications that occurs in the microcomputer industry is likely to shift the:
aggregate supply curve rightward
The long run is the period of time during which:
agreements can be renegotiated based on the actual price level
During a recession, output is
below potential and unemployment is above the natural rate
If the price level turns out to be higher than expected,
businesses increase production
The natural rate of unemployment prevails in an economy when _____.
cyclical unemployment is zero
A(n) _____ will shift the long-run aggregate supply curve of an economy leftward.
decline in the fertility of land
To close a contractionary gap using fiscal policy, the government can
decrease taxes by less than the size of the gap
An adverse supply shock is likely to:
decrease the equilibrium output and increase the equilibrium price level, resulting in stagflation.
The figure below shows the aggregate demand and supply curves for an economy. If the economy moves from point e to e', then the:
economy experiences deflation
Exhibit 10-4 shows that the
economy will experience deflation
If the actual price level in Exhibit 10-2 exceeds the expected price level, then
equilibrium output might be Y3 in the short run
The _____ when an economy produces its potential output.
expected price level equals the actual price level
If the price level rises by 5 percent and the nominal wage rises 3 percent, the real wage
falls by 2 percent
A federal budget surplus occurs when
federal government net taxes exceed purchases
The expected price level is significant because
firms and resource owners make long-term agreements based on the expected price level
If the expected price level exceeds the actual price level,
firms decrease production in the short run
If the actual price level is below the expected price level in an economy, _____.
firms reduce the quantity supplied, and the actual unemployment rate exceeds the natural rate
Potential output is the amount produced when
firms' and workers' expectations about the price level are realized
The slope of the aggregate supply curve depends on:
how quickly the marginal cost of production rises as output expands
In the long run, an increase in aggregate demand will:
increase the price level but not change output
The goal of fiscal policy after the Great Depression was to
influence aggregate demand
The result of an adverse supply shock is a:
leftward shift of both the short-run and the long-run aggregate supply curves
An expansionary gap is closed in the long run by a(n)
leftward shift of the short-run aggregate supply curve
An adverse supply shock would shift the
long-run and short-run aggregate supply curves inward
A beneficial supply shock would shift the
long-run and short-run aggregate supply curves outward
The effect of automatic stabilizers on the business cycle is to
make both upswings and downswings smaller
A nominal wage is
measured in current dollars rather than in constant dollars
Which of the following is not a tool of fiscal policy?
money supply
John Maynard Keynes influenced the use of fiscal policy in the U.S. by arguing effectively that
natural economic forces were not necessarily adequate to move the economy toward its potential output level
It is generally observed that an economy's______ during a recession.
output is below the potential level, and its unemployment rate is above the natural rate
It is generally observed that when a recessionary gap is closed in the long run, there is _____.
price deflation and greater output
The aggregate supply curve reflects the relationship between the
price level and the quantity of all goods supplied in the economy
Among the reasons firms find it profitable to expand output in the short run when the price level is rising faster than expected is that
prices for firms' output are rising with the price level
If the expected price level falls below the actual price level,
production becomes more attractive to firms
The real wage represents the
quantity of goods and services a worker can purchase in exchange for work time
As actual output rises above the potential level, which of the following must be true?
real GDP rises
If the rate of inflation increases from 2 percent to 3 percent, it is likely that the:
real wage of a worker will fall
To close a recessionary gap:
real wages should decrease
If the actual output level exceeds the potential output in an economy in the short run, there will be a(n)______.
reduction in output and cost-push inflation in the long run
The significance of the expected price level is that:
resource owners make long-term agreements based on the expected price level
If the price level rises by 4 percent and the nominal wage rises 6 percent, the real wage
rises by 2 percent
A beneficial supply shock will shift the:
short-run and long-run aggregate supply curves rightward and increase the equilibrium output and decrease the price level.
In the short run, but not in the long run,
some resource prices are fixed
Supply-side economics emphasized government policies to
stimulate real GDP by improving incentives to work
Fiscal policy under the Reagan administration was intended to
stimulate the economy by decreasing taxes in order to increase aggregate supply
In the short run, there is a positive relationship between
the actual price level and aggregate quantity supplied
In the short run, a positive relationship exists between _____, other things remaining constant.
the actual price level and real gross domestic product supplied
If an economy is simultaneously in long-run and short-run equilibrium:
the actual price level equals the expected price level
A recessionary gap can be closed in the long run if:
the aggregate supply curve shifts rightward
If capital depreciation exceeds gross investment in an economy, it is likely that:
the capital stock of the economy will decrease, and the aggregate supply curve will shift leftward
An economy's potential gross domestic product changes when there are changes in _____.
the composition of the labor force
In constructing the short-run aggregate supply curve, we define the short run as the period in which
the costs of some resources are fixed
According to Keynes,
the economy could be stuck at equilibrium below the potential output for a prolonged period
In the long run, the aggregate demand curve determines ______, given the aggregate supply curve.
the equilibrium price level but not the equilibrium output level
The long-run aggregate supply curve in an economy depends on the:
the level of technology
The aggregate supply curve shows the relationship between _____, all other things remaining the same.
the price level in an economy and the aggregate output produced by firms
The short run is a period of time during which:
the price of some resources cannot be changed
Real wage is measured in terms of:
the quantity of goods and services that can be bought
The natural rate of unemployment is
the unemployment rate at which the economy is producing its potential GDP
The long-run aggregate supply curve is a(n):
vertical line
Compensation is usually negotiated in terms of a nominal wage because
wage agreements are based on expected price levels
Workers usually negotiate compensation in terms of nominal wages because:
wage agreements are based on expected price levels
In the long run, the economy will produce the potential output if:
wages and prices are sufficiently flexible
Lags in the approval and implementation of fiscal policy
weaken fiscal policy as a tool of economic stabilization
Potential output will decrease if
workers choose shorter work schedules in order to enjoy more leisure time
If the economy is experiencing an expansionary gap, which of the following will occur in the long run?
Workers will negotiate nominal wage increases that will shift the SRAS curve to the left.
Which of the following supply shocks would shift the aggregate supply curve inward?
a decrease in agricultural output
The long-run aggregate supply curve is represented by
a vertical line
An expansionary gap is the amount by which:
actual output in the short run exceeds an economy's potential output
