econ Final part 3

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18. According to many economists, the primary burden of the debt is the (a) absolute size of the debt for the economy (b) annual interest charges from bonds sold to finance the public debt (c) deficit arising from a decline in exports and increase in imports (d) government spending that the public debt finances for the economy

(b) annual interest charges from bonds sold to finance the public debt

-M1 -savings deposits -money market mutual funds -small denomination time deposits

Changes in Aggregate Demand

-a change in one of the determinants of aggregate demand that directly changes the amount of real GDP demanded -a multiplier effect that produces a greater ultimate change in aggregate demand than the initiating change in spending

shortcomings of unemployment rate

-doesn't include discouraged/underemployed workers -doesn't include how long someone has been unemployed

What does MPC + MPS Equal?

Describe the long-run aggregate supply curve.

1.shows the relationship in the long run between the price level and the quantity of real GDP supplied 2. a vertical line because in the long run, real GDP is always at its potential level and is unaffected by the price level

Multiplier Equation (MPC)

1/(1-MPC)

Multiplier Equation (MPS)

1/MPS

In the diagram, the economy's immediate-short-run AS curve is line ______, its short-run AS curve is _____, and its long-run AS curve is line ______.

3; 2; 1

Long-term economic growth: A) improves average material living standards. B) is achieved only by changes in factor-utilization rates. C) alleviates all poverty.

If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes A. a recession in the short run and a decline in the price level in the long run. B. an expansion in the short run and an increase in the price level in the long run. C. an expansion in the short run and a decline in the price level in the long run. D. a recession in the short run and an increase in the price level in the long run.

Refer to Table 24-1. In which economy is there the most unused capacity? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E

An economy may not quickly and automatically eliminate a recessionary output gap because wages A) have a tendency to be sticky downward. B) are flexible but prices have a tendency to be sticky downward. C) have a tendency to rise too quickly. D) have a tendency to fall too quickly. E) never change in response to changes in the demand for labour.

A 48)

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing:

A negative GDP gap.

Saving Schedule

A schedule that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income

A change in the real value of consumer wealth

A sharp decline in the real value of stock prices, which is independent of a change in the price level, would best be an example of

properties of the aggregate production function - constant returns to scale

A situation in which output increases in proportion to the change in all inputs as the scale of production is increased.

28) Refer to Figure 24-2. Suppose the economy is in equilibrium at Y1. The economy's automatic adjustment process will restore potential output, Y*, through A) wage increases and a leftward shift of the AS curve. B) wage increases and a rightward shift in the AS curve. C) wage decreases and a rightward shift of the AD curve. D) an increase in potential GDP to intersect both the AD and AS curves at B. E) a leftward shift of the AD to intersect both the AS and potential GDP at A.

A) wage increases and a leftward shift of the AS curve.

47) In Canada, the labour-force participation rate is about A) 66%. B) 76%. C) 86%. D) 90%.

A) 66%.

24) Refer to Figure 24-1. If the economy is currently in a short-run equilibrium at Y0, the economy is experiencing A) a recessionary output gap. B) an inflationary output gap. C) a labour shortage. D) a long-run equilibrium. E) potential output growth.

A) a recessionary output gap.

If the government purchases multiplier is 4, and Congress and the president decrease government spending by $100 billion, what is the change in GDP, holding everything else constant? A) a $400 billion increase in GDP. B) a $400 billion decrease in GDP. C) a $0.25 billion increase in GDP. D) a $0.25 billion decrease in GDP.

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) experiencing a recessionary gap. C) experiencing an inflationary gap. D) threatened with an acceleration of inflation. E) operating at full capacity.

9) An inflationary output gap occurs when A) actual GDP exceeds potential GDP. B) nominal GDP exceeds real GDP. C) demand for labour services is very low. D) equilibrium national income is below potential national income. E) potential GDP exceeds actual GDP.

A) actual GDP exceeds potential GDP.

In the basic AD/AS macro model, the "paradox of thrift" is only a short-run phenomenon because A) consumers exhibit cyclical consumption behaviour. B) in the long run output is determined by potential output. C) savings are transformed into expenditures in the long run. D) the marginal propensity to consume is fixed in the long run. E) consumers base their consumption expenditures only on their lifetime income.

In the long run, changes in average material living standards are best shown by: A) improvements in monetary policy. B) growth in real per capita GDP. C) growth in real GDP.

Refer to Figure 24-1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the A) economy will eventually move to point B. B) economy will only move gradually toward point A as wages slowly adjust. C) economy will quickly move to point A. D) level of output will decrease below Y0. E) AD curve will eventually shift to the right and return the economy to its full-employment level of output.

Refer to Figure 24-3. The economy cannot be in long-run equilibrium at E1 because the A) AS will shift to the right due to a decrease in the price level. B) AS will shift to the left due to an increase in wages. C) AD1 curve will shift back to AD0 due to an increase in the price level. D) AD1 curve will shift back to the left due to a fall in current consumption. E) AS will shift to the left due to an increase in the price level.

B 75)

Aggregate supply features

AS is horizontal at the economy's current price level in the immediate market period AS is upsloping in the short run AS is vertical in the long run at the economy's full employment output level (Qf)

In 2012, the U.S. federal debt held by the public was:

About 70 percent of the size of the GDP.

31) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is . Now, suppose the AE curve shifts to and we move to a new equilibrium level of GDP at and point A on . A possible cause of this change in equilibrium is A) an exogenous rise in the price level. B) a decrease in desired investment. C) a decrease in autonomous consumption. D) a decrease in desired net exports. E) an increase in government purchases.

A) an exogenous rise in the price level.

Decrease the price level and increase the real domestic output

An increase in aggregate supply will

Downward and the saving schedule downward

An increase in taxes shifts the consumption schedule

24) Which of the following would likely cause an upward parallel shift in the AE curve and a rightward shift in the AD curve? A) an increase in the business confidence of firms B) a reduction in government purchases C) an increase in the MPC D) a decrease in the price level E) an increase in the price level

A) an increase in the business confidence of firms

72) A leftward shift in the economy's AS curve implies that A) at any given price level, a lower level of output will be supplied. B) at any given price level, a higher level of output will be supplied. C) there is an increase in aggregate supply. D) there is a demand shock. E) the same output will be produced in equilibrium, but at a lower price level.

A) at any given price level, a lower level of output will be supplied.

38) A leftward shift of the aggregate demand (AD) curve could result from a fall in A) autonomous government purchases. B) induced imports. C) the net tax rate. D) autonomous desired saving. E) the price level.

A) autonomous government purchases.

20) An example of ʺinterbank activitiesʺ in the Canadian banking system is A) banks lending money to each other in order to meet daily cash requirements. B) the joint regulation of financial markets. C) lender of last resort to the banking system. D) the joint regulation of the money supply. E) banks pooling their money together to fund the operations of the Bank of Canada.

A) banks lending money to each other in order to meet daily cash requirements.

Menu costs:

Are the costs to firms of changing prices and communicating them to customers.

29) Canadian commercial banks maintain their reserves in the form of A) cash in their bank vaults and deposits at the Bank of Canada. B) cash and foreign currency at the Bank of Canada. C) deposits at other commercial banks that are immediately accessible. D) cash in their bank vaults. E) gold in their bank vaults.

A) cash in their bank vaults and deposits at the Bank of Canada.

10) A decrease in long-run real GDP (potential GDP) would be most likely caused by a (an) A) decrease in factor productivity. B) decrease in interest rates. C) decrease in unemployment rates. D) increase in factor-utilization rates. E) increase in unemployment rates.

A) decrease in factor productivity.

11) A decrease in short-run real GDP that leaves potential GDP unaffected would be most likely caused by a (an) A) decrease in factor-utilization rates. B) decrease in interest rates. C) decrease in unemployment rates. D) increase in factor productivity. E) None of the above are likely to cause a reduction in real GDP.

A) decrease in factor-utilization rates.

14) Which of the following may increase real GDP in the short run but may actually decrease the long-run growth rate of GDP? A) decrease in households' desired saving B) decrease in factor productivity C) increase in factor-utilization rates in the short run D) increase in factor supplies E) increase in the unemployment rate

A) decrease in households' desired saving

Shift downward

Assume the level of investment is independent of the level of GDP. If the interest rate rises, the investment schedule will:

Built in Stabilizers

Automatic or built-in stabilizers - tax revenue varies directly with GDP G is assumed to be independent of GDP -anything that increases the govt's budget deficit (or reduces its budget surplus) during an expansion without requiring explicit action by policymakers

Consider Figure 24-6. At the initial short-run equilibrium, there is ________ output gap of ________ but this gap could be closed by a ________. A) an inflationary; 200; fiscal contraction B) a recessionary; 100; fiscal contraction C) an inflationary; 100; fiscal contraction D) a recessionary; 200; fiscal expansion E) an inflationary; 350; fiscal expansion

A 97)

98) According to the "new" growth theory, increasing marginal returns to capital investment is A) impossible, and is thus a weak source of growth. B) possible after initial fixed costs of innovation have been borne. C) possible only if the capital is government- owned infrastructure. D) possible, but only in the early stages of innovation before imitators rush in to drive prices down. E) impossible because diminishing returns are unavoidable.

A common assumption among macroeconomists is that when real GDP is less than potential output, factor prices adjust and the A) AS curve shifts to the left fairly rapidly. B) AS curve shifts to the right only very slowly. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) None of the above - the AS curve remains unchanged.

Consider Figure 24-6. If the government takes no action to close the existing output gap, then A) the AS curve will shift to the left until it intersects with the AD curve at point C. B) the AD curve will shift up until it intersects with the AS curve at point B. C) the AS curve can either shift to the right or left depending on the fiscal policy. D) the AS curve will shift to the right until it intersects with the AD curve at point E. E) the AD curve will shift down until it intersects with the AS curve at point D.

A 98)

Which of the following represents the most expansionary fiscal policy?

A $10 billion increase in government spending.

Which of the following represents the most contractionary fiscal policy?

A $30 billion decrease in government spending.

86) Refer to Figure 23-2. Which of the following events could cause the upward shift of the AS curve? A) a decrease in the price of raw materials B) a decrease in the world supply of oil as a result of a major hurricane C) improved quality of the national education system D) rapid technological advances in mass production E) an increase in consumption

B) a decrease in the world supply of oil as a result of a major hurricane

104) Refer to Figure 24-6. In the initial short-run equilibrium, there is ________ output gap of ________ but this gap could be closed by a ________. A) a recessionary; 100; fiscal contraction B) a recessionary; 200; fiscal expansion C) a recessionary; 200; fiscal contraction D) an inflationary; 100; fiscal contraction E) an inflationary; 200; fiscal expansion

B) a recessionary; 200; fiscal expansion

26) Which of the following would likely cause a downward parallel shift in the AE curve and a leftward shift in the AD curve? A) an increase in the business confidence of firms B) a reduction in government purchases C) an decrease in the MPC D) a decrease in the price level E) an increase in the price level

B) a reduction in government purchases

8) An exogenous fall in the domestic price level causes an increase in real wealth and A) a fall in desired investment. B) a rise in desired consumption. C) a downward shift in the AE curve. D) a downward shift of the net export function. E) a fall in government purchases.

B) a rise in desired consumption.

15) The functions of the Bank of Canada include A) providing deposit insurance at Canadian commercial banks. B) acting as banker for the commercial banks. C) regulating both the money market and stock market. D) setting the exchange rate for the Canadian dollar on world markets. E) acting as the lender of last resort for the largest private corporations.

B) acting as banker for the commercial banks.

76) Consider the basic AD/AS model. When wage rates rise faster than the increase in labour productivity, the A) AD curve shifts left. B) AS curve shifts upward. C) output gap falls. D) output gap increases. E) AS curve shifts downward.

B) AS curve shifts upward.

59) In the short run, the aggregate supply curve has a positive slope because, as the price level rises, producers can A) accumulate inventories. B) be compensated for the extra costs incurred to produce more output. C) experience rising factor prices. D) produce less in response to falling profits. E) increase output at unchanged unit costs.

B) be compensated for the extra costs incurred to produce more output.

17) 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) experiencing a recessionary gap. C) experiencing an inflationary gap. D) threatened with an acceleration of inflation. E) operating at full capacity.

B) experiencing a recessionary gap.

8) If a majority of Canadian households and businesses refused to accept Canadian dollars in exchange for goods and services, the value of the Canadian dollar would A) stay constant since its value is determined only by the Bank of Canada. B) fall. C) rise since less would be in circulation. D) stay constant since the value does not depend on its acceptability by people. E) stay constant since its value is determined only by the Government of Canada.

B) fall.

126) In the basic AD/AS macro model, the "paradox of thrift" is only a short-run phenomenon because A) consumers exhibit cyclical consumption behaviour. B) in the long run output is determined by potential output. C) savings are transformed into expenditures in the long run. D) the marginal propensity to consume is fixed in the long run. E) consumers base their consumption expenditures only on their lifetime income.

B) in the long run output is determined by potential output.

17) In the long run, increases in potential GDP are possible only if there is A) no government interference with the market system. B) growth in the supply of available factors or growth in factor productivity. C) continuous growth in the saving rate. D) an increase in the general price level. E) an increase in the unemployment rate.

B) growth in the supply of available factors or growth in factor productivity.

50) Other things being equal, a ________ marginal propensity to spend will lead to a ________ AD curve. A) lower; flatter B) higher; flatter C) higher; steeper D) lower; rightward shift of the E) lower; leftward shift of the

B) higher; flatter

51) Other things being equal, a closed economy will have a ________ marginal propensity to spend and thus a ________ AD curve compared to an open economy with foreign trade. A) lower; flatter B) higher; flatter C) higher; steeper D) lower; rightward shift of the E) lower; leftward shift of the

B) higher; flatter

2) Other things being equal, a fall in the domestic price level leads to a rise in private-sector wealth and thus A) an increase in the average propensity to save. B) an increase in autonomous desired consumption. C) a downward shift in the AE curve. D) a downward shift in net exports. E) domestic goods appearing less attractive to foreigners.

B) an increase in autonomous desired consumption.

12) An increase in potential GDP would most likely be caused by a (an) A) decrease in factor-utilization rates. B) increase in factor productivity. C) increase in interest rates. D) decrease in saving in the short run. E) increase in the unemployment rate.

B) increase in factor productivity.

20) All points on an economy's AD curve A) correspond to a particular point on industry demand curves for a particular product. B) relate a particular price level to the total demand for output at that price level. C) show only changes in relative prices and quantities. D) show the direct relationship between the price level and net exports. E) show the direct relationship between the price level and the demand for consumer goods.

B) relate a particular price level to the total demand for output at that price level.

79) Consider the basic AD/AS model. Suppose that high-school graduates have better computing skills than did graduates in the past, resulting in an increase in average labour productivity. This change will A) shift the AS curve to the left. B) shift the AS curve to the right. C) shift the AD curve to the left. D) shift the AD curve to the right. E) cause a movement along the AS curve to the right.

B) shift the AS curve to the right.

34) Consider the basic AD/AS diagram. The vertical line at Y* shows the relationship between the price level and the amount of output ________ have adjusted to output gaps. A) demanded by households after all factor prices B) supplied by firms after all factor prices C) demanded by households before all factor prices D) supplied by firms before all factor prices E) supplied by firms after all output prices

B) supplied by firms after all factor prices

An inflationary output gap implies that A) the demand for all factor services will be relatively low. B) the intersection of AD and AS occurs at real GDP below potential output. C) the economy's resources are being used beyond their normal capacity. D) there is a pressure for wages to decrease. E) there is excess supply of most factors of production

Assume that an economy is initially in long-run equilibrium. Explain the short-run effect of monetary policy that causes an increase in interest rates. As a result of higher interest rates, the A. aggregate demand curve will shift right. B. long-run aggregate supply curve will shift left. C. aggregate demand curve will shift left. D. short-run aggregate supply curve will shift left.

downward wage stickiness

Both upward and downward adjustments to wages and unit costs do occur, but there are differences in the speed at which they typically operate. Booms can cause wages to rise rapidly; recessions usually cause wages to fall only slowly.

) The Phillips curve describes the relationship between A) aggregate expenditure and aggregate demand. B) the money supply and interest rates. C) unemployment and the rate of change of wages. D) inflation and interest rates. E) the output gap and potential GDP.

61) In the Neoclassical growth model, whenever diminishing returns applies, increases in the population, other things being equal, are accompanied by A) increasing GDP and constant living standards. B) decreasing GDP and falling living standards. C) increasing GDP and falling living standards. D) increasing GDP and increasing living standards. E) decreasing GDP and increasing living standards.

72) The Neoclassical growth model assumes that with a given state of technology, A) increases in the use of a single factor bring increasing returns. B) growth in GDP happens only if the labour force grows more quickly than the amount of physical capital. C) the standard of living will decrease if the labour force grows more quickly than the amount of physical capital. D) increases in the use of a single factor result in constant returns. E) increases in GDP are possible only if all factors are increased at an equal rate.

77) Real GDP is not a good measure of average material living standards because A) it excludes the role of imported goods. B) it is sensitive to the base year chosen in its calculation. C) it does not take into account the growth in the population. D) it is biased by the changes in the inflation rate. E) none of the above.

78) The main properties of a Neoclassical aggregate production function are ________ and ________. A) increasing returns to scale; increasing marginal returns B) increasing returns to scale; diminishing marginal returns C) constant returns to scale; diminishing marginal returns D) decreasing returns to scale; diminishing marginal returns E) constant returns to scale; constant marginal returns

8) Over the long term, by far the most potent force for raising average material living standards is A) increasing the money supply. B) reducing inefficiencies. C) economic growth. D) appropriate fiscal policies. E) redistributing income.

82) When a new personal computer is purchased to replace an old one, and the new PC is much better and faster than the old one, there has been A) a disembodied technical change. B) a fall in the output per unit of capital. C) an embodied technical change. D) a rise in the capital- output ratio. E) capital "deepening".

85) An example of "embodied technical change" is A) the strengthening of social infrastructure, such as delivery of basic health- care services. B) education that teaches a wider portion of the labour force basic numeracy. C) the replacement of old computer chips with new ones designed for faster processing. D) better methods of inventory control. E) the development of better intellectual property law.

93) Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5 percent each, and the production function displays constant returns to scale, then total output will increase by ________ percent. A) more than 5 B) less than 5 C) 5 D) 0 E) Not enough information to determine.

A common measure of a countryʹs level of productivity is: A) per capita GDP. B) the capital-output ratio C) output per unit of labour input.

An adjustment "asymmetry" in aggregate supply is A) the concave shape of the AS curve. B) the convex shape of the AS curve. C) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps). D) the difference in speed of increases in factor prices versus wage rates. E) the difference in speed of decreases in output levels.

Briefly explain whether an expansionary fiscal policy will cause each of the following variables to increase or decrease: (iii) The price level A. Increase the price level because less is supplied. B. Decrease the price level because inflation falls. C. Increase the price level because more is demanded. D. Decrease the price level because more is supplied.

Consider a simple macro model with demand-determined output. Which of the following parameters will produce the strongest automatic stabilizer? A) MPC = 0.8, t = 0.2, m = 0.3 B) MPC = 0.7, t = 0.3, m = 0.2 C) MPC = 0.7, t = 0.1, m = 0.4 D) MPC = 0.9, t = 0.2, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2

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) small increase; a large increase B) small increase; a large decrease C) large increase; a small increase D) large increase; a small decrease E) large increase; no change

Consider the Dynamic AD-AS model and assume initially the economy is in long-run equilibrium. Now, suppose technology increases, oil prices decline, and interest rates decline. The technology shock is greater than the interest rate shock. In response to the three events, prices _________, output ____________, and unemployment ______________. A) increase; increases; decreases B) decrease; decreases; increases C) decrease; increases; decreases D) increase; decreases; increases

Consider the adjustment of factor prices to output gaps in the basic AD/AS macro model. The experience of many economies suggests that A) downward pressure on wages during slumps results in sharply increased labour costs. B) upward pressures on wages are largely ineffective in booms. C) downward pressure on wages during slumps is not as intense as upward pressure on wages during booms. D) unit labour costs fall quickly during booms. E) slumps and booms are not common; the economy is usually in equilibrium at potential output.

Refer to Table 24-1. Which of the economies is operating at its long-run equilibrium? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E

C 36)

Consider Figure 24-5. In the initial short-run equilibrium, there is ________ output gap of ________ but this gap could be closed by a ________. A) an inflationary; 100; fiscal contraction B) a recessionary; 100; fiscal contraction C) a recessionary; 200; fiscal expansion D) an inflationary; 200; fiscal expansion E) a recessionary; 200; fiscal contraction

C 94)

private open economy GDP is

C + Ig + Xn

37) The Canadian banking system is a A) target-reserve system. B) treasury-bill reserve system. C) fractional-reserve system. D) gold-reserve system. E) asset-backed reserve system

C) fractional-reserve system.

69) Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y*

C) leftward; AS

90) In the long run in the AD/AS macro model we can say that A) both real GDP and the price level are determined by aggregate demand. B) both real GDP and the price level are determined by Y*. C) long-run real GDP is determined by Y* and the long-run price level by the AD curve. D) real GDP is determined by aggregate demand and the price level by Y*. E) long-run real GDP is determined by aggregate demand and the price level is determined solely by the AS curve.

C) long-run real GDP is determined by Y* and the long-run price level by the AD curve.

32) If the economy in the short run is experiencing a recessionary gap, we are likely to see A) severe and widespread labour shortages. B) quickly rising output prices. C) many workers receiving employment-insurance benefits. D) the number of employment-insurance recipients the lowest ever. E) consumers optimistic about the future.

C) many workers receiving employment-insurance benefits.

88) Refer to Figure 23-2. The shift from AS1 to AS2 shown in the diagram is referred to as a(n) A) increase in aggregate supply. B) increase in unit costs. C) negative aggregate supply shock. D) positive aggregate supply shock. E) decrease in unit costs.

C) negative aggregate supply shock.

Consider a simple macro model with demand-determined output. Which of the following parameters will produce the strongest automatic stabilizer? A) MPC = 0.8, t = 0.2, m = 0.3 B) MPC = 0.9, t = 0.2, m = 0.4 C) MPC = 0.7, t = 0.3, m = 0.2 D) MPC = 0.7, t = 0.1, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2

D 108)

Assume the economy is in long-run equilibrium. Now assume that there is a large increase in demand for U.S. exports. The new short-run equilibrium will be A. where the original aggregate demand curve intersects the original short-run aggregate supply curve. B. where the new aggregate demand curve intersects the original aggregate demand curve. C. where the new aggregate demand curve intersects the original long-run aggregate supply curve. D. where the new aggregate demand curve intersects the original short-run aggregate supply curve.

Consider the AD/AS macro model. The main source of increases in material living standards over the long term is the A) maintenance of a continuous inflationary gap. B) continual avoidance of recessionary gaps. C) continuous outward shift of aggregate demand. D) continual increase in potential national income. E) positive slope of the aggregate supply curve.

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

85) 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) decrease real GDP and the price level. C) affect only the level of real GDP. D) increase real GDP and lower the price level. E) decrease real GDP and raise the price level.

D) increase real GDP and lower the price level.

114) Aggregate supply shocks cause the price level and real GDP to change in A) the same direction with price changing by more than output. B) the same direction and by the same amount. C) opposite directions with price changing by less than output. D) opposite directions but not necessarily by the same amount. E) opposite directions but by the same amount.

D) opposite directions but not necessarily by the same amount.

40) A leftward shift of the aggregate demand (AD) curve could result from a rise in A) desired exports. B) government purchases. C) government transfer payments to households. D) the net tax rate. E) desired investment.

D) the net tax rate.

66) Consider the basic AD/AS model. If major labour unions succeed in increasing wages across the economy, the AS curve will shift A) downward (to the right), reducing the price level. B) downward (to the right) and then return immediately to its original position. C) upward (to the left) and then return immediately to its original position. D) upward (to the left), increasing the price level. E) None of the above; there will no effect on the AS curve.

D) upward (to the left), increasing the price level.

21) In a macro model with a constant price level, an increase in autonomous desired consumption will cause the AE curve to shift A) downward and the AD curve to shift to the left. B) downward and the AD curve to shift to the right. C) upward and the AD curve to shift to the left. D) upward and the AD curve to shift to the right. E) upward and a movement to the right along the AD curve.

D) upward and the AD curve to shift to the right.

88) The aggregate production function shows the ________ for given levels of labour and capital inputs. A) returns to scale B) the production possibilities boundary C) marginal product of labour D) marginal product of capital E) total output for society (real GDP)

In the Neoclassical growth model, whenever diminishing returns applies, increases in the population, other things being equal, are accompanied by: B) increasing GDP and constant living standards. C) increasing GDP and increasing living standards. D) decreasing GDP and increasing living standards. E) increasing GDP and falling living standards.

Investment in innovation is often considered to have increasing marginal returns because B) innovation is mostly through ʺleaning by doingʺ. C) new products increase firmsʹ profits. D) R&D costs are negligible relative to firmsʹ total costs. E) of market development costs and the ʺpublic goodʺ nature of knowledge

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) government deficits tend to reduce the value of the multiplier; 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

. Which of the following is considered a negative supply shock? A) increasing investment in the economy causes the capital stock to rise B) an improvement in technology C) a decline in wages D) an unexpected increase in the price of natural gas

D) an unexpected increase in the price of natural gas

53) Consider the simple multiplier when the price level is constant. We can say that national income is ________ and that the simple multiplier measures the horizontal shift in ________ in response to a change in autonomous desired expenditure. A) demand determined; the AS curve B) unit-cost determined; the AD curve C) constant; the AD curve D) demand determined; the AD curve E) constant; the AE curve

D) demand determined; the AD curve

The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in

potential GDP

Assume the MPC is 2/3. If government spending decreases by $6 billion, equilibrium GDP will:

fall by $18 billion If the MPC is 2/3, the multiplier is 3. The decline in GDP is 3 times the decrease in government spending of $6 billion, or $18 billion.

a decrease in investment demand would be a consequence of a decline in

expected future sales

If the short-run macroeconomic equilibrium occurs with real GDP less than Y*, the economy is

experiencing a recessionary gap

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 ________.

fall sharply; decrease slightly

Economic growth, which promises more goods and services tomorrow, is achieved by consuming fewer goods today. For the economy as a whole, this sacrifice of current consumption is the

primary cost of growth.

investment

private spending on tools, plant, equipment, and newly built housing

Actions by the federal government to increase the progressivity of the tax system

steepen the slope of line T and increase built-in stability

Consider the basic AD/AS diagram. The vertical line at Y* shows the relationship between the price level and the amount of output ________ have adjusted to output gaps.

supplied by firms after all factor prices

wealth resitribution

surprise inflation redistributes wealth from lenders to borrowers

induced expenditures

systematically change with level of national income

implementation lag

takes time for policy to be enacted

recognition lag

takes time to know if policy actually worked

quantitative easing

targeted use of open market operations in which the central bank buys securities specifically targeting certain markets -typically short term

As the disposable income of the economy increases

the APC falls and the APS rises

Marginal Propensity to Save (MPS)

the fraction of any change in income saved MPS= change in saving/change in income

Average Propensity to Save (APS)

the fraction of total income that is saved APS= saving/income

Average Propensity to Consume (APC)

the fraction or percentage of total income that is consumed APC = consumption/income

Suppose an economy has two types of money -- gold and silver coins -- that are both legal tender but have different non-monetary values. Greshamʹs law has come into effect when

the higher-valued coin is taken out of circulation

Through the multiplier effect, an initial change in investment spending can cause a magnified change in domestic output and income.

true

To increase initial consumption by a specific amount, government must reduce taxes by more than that amount because some of the tax cut will be saved by households.

true

Greshamʹs law predicts that

undebased money will be driven from circulation

As I.R. falls, firms decide to

undertake more investment projects and the economy moves from the initial equilibrium to the new equilibrium

In a simple model of the economy with demand-determined output, the equilibrium level of national income is at an income

where aggregate desired expenditure equals the value of total output

Growth in phsical cap

...

Contractionary fiscal policy

4. Decreased government spending 5. Increased taxes 6. Combined government spending decreases and increased taxes

What percentage of the U.S. public debt is held by federal agencies and the Federal Reserve?

40 percent.

If the real rate of interest is 4% then the equilibrium level of GDP will be

500 bill investment 150, consumption 350, GDP 500

0.9

If plotted on a graph, the slope of the consumption schedule would be

$66.7 billion

If the MPC in an economy is 0.75, government could eliminate a recessionary expenditure gap of $50 billion by decreasing taxes by

$400

If the investment schedule is $60 at each level of output, the equilibrium level of real GDP will be

$10.00

If the marginal propensity to consume is 0.6 and real GDP falls by $25, this is caused by a decrease in initial spending of

Increase by $75

If the marginal propensity to consume is 0.67 and initial spending increases by $25, real GDP will

Decrease aggregate supply

If the prices of imported resources increase, then this event would most likely

150 and $4,000

If the quantity of real domestic output demanded increased by $2,000 at each price level, the new equilibrium price level and quantity of real domestic output would be

The real domestic output would decrease and the price level would rise

If there were cost-push inflation,

Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economy's natural adjustment process to operate is that A) it will reduce the downward pressure on prices that would otherwise occur. B) if private-sector expenditures increase on their own, the policy will stabilize real GDP. C) it will shorten what might otherwise be a long recession. D) it will close the output gap. E) it will reduce the inflationary pressure on prices that would otherwise occur.

E 100)

An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________. A) is crowded out; corporate tax revenue is reduced B) increases; aggregate demand increases C) rises to an unsustainable level; real GDP is reduced D) increases; net exports increases E) is crowded out; potential output is reduced

E 118)

59) If the target reserve ratio in the banking system is 1%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an expansion of the money supply of A) $0.01. B) $1.10. C) $1.00. D) $10.00. E) $100.00.

E) $100.00.

53) An economy's current GDP is $100 billion, the labour force is composed of 2.2 million people, and 2 million people are employed. What is the economy's (approximate) labour productivity? A) 0.91 B) 0.45 C) $50 D) $5000 E) $50 000

E) $50 000

76) Refer to Figure 24-4. Following the positive AS shock shown in the diagram, the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 60; 1000 B) 60; 1300 C) 90; 750 D) 90; 1200 E) 110; 1000

E) 110; 1000

economic growth in the Neoclassical model - labour-force growth

In the Neoclassical growth model with diminishing marginal returns, increases in population (with a fixed stock of capital) lead to increases in GDP but an eventual decline in material living standards.

economic growth in the Neoclassical model - physical and human capital accumulation

In the Neoclassical model, capital accumulation leads to improvements in living standards, but because of the law of diminishing marginal returns, these improvements become smaller with each additional increment of capital.

What is currently the most reliable measure of money supply?

Investment decision

MB vs. MC MB > MC MB f(r), MC f(i)

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

Reductions in federal tax rates on personal and corporate income.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports caused by the foreign purchases effect of a price-level increase is depicted by the:

Move from point a to point b in panel (B).

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the:

Multiplier effect.

Multiplier and Marginal Propensities

Multiplier= 1/1-MPC -directly related Multiplier= 1/MPS -inversely related

In the diagram, a shift from AS3 to AS2 might be caused by an increase in:

Productivity.

A decrease in government spending

Refer to the graph. The shift from AD1 to AD2 may have been caused by:

$200

Refer to the table. The equilibrium level of GDP in this economy is:

Consumption Schedule

Reflects the direct consumption-disposable income relationship suggested by the data, and it is consistent with many household budget studies.

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. Answer the following question on the basis of this information. Refer to the information. All else being equal, if the price of each input increased from $4 to $6, productivity would:

Remain unchanged.

An increase in net exports will shift the AD curve to the:

Right by a multiple of the change in investment.

If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift:

Rightward by $50 billion at each price level.

Injection

An addition of spending into the income-expenditure stream: any increment to consumption, investment, government purchases or net exports.

5) Other things being equal, when the domestic price level rises exogenously, A) Canadian goods become more expensive relative to foreign goods. B) the net export function shifts upward. C) the aggregate expenditure function shifts upward. D) imports of foreign goods fall. E) the desired investment function shifts upward.

A) Canadian goods become more expensive relative to foreign goods.

The aggregate supply curve:

Shows the various amounts of real output that businesses will produce at each price level.

The federal budget deficit is found by:

Subtracting government tax revenues from government spending in a particular year.

increasing marginal returns - market-development costs

Successive increments of investment associated with an innovation often yield a range of increasing marginal returns as costs that are incurred in earlier investment expenditure provide publicly available knowledge and experience and as customer attitudes and abilities become more receptive to new products.

For a given level of private saving, an increase in the growth of government purchases will likely ________ the economy's long-run growth rate. A) accelerate B) slow down C) not affect

fiscal stabilization

When the economy's adjustment process is slow to operate, or produces undesirable side effects, such as rising prices, there is a potential stabilization role for fiscal policy.

To say that "the U.S. public debt is mostly held internally" is to say that:

The bulk of the public debt is owned by U.S. citizens and institutions.

Knowledge transfer

The diffusion of technological knowledge from those who have it to those who want it is not costless Most skills cannot be "embodied" in the machine themselves, instruction books, or blueprints. The needed knowledge is tacit in the sense that it can be acquired only by experience.

In the figure, AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. The change in aggregate supply from AS1 to AS2 could be caused by:

The increase in productivity.

Expected Rate of Return

The increase in profit a firm anticipates it will obtain by purchasing capital (or engaging in research and development); expressed as a percentage of the total cost of the investment

Expected Rate of Return

The increase in profit a firm anticipates it will obtain by purchasing capital or engaging in research and development (R&D); expressed as a percentage of the total cost of the investment (or R&D) activity.

$0.40

The per-unit cost of production is

Horizontal AS curve

The price level won't change and only real GDP will change

Vertical AS curve

The real GDP won't change and only the price level will change

Wealth Effect

The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets fall

Wealth Effect

The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls.

Decrease the aggregate expenditures schedule by $5 billion

Assume that the marginal propensity to save is 0.1 in an economy. To reduce the level of real GDP by $50 billion in that economy to achieve a full employment level of output, it will be necessary to

Fall by $18 billion

Assume the MPC is 2/3. If government spending decreases by $6 billion, equilibrium GDP will:

built in stabilizers

avoid the problems associated with the administrative lag of discretionary fiscal policy Built-in stabilizers automatically move the government's budget toward surplus during expansions and toward deficit during recessions without requiring explicit government action. Thus, there is no lag between the recognition of a problem and Congress taking appropriate action.

Which of the following will cause the short-run aggregate supply curve to shift to the right? a. a higher expected future price level b. an increase in the actual (or current) price level c. a technological change d. all of the above

c. a technological change

How can government policies shift the aggregate demand curve to the right? a. by increasing personal income taxes b. by increasing business taxes c. by increasing government purchases d. all of the above

c. by increasing government purchases

If workers and firms across the economy adjust to the fact that the price level is higher than they had expected it to be, a. there will be a movement up and to the right along a stationary aggregate supply curve. b. there will be a movement down and to the left along a stationary aggregate supply curve. c. the short-run aggregate supply curve will shift to the left. d. the short-run aggregate supply curve will shift to the right.

c. the short-run aggregate supply curve will shift to the left

In a simple macro model, an increase in households' wealth is generally assumed to

cause an upward shift in the aggregate consumption function

First investment in new product will encounter production problems that, once overcome,

cause fewer problems to subsequent investors.

Multiplier

change in real GDP/initial change in spending

Public saving is equal to the

combined budget surpluses of the federal, provincial and municipal governments:

steady state

condition of a macroeconomy when there is no new net investment because of declining marginal product

Current thinking about discretionary fiscal policy among mainstream economists is that it should be designed to

contribute to long run economic growth

If the cyclically adjusted budget shows a deficit of about $200 billion and the actual budget shows a deficit of about $250 billion over a several-year period, it can be concluded that there is a

cyclical deficit

) Which of the following is a defining assumption of the AD/AS macro model in the short run? A) factor supplies are assumed to be flexible B) technology used in production is endogenous and variable C) the level of potential output fluctuates with the price level D) factor prices are assumed to be exogenous E) firms cannot operate near their normal capacity

The aggregate demand curve shows the relationship between the price level and the quantity of real GDP demanded by a. households. b. firms. c. the government. d. all of the above

d. all of the above

If firms and workers could predict the future price level exactly, the short-run aggregate supply curve would be a. downward sloping. b. upward sloping. c. horizontal. d. the same as the long-run aggregate supply curve

d. the same as the long-run aggregate supply curve.

Expectations of a recession are likely to lead households to

decease consumption and increase saving

Higher real interest rates are likely to

decrease consumption and increase saving

Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will

decrease real output and increase the price level

Other things being equal, a rise in the price level will

decrease the purchasing power of money

In the aggregate demand-aggregate supply model, an increase in the price level will

decrease the strength of the multiplier

Consumption ___ as a percentage of disposable incomes as disposable income increases

decreases

Aggregate supply

a schedule or curve showing the relationship between a nations price level and the amount of real domestic output that firms in the economy produce immediate short run: both input prices as well as out put prices are fixed short run: input prices are fixed, but output prices can vary long run: input prices as well as output prices can vary

Which of the following discretionary policies both restrains the growth of government and helps return the economy to full employment?

a tax cut in a recession A decrease in government spending in a recession would decrease the size of government, but it would also be counterproductive. Tax cuts in a recession would expand GDP while also restraining the size of government.

Doug compares the unit price of chocolate bars in order to get the ʺbest buyʺ. This represents using money as

a unit of account

When you are estimating your monthly income and expenses, money is being used as

a unit of account

Basic functions of the Bank of Canada include

acting as banker for the chartered banks and regulating the money supply

The functions of the Bank of Canada include

acting as banker for the commercial banks

What is sometimes called the ʺlong-run aggregate supply curveʺ relates the aggregate price level to real GDP

after factor prices have fully adjusted to eliminate output gaps

fiscal policy generally focuses on:

aggregate demand

An increase in the incomes of U.S. trading partners would shift the U.S.:

aggregate demand curve to the right Feedback: Higher incomes abroad will lead U.S. trading partners to increase their purchases of U.S.-produced goods. The resulting increase in U.S. net exports will add to aggregate demand in the U.S., leading to increased real output and a higher price level.

aggregate demand; inflationary

According to many economists, the primary burden of the debt is the

annual interest charges from bonds sold to finance the public debt

The Canada Deposit Insurance Corporation (CDIC) was set up to protect

depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit

The main distinction between M2 and M2+ is that M2+ also includes

deposits at financial institutions other than the chartered banks

checkable deposits

deposits in bank accounts from which depositors may make withdrawals by writing checks

Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y*

A common assumption among macroeconomists is that when real GDP is less than potential output, factor prices adjust and the A) AS curve shifts to the right very rapidly. B) AD curve shifts to the left rapidly. C) AS curve shifts to the right only very slowly. D) AS curve shifts to the left fairly rapidly. E) none of the above -- the AS curve remains unchanged.

C 21)

If the economy in the short run is experiencing a recessionary gap, we are likely to see A) rising output prices. B) the number of employment-insurance recipients the lowest ever. C) many workers receiving employment-insurance benefits. D) severe labour shortages. E) consumers optimistic about the future.

C 31)

44) 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. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary

D) aggregate demand; inflationary

If a majority of Canadian households and businesses refused to accept Canadian dollars in exchange for goods and services, the value of the Canadian dollar would

fall

The experience of many economies suggests that

downward pressure on wages during slumps is not as intense as upward pressure on wages during booms

Which of the following is a defining assumption of the AD/AS macro model in the long run? A) factor supplies are assumed to be fixed B) technology used in production is constant C) the level of potential output is constant D) factor prices are assumed to be fixed E) changes in real GDP are determined by the changes in potential output

The increase in productive capacity created by installing new and better capital is called

embodied technical change

According to the law of diminishing marginal returns, whenever

equal increases of one factor of production are combined with a fixed amount of another factor, the increment to total production will eventually decline

A commercial bankʹs target reserve ratio is the

fraction of its deposit liabilities that it wishes to holds as reserves, either as cash or as deposits with the Bank of Canada

The crowding-out effect from government borrowing is reduced when

govt spending improves human capital in the economy

If there is a decrease in the investment schedule, there will be an upshift in the aggregate expenditures schedule.

false

If the cyclically adjusted deficit as a percentage of GDP is zero one year, and there is a cyclically adjusted budget surplus the next year, it can be concluded that

fiscal policy is contractionary

One reason why the aggregate demand (AD) curve slopes downward is that

increases in the price level cause consumers to substitute foreign goods for domestic goods

The crowding-out effect of an expansionary (deficit) fiscal policy is the result of government borrowing in the money market that

increases interest rates and decreases net investment spending

Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy because

households may save the extra income from a tax cut rather than spend it; and there are long and uncertain lags in implementing fiscal policy

seniority system

in regard to employment relationships, a system in which those who have worked longest for the employer are first in line for promotions, scary increases, and other benefits. They are also the last to be laid off if the workforce must be reduced.

In the basic AD/AS macro model, the ʺparadox of thriftʺ is only a short-run phenomenon because

in the long run output is determined by potential output

These innovations cause continual changes in the techniques of production and in the nature of what is produced. Embodied technical change leads to

increase in potential output even if the amounts of labour and capital are held constant.

Advances in technological knowledge typically comes with an

increase in the economy's resource efficiency.

If the Bank of Canada enters the open market and purchases $1000 of government securities, what will be the eventual change in the money supply given a 10 percent target reserve ratio in the commercial banking system?

increase of $10 000

If Congress passed much stricter laws to control the air pollution from businesses, this action would tend to

increase per unit production costs and shift the AS curve to the left

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

increase real GDP and lower the price level

Other things being equal, the purchasing power of money is

inversely related to the price level

Which is an injection of spending into the income expenditures stream?

investment

We can take the level of output as given (Y*) and use the condition that desired saving equals desired investment to determine the equilibrium growth and use the condition that desire saving equals desired

investment to determine the equilibrium real interest rate

Injection

investment--the purchase of capital goods--is therefore an injection of spending into the income expenditures stream. As an adjunct to consumption, investment is thus a potential replacement for the leakage of saving. -if the leakage of saving at a certain level of GDP exceeds the injection of investment, then C+Ig will be less than GDP and that level of GDP cannot be sustained. Any GDP for which saving exceeds investment is an above equilibrium GDP.

Describe fiscal policy.

involves changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives

Describe monetary policy.

involves the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives

Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP

is determined by potential output and the price level by aggregate demand

Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economyʹs natural adjustment process to operate is that

it will reduce the upward pressure on the price level that would otherwise occur

If the AS curve is very steeply sloped, a change in AD leads to a relatively

large change in price level and a small change in real GDP

In command economies, economic behavior is

largely determined by a central authority

Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the ________ the output gap being suffered, an argument supporting ________ .

larger; gross tuning

prima facie case

latin for, at first sight. Legally, it refers to a fact that is presumed to be true unless contradicted by evidence.

Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________.

leftward; AS

future price level uncertainty

long term agreements may not be signed if lenders, firms, and worker are unsure about future price levels

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

long-run real GDP is determined by Y* and the long-run price level by the AD curve

The slope of the consumption schedule or line for a given economy is the

marginal propensity to consume

Gross Domestic Product

market value of all final goods and services produced within a nation during a specific period of time

store of value

means for holding wealth

unit of account

measure in which prices are quoted aka common language

Credit cards are considered to be ʺmoney substitutesʺ instead of money because

money must eventually be used to pay for the transaction

commodity backed money

money that can be exchanged for a commodity at a fixed rate

Without a central bank, commercial banks in Canada would probably hold ________ reserves than they do now, resulting in a ________ money supply than at present.

more; smaller

the short run aggregate supply curve assumes that

nominal wages do not respond to changes in the price level

Suppose a student deposits into a downtown bank a $200 cheque that she received from her parents in the suburbs. This transaction alone would

not change the money supply

The currency that is in circulation in Canada today is

not officially backed by anything

the fed uses ___________ _______________ operations to implement monetary policy

open market

currency

paper bills and coins that are used to buy goods and services

transfer payments

payments made to groups/individuals when no good/service is received in return -welfare -social security

interest payments

payments to owners of U.S. treasury bonds -difficult to alter -pretty much mandatory

economic growth

percentage change in real per capita GDP

unemployment rate

percentage of labor force that is unemployed

crowding out

phenomenon occurring when private spending falls in response to increases in government spending

marginal propensity to consume

portion of additional income that is spent on consumption

We therefore interpret GDP n the aggregate production function as

potential output

If I is above I*, the amount of desired saving exceeds the amount of desired investment, and this excess supply of loanable funds pushes down the

price of credit - the real interest rate.

An increase in the price level will:

reduce the purchasing power of household wealth and reduce consumption Feedback: A given amount of dollar-denominated assets, such as savings accounts, will purchase fewer goods and services if the price level rises. This drop in household wealth causes consumers to cut back on their spending in order to replenish their real savings.

The crowding-out effect of borrowing to finance an increase in government expenditures

reduces current spending for private investment

If the MPC is .75, government could eliminate a $60 recessionary expenditure gap by:

reducing lump sum taxes by 80 An $80 decrease in lump-sum taxes would increase consumption by .75 times $80, or $60. This would eliminate the recessionary expenditure gap, which is defined as the amount by which aggregate spending must be increased to achieve the full employment level of GDP.

Automatic fiscal stabilizers are most helpful in

reducing the intensity of business cycles

45 degree line Equilibrium

reference line, bisects the 90 degree angle formed by the two axes of the graph. At each point on the 45 degree line, consumption would equal disposable income. C=DI

marginal propensity to consume

relates the change in desired consumption to the change in disposable income, slope of the consumption function

consumption function

relates the total desired consumption to disposable income, holding everything else constant

Suppose that real domestic output in an economy is 50 units, the quantity of inputs is 10, and the price of each input is $2. Answer this Question on the basis of this information. All else equal, if the price of each input increases from $2 to $4, productivity would

remain unchanged and aggregate supply would decrease

A major advantage of the built-in or automatic stabilizers is that they:

require no legislative action by Congress to be made effective.

shoe leather costs

resources wasted when people change their behavior to avoid holding money

Income taxes in Canada can be considered to be automatic stabilizers because tax

revenues increase when income increases, thereby offsetting some of the increase in aggregate demand

Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________.

rightward; AS

Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________.

rightward; AS

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

rise and the AS curve will shift left

Consider the basic Aggregate Demand and Aggregate Supply (AD/AS) model. A fall in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income

shifts the AD curve to the left

recession

short economic downturn that typically lasts about 6 to 18 months

business cycle

short-run fluctuation in economic activity

The theory of economic growth is a long-run theory. It concentrates on the growth of potential output over long periods of time, not on

short-run fluctuations of output around potential.

If the slope of line T were flatter, there would be

smaller cyclical deficits produced as GDP moved from Y 3 to Y 2

In the neoclassical model, capital accumulation leads to improvements in living standards, but because of the law of diminishing marginal returns, these improvements become

smaller with additional increment of capital

If the economy is to have built-in stability, when real GDP falls,

tax revenues should fall and government transfer payments should rise

capital gains taxes

taxes on gains realized by selling an asset for more than its purchase price

The M2++ and M3 definitions of the money supply include financial assets

that are easily convertible into a medium of exchange

The Phillips curve provides a theoretical link between

the goods market and the labour market

A desire by ________ has no effect on the ability of the banking system to create bank deposits, for a given amount of reserves in the banking system.

the government to increase its level of spending

If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by

the intersection of the AD and AS curves at potential output

A high growth rate usually requires rapid adjustments in

the labour force

Federal open market committee

they makes the actual decisions about monetary policy. The Federal funds rate is the rate at which one bank lends reserves to another bank. It is the Fed's primary operating target.

Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap? A) rising prices B) decreasing investment C) increasing government purchases D) falling tax rates E) decreasing wages

to I2.

Average Propensity to Save (APS)

Fraction (or percentage) of disposable income that households save; savings divided by disposable income.

Average Propensity to Consume (APC)

Fraction (or percentage) of disposable income that households spend on consumer goods; consumption divided by disposable income.

The economy's long-run aggregate supply curve:

Is vertical.

A decline in investment will shift the AD curve to the:

Left by a multiple of the change in investment.

Of the following groups, the largest proportion of the total public debt is held by:

U.S. government agencies, including the Federal Reserve

What is stagflation?

a combination of inflation and recession, usually resulting from a supply shock

Which would be a consequence of the retirement of the internally held (U.S.-owned) portion of the public debt?

a redistribution of the nation's wealth among its citizens

The concept of ʺnear moneyʺ refers to

assets that fulfill the temporary store-of-value function but not the medium-of-exchange function

A major limitation of the aggregate expenditures model is that it

assumes that prices are stuck or inflexible even as the economy moves near potential GDP

A rightward shift in the economy's AS curve implies that

at any given price level, a higher level of output will be supplied

Canadian commercial banks maintain their reserves in the form of

cash in their bank vaults and deposits at the Bank of Canada

frictional unemployment

caused by delays in matching available jobs and workers

cyclical unemployment

caused by recessions or economic downturns aka unhealthy economy

structural unemployment

change in economy leading to new jobs and extinction of older ones

We therefore focus on the effects of

changes in K or L

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

changes in aggregate demand have no impact on real GDP in the long run

menu costs

cost of changing prices and the losing customers

In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of A) the short run. B) the adjustment process. C) the national accounts model. D) the long run. E) the business cycle model.

In the long-run version of our macro model, with real GDP equal to Y*, the equilibrium interest rate is determined where

desired national saving equals desired investment

The economyʹs output gap is defined as the

difference between actual GDP and potential GDP

The economy's output gap is defined as the

difference between actual GDP and potential GDP.

Private Saving

difference between disposable income and consumption expenditure

owner's equity

difference between the firm's assets and its liabilities

Disired saving is the difference between

disposable income and desire dincome

price confusion

inflation could be mistaken for demand

disparate-impact discrimination

intentional discrimination by an employer against an employee.

net investment

investment-depreciation

too strong; rise above

too weak; stay below

average propensity to consume

total consumption divided by total disposable income.

debt

total of all accumulated and unpaid budget deficits

An increase in aggregate supply driven by productivity increases can offset the inflationary pressures from an increase in aggregate demand.

true

Saving at any level of real GDP equals planned investment plus unplanned changes in inventories.

true

Selling U.S. securities to foreigners to finance increased expenditures by the federal government imposes a burden on future generations.

true

NeoC GT gave economies the name "the dismal science" by emphasizing diminishing marginal returns under conditions of given technology. The new growth theories are more optimistic because they emphasize the

unlimited potential of knowledge-drien technological change.

at the equilibrium level of GDP

unplanned changes in inventories are zero

What economists sometimes call the ʺlong-run aggregate supply curveʺ is

vertical

in the long run, the aggregate supply curve is

vertical

If real GDP is $275 billion, consumption is $250 billion, and investment is $30 billion, real GDP

will tend to increase

Built-in stability means that:

with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus.

underemployed workers

workers who have part-time jobs but who would like to have full time jobs

barter

when there is no commonly accepted medium of exchange

The major problem of a currency that is fractionally backed and convertible into a precious metal is that of

maintaining its convertability into the metal

For a country to be on a ʺgold standardʺ, it must

make its currency convertible into gold at a fixed rate of exchange

entitlement programs

mandatory outlays

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

many workers receiving employment-insurance benefits

Many innovations are embodied in either

physical or human capital.

The production function - indicated by FT - tells us how much GDP will be

produced for given amounts of labour and physical capital employed, given levels of human capital, and a given state of technology.

austerity

strict budget regulations aimed at debt reduction

Suppose that the cash drain in the banking system increases during holiday periods. As a result,

the capacity of the banking system to create deposit money is dampened during holiday periods

The expansion of deposits resulting from an injection of cash to the banking system can be calculated as follows:

the change in deposits is equal to the change in reserves divided by the sum of the target reserve ratio and the cash-deposit ratio

Suppose that the government announces temporary tax cuts to stimulate consumersʹ 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

the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their ʺlifetimeʺ income.

if there were cost push inflation

the real domestic output would decrease and the price level would rise

A reduction in the net tax rate might lead to an increase in the growth rate of potential output if

the tax cuts stimulate private investment

commodity money

the use of an actual good in place of money -gold, silver, tobacco

why does technological innovation occur in Solow model

there is no real reason

A decline in either C or G means that national saving rises at any real interest rate and so the NS curve shifts

to the right

An increase in the imports of a nation will increase the exports of other nations.

true

An increase in the stock of capital goods on hand will decrease the investment demand

true

An inflationary expenditure gap is the amount by which the economy's aggregate expenditures schedule must shift downward to eliminate demand-pull inflation and still achieve the full-employment GDP.

true

At equilibrium, the sum of leakages equals the sum of injections.

true

Built-in stabilizers are not sufficiently strong to prevent recession or inflation, but they can reduce the severity of a recession or inflation.

true

When it is computed as 1/MPS, the multiplier reflects only the leakage of income into saving.

true

When the determinants of short-run aggregate supply change, they alter the per-unit production cost at each price level and thereby aggregate supply.

true

public debt is also public credit

true

saving and actual investment are always equal

true

An increase in wealth shifts the consumption schedule

upward and the saving schedule downward

The growth rate of potential output might be decreased by an expansionary fiscal policy if

the policy crowds out private investment

The ʺasymmetryʺ in the behaviour of the AS curve implies that

unemployment can persist for a while without causing large decreases in wages and prices

In the short run, a reduction in aggregate demand is:

unlikely to cause a reduction in the price level because of menu costs and efficiency wages Feedback: Among other reasons, prices tend to be inflexible downward because changing prices is costly and because wage cuts can negatively affect morale and productivity.

Multiplier Equation

Change in Real GDP/Initial Change in Spending

Suppose that labour force grows hile stock of capital remains constant

More and more people go to work using a fixed quantity of capital.

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes:

The crowding-out effect.

The ________ associated with fiscal policy make(s)________ tuning difficult to implement successfully.

execution and decision lags; fine

One of the most important reasons that both GDP and per capita GDP increase over many years is

growth in productivity

and that technology is

held constant

Answer the question on the basis of the following information. An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. Refer to the information. The per-unit cost of production in this economy is:

$0.10.

If there was a change in investment spending of $10 and the marginal propensity to save was 0.25, then real GDP would increase by

$40

2. An economy is in a recession and the government decides to increase spending by $4 billion. The MPC is 0.8. What would be the full increase in real GDP from the change in government spending? (a) $3.2 billion (b) $4 billion (c) $16 billion (d) $20 billion

(d) $20 billion Feeback: Multiplier = 5 (1/.2 (MPS). 5 multiplied by $4B is $20B.

reasons to avoid reducing unemployment rate:

-can cause inflation and price level can go up -too much aggregate demand

Approximately what percentage of the U.S. public debt is held by foreign individuals and institutions?

33 percent.

90) An aggregate production function exhibits constant returns to scale when a one percent increase in labour input A) along with a one percent increase in capital produces one percent more output. B) induces a one percent increase in capital input. C) along with a one percent increase in capital produces the same amount of output. D) along with a one percent decrease in capital produces the same amount of output. E) produces a one percent increase in output.

According to the Neoclassical growth model, it is most likely that GDP would increase, but that average material living standards would fall, as a result of A) an increase in the working population. B) an increase in the availability of natural resources. C) a fast-growing capital stock.

Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y*

Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from to . At the new short-run equilibrium, the price level is ________ and real GDP is ________. A) 90; 900 B) 110; 800 C) 60; 1000 D) 60; 700 E) 90; 1250

Refer to Table 24-1. In which economy is there the most unused capacity? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E

A 42)

All else equal, if domestic consumers begin to spend a greater fraction of their consumption expenditures on foreign-produced goods:

AE and GDP will both decrease The increase in imports represents an increased leakage from the flow of spending on domestically produced output. Consumption of domestically produced goods falls, reducing aggregate expenditures and GDP.

Income effect

As interest rate goes up don't need to save as much to consume a certain amount in the future

The APC falls and the APS rises

As the disposable income of the economy increases,

) Refer to Figure 24-6. In the initial short-run equilibrium, there is ________ output gap of ________ but this gap could be closed by a ________. A) a recessionary; 100; fiscal contraction B) a recessionary; 200; fiscal expansion C) a recessionary; 200; fiscal contraction D) an inflationary; 100; fiscal contraction E) an inflationary; 200; fiscal expansion

Imagine a graph that shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential GDP? A. Increase the money supply. B. Increase government spending or decrease taxes. C. Decrease government spending or increase taxes. D. Both A and B.

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP, there will be A) Inflation B) Recession

In the long run, an increase in the demand for investment pushes ________ the real interest rate, encourages ________ saving by households, and leads to a ________ future growth rate of potential output. B) up; more; higher C) down; less; lower D) up; more; lower E) up; less; lower

11) Of the variables listed below, the best measure of a nation's average material standard of living is A) percent change in nominal GDP. B) per capita nominal GDP. C) per capita real GDP. D) nominal GDP. E) real GDP.

19) Refer to Figure 26- 1. Which of the following costs of economic growth are reflected in this diagram? A) lower real interest rate B) environmental degradation C) the sacrifice of current consumption D) resource exhaustion E) none of the above

26) Long- term economic growth A) alleviates all poverty. B) is achieved only by changes in factor- utilization rates. C) improves average material living standards. D) leads to equal income distribution. E) is the result of expansionary fiscal policy.

56) If the government has a budget deficit of $400 and the country's level of national saving is $200, then private saving must be A) - $400. B) $200. C) $600. D) $800. E) $400.

7) A common measure of a country's rate of economic growth is A) the level of output per capita. B) the level of real gross domestic product. C) the change in output per capita. D) the capital- output ratio. E) the marginal efficiency of capital.

86) The Solow residual is an estimate of changes in A) physical capital. B) labour. C) technology. D) human capital. E) economic growth.

In the basic AD/AS macro model, permanent increases in real GDP are possible only if A) the economy's automatic stabilizers are allowed to operate. B) aggregate demand responds positively to demand shocks. C) potential output is increasing. D) the correct fiscal policy is implemented. E) the aggregate supply curve is vertical.

Refer to Figure 24-4. The initial effect of a positive AS shock results in A) a recessionary output gap of 250. B) a recessionary output gap of 450. C) an inflationary output gap of 200. D) an inflationary output gap of 300. E) an inflationary output gap of 550.

Which of the following causes the short-run aggregate supply curve to shift to the left? A. an increase in productivity B. an increase in the labor force C. an increase in the expected price of an important natural resource D. a positive technological change

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 there is now A) an inflationary gap and permanent inflation. B) a recessionary gap and a permanent decrease in prices. C) an inflationary gap and some temporary inflation. D) a recessionary gap and a temporary decrease in prices. E) an inflationary gap but no inflation at all.

C 43)

1) The function of money in an economy is to serve as 1) a unit of account; 2) a store of value; 3) a medium of exchange. A) 2 and 3 B) 1 and 2 C) 1, 2, and 3 D) 1 and 3 E) 3 only

C) 1, 2, and 3

121) Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government's net tax revenues ________ during booms and ________ during recessions. A) magnify; increase; decrease B) magnify; decrease; increase C) dampen; increase; decrease D) dampen; decrease; increase E) does not affect; are constant; are constant

C) dampen; increase; decrease

7. Higher personal income taxes A) increase aggregate demand. B) increase disposable income. C) decrease aggregate demand. D) both b and c.

C) decrease aggregate demand.

77) Consider the basic AD/AS macro model, initially in a long-run equilibrium. A positive AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) decrease; decrease; decrease further; will decrease further B) decrease; increase; decrease further; will be restored to potential output C) decrease; increase; return to its initial level; will be restored to potential output D) increase; increase; decrease; will be restored to potential output E) increase; increase; return to its initial level; will be restored to potential output

C) decrease; increase; return to its initial level; will be restored to potential output

23) Which of the following entries would appear on the liabilities side of a commercial bankʹs balance sheet? A) Government of Canada securities B) cash reserves C) demand deposits D) foreign currency reserves E) mortgage loans

C) demand deposits

47) Consider the adjustment of factor prices to output gaps in the basic AD/AS macro model. The experience of many economies suggests that A) downward pressure on wages during slumps results in sharply increased labour costs. B) upward pressures on wages are largely ineffective in booms. C) downward pressure on wages during slumps is not as intense as upward pressure on wages during booms. D) unit labour costs fall quickly during booms. E) slumps and booms are not common; the economy is usually in equilibrium at potential output.

C) downward pressure on wages during slumps is not as intense as upward pressure on wages during booms.

64) A decrease in aggregate supply in the short run is A) reflected in a movement to the left along the AS curve. B) reflected in a shift to the right in the AS curve. C) interpreted to mean that less total output will be supplied at any given price level. D) caused by a decrease in the price level. E) caused by an increase in the price level.

C) interpreted to mean that less total output will be supplied at any given price level.

48) An important asymmetry in the behaviour of the AS curve is that A) prices are sticky but wages are not. B) positive output gaps can persist for a long time without causing increases in wages and prices, whereas negative output gaps lead to immediate reductions in wages and prices. C) negative output gaps can persist for a while without causing large decreases in wages and prices, whereas positive output gaps lead more quickly to increases in wages and prices. D) wages are very flexible in the downward direction, but not in the upward direction. E) wages and prices are equally sticky in both directions.

C) negative output gaps can persist for a while without causing large decreases in wages and prices, whereas positive output gaps lead more quickly to increases in wages and prices.

15) Other things being equal, an exogenous increase in the price level causes the aggregate wealth of holders and issuers of private-sector bonds to A) decrease. B) increase. C) not change since the changes in the wealth of bondholders and bond issuers offset each other. D) either increase or decrease depending on other factors. E) rise in nominal terms, but fall in real terms.

C) not change since the changes in the wealth of bondholders and bond issuers offset each other.

27) GDP can be represented by the equation: GDP = F × (Fe/F) × (GDP/Fe). In this equation, the term (Fe/F) represents A) factor supply per level of output. B) output per capita. C) the factor-utilization rate. D) factor productivity.

C) the factor-utilization rate.

138) The growth rate of potential output might be decreased by an expansionary fiscal policy if A) the budget deficits are persistent. B) the simple multiplier is small. C) the policy crowds out private investment. D) public investment has high productivity. E) the composition of output is not altered.

C) the policy crowds out private investment.

67) A movement along the economy's AS curve could be caused by a change in A) labour productivity. B) the cost of capital. C) the price level, caused in turn by an AD shock. D) technology. E) the wage rate.

C) the price level, caused in turn by an AD shock.

Equilibrium GDP

C+Ig=GDP

The U.S. public debt:

Consists of the historical accumulation of all past federal deficits and surpluses.

31) For a given level of private saving, an increase in the growth of government purchases will likely ________ the economy's long- run growth rate. A) accelerate B) increase C) not affect D) slow down E) Not enough information to know

If planned aggregate spending is less than total production A) actual inventories will equal planned inventories. B) GDP will increase. C) the economy is in equilibrium. D) firms will experience an unplanned increase in inventories.

If the level of income increases, then this will result in A. the consumption function shifting up. B. a downward movement along the consumption function. C. the consumption function shifting down. D. an upward movement along the consumption function.

In the basic AD/AS macro model, which of the following events would cause stagflation? A) a large decrease in wages B) a large increase in business confidence C) a large increase in the net tax rate D) a large increase in the price of raw materials E) a large increase in labour productivity

Refer to Figure 24-2. If the economy is currently in a short-run equilibrium at , the economy is experiencing A) potential output growth. B) a long-run equilibrium. C) an excess supply of labour. D) an inflationary output gap. E) a recessionary output gap.

Refer to Figure 24-3. Which of the following events could have shifted the AD curve from to ? A) an increase in net exports B) an increase in government purchases C) an increase in desired investment D) an increase in autonomous household saving E) an increase in autonomous consumption

Refer to Table 24-1. Which of the economies are experiencing an inflationary gap? A) Economies A and B B) Economies B and C C) Economies C and D D) Economies D and E E) none of the economies

Which of the following statements about fiscal policy is an example of "fine tuning"? A) The government increases tax rates to decrease an inflationary gap. B) The government increases its spending to reduce an inflationary gap. C) The government cuts taxes to remove a large and persistent recessionary gap. D) The government consistently uses its spending powers to hold real GDP at potential. E) The government uses automatic stabilizers to reduce any output gaps.

D 101)

An "adjustment asymmetry" is exhibited in the aggregate supply curve by A) a leftward shift. B) its concave shape. C) its convex shape. D) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps). E) a rightward shift.

D 49)

113) Which of the following will cause a positive aggregate supply shock? A) an increase in the price of raw materials B) a decrease in the price of foreign output C) an increase in the price of foreign output D) a decrease in the price of oil E) a decrease in productivity

D) a decrease in the price of oil

23) The level of aggregate output is determined in the short run by ________ but in the long run by the level of ________. A) the output gap; factor productivity B) the AD curve; interest rates C) the AS curve; potential output D) the AD and AS curves; Y* E) the AD and AS curves; factor utilization

D) the AD and AS curves; Y*

30) The Phillips curve provides a theoretical link between A) the liquidity preference and investment demand schedules. B) labour markets and foreign-exchange markets. C) the goods market and productivity. D) the goods market and the labour market. E) inflation and the demand for money.

D) the goods market and the labour market.

23) If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by A) the aggregate supply curve shifting to the left. B) the aggregate demand curve shifting to the left. C) the aggregate expenditure curve shifting upward. D) the intersection of the AD and AS curves at potential output. E) a point to the right of the aggregate supply curve at potential GDP.

D) the intersection of the AD and AS curves at potential output.

16) Refer to Figure 26- 1. Which of the following statements about Economies A and B are correct? A) Economies A and B will have equal material living standards beginning at Year Y. B) Economy A will sustain higher material living standards than Economy B in the long run. C) Economies A and B will have equal material living standards beginning at Year 0. D) Economies A and B will have equal material living standards beginning at Year X. E) Economy B will sustain higher material living standards than Economy A in the long run.

24) The costs of economic growth include A) reduced interest rates. B) current saving must be sacrificed to increase investment in capital goods. C) declining future living standards. D) improvements in technology. E) the effects on workers whose skills are made obsolete by technical change.

55) Refer to Table 26- 1. What is the level of national saving for this economy? A) $150 B) - $150 C) - $200 D) $200 E) - $50

Refer to Figure 24-5. Following a positive demand shock that takes the economy from E0 to E1, the movement of the economy from E1 to E2 indicates that A) a demand shock can keep real GDP above potential output permanently. B) an increase in the price level causes the AS curve to shift to the left. C) an increase in the price level causes the AD curve to shift to the left. D) the economy cannot return to potential output without government intervention. E) the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor eventually cause the: C) material standard of living to increase. D) average product of the factor to increase. E) marginal product of the factor to fall.

120) 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 = 0.3, m = 0.2 C) MPC = 0.7, t = 0.1, m = 0.4 D) MPC = 0.9, t = 0.2, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2

E) MPC = 0.8, t = 0.1, m = 0.2

38) Suppose a commercial bank has a target reserve ratio of 1%, but has an actual reserve ratio of 0.8%. This bank will likely A) buy government securities from the Bank of Canada. B) allow fewer cash withdrawals by the bankʹs customers. C) expand its portfolio of loans. D) maintain its new, higher reserve ratio because it is more profitable. E) contract its portfolio of loans.

E) contract its portfolio of loans.

16) Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap? A) rising prices B) decreasing investment C) increasing government purchases D) falling tax rates E) decreasing wages

E) decreasing wages

How does human capital accumlate?

Health Technical training, which also leads to better adaptability and, hence, more productive.

A small disposable income than a large disposable Income

Households tend to spend a larger portion of

Shortage and the price level will rise

If at a particular price level real domestic output from producers is less than real domestic output desired by buyers, there will be a

Reducing lump-sum taxes by $80

If the MPC is .75, government could eliminate a $60 recessionary expenditure gap by:

Disposable income

If the economy is private, closed to international trade, and government neither taxes nor spends, then real GDP equals

MPS has decreased

If the slope of a linear saving schedule decreases, then it can be concluded that the

Vertical

In the long run, the aggregate supply curve is

theories of economic growth - investment

In the long-run version of our macro model, with real GDP equal to Y*, the equilibrium interest rate is determined where desired national savings equals desired investment.

Unlikely to cause a reduction in the price level because of menu costs and efficiency wages

In the short run, a reduction in aggregate demand is:

Are independent of GDP

In this graph it is assumed that investment, net exports, and government expenditures

Endogenous Technological Change (Endogenous growth model)

Learning by doing Knowledge Transfer Market structure and innovation Shocks and innovation

A contractionary fiscal policy is shown as a:

Leftward shift in the economy's aggregate demand curve.

Expansionary monetary policy works as follows:

M (up) intrest rate (down), investments (up), output ( up)

What used to be the most reliable measure of money supply?

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in investment spending caused by the interest-rate effect of a price-level increase is depicted by the:

Move from point a to point b in panel (B).

Fall to Q3 but the price level to remain at P1

Refer to the graph. Suppose aggregate demand falls from AD1 to AD2. In the short run, this will cause output to:

Planned Investment

The amount that firms plan or intend to invest.

When current government expenditures exceed current tax revenues and the economy is achieving full employment:

The cyclically adjusted budget has a deficit.

When current tax revenues exceed current government expenditures and the economy is achieving full employment:

The cyclically adjusted budget has a surplus.

An increase in the price level

The economy is operating at the full-employment level of output. A depreciation of the dollar will most likely result in

Break-Even Income

The level of disposable income at which households plan to consume (spend) all their income and to save none of it

Break-Even Income

The level of disposable income at which households plan to consume (spend) all their income and to save none of it.

social costs of economic growth

The process of economic growth renders some machines obsolete and also leaves the skills of some workers partly obsolete.

45° (degree) line

The reference line in a two-dimensional graph that shows equality between the variable measured on the horizontal axis and the variable measured on the vertical axis. In the aggregate expenditures model, the line along which the value of output (measured horizontally) is equal to the value of aggregate expenditures

Aggregate production function

The relationship between the total amount of each factor of production employed in the nation's total GDP

human capital

The set of skills workers acquire through formal education and on-the-job training.

output below potential (Y < Y*)

The slump that is associated with a recessionary gap generates a set of conditions - low profits for firms and low demand for labour - that tends to cause wages (and other factor prices) to fall.

theory of economic growth

The theory of economic growth is a long-run theory. It concentrates on the growth of potential output over long periods of time, not on short-run fluctuations of output around potential.

Investment

Which is an injection of spending into the income expenditures stream?

Investment spending and the rate of interest

Which relationship is an inverse one?

the consumption schedule is

a direct relationship between consumption and disposable income

Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock would have ________ output effect in the short run and ________ output effect in the long run.

a positive; no

fear of price wars, menu costs, and wage contracts are associated with

a price level that is inflexible downward

The function of money in an economy is to serve as

a unit of account; a store of value; a medium of exchange.

Why does the short-run aggregate supply curve slope upward? a. because profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs b. because an increase in market price results in an increase in quantity supplied, as stated by the law of supply c. because, as the number of workers, machinery, equipment, and technological changes increase, quantity supplied increases d. all of the above

a. because profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs

If firms reduce investment spending and the economy slumps into a recession, which of the following contributes to the adjustment that causes the economy to return to its long-run equilibrium? a. the eventual agreement by workers to accept lower wages b. the decision by firms to charge higher prices c. both of the above d. none of the above

a. the eventual agreement by workers to accept lower wages

ʺExcess reservesʺ for a commercial bank refer to

any reserves (cash or deposits with the Bank of Canada) that the bank holds over and above its desired reserves

An unexpected increase in the price of oil would be called _________ by economists. a. a demand shock b. an adverse supply shock c. disinflation d. an increase in menu costs

b. an adverse supply shock

The aggregate demand and aggregate supply model explains a. the effect of changes in the inflation rate on the nominal interest rate. b. short-run fluctuations in real GDP and the price level. c. the effect of long-run economic growth on the standard of living. d. the effect of changes in the interest rate on investment spending.

b. short-run fluctuations in real GDP and the price level.

expansionary fiscal policy inevitably leads to increases in:

budget deficits and nation debt during economic downturns

the investment demand curve will shift to the left if

business taxes increase

An increase in net exports that results from a change in the price level in the United States a. will shift the aggregate demand curve to the right. b. will shift the aggregate demand curve to the left. c. will not cause the aggregate demand curve to shift. d. will have an indeterminate effect on aggregate demand.

c. will not cause the aggregate demand curve to shift

For simplicity, we combine human capital and physical capital into single variable called

capital

two implications of the Solow model

conditions of a steady state and convergence

On a graph of a consumption function, what is the significance of the 45-degree line

connects all points where desired consumption equals actual disposable income

Other main property of Neoclassical aggregate production function is that it displays

constant returns to scale

With one input held constant, the other input has a

declining average and marginal product.

an increase in business taxes will tend to

decrease AD and decrease AS

double coincidence of wants

each party in an exchange trnasaction happens to have what the other party desires

The change in GDP associated with a change in government spending is

equal to the change in government spending (An increase in government spending and a decrease in taxes have similar effects. However, government spending affects GDP directly while taxes work indirectly through consumption. Part of any tax cut is saved, muting the expansionary effects of a tax cut.)

Because not everyone benefits equally from growth,

even in a growing economy, redistribution policies will be needed if poverty is to be reduced.

Durable consumption

goods consumed over long periods and only need to be purchased once in while

Nondurable consumption

goods consumed over short period and need to be repurchased

social security

government administered retirement funding program

contractionary fiscal policy

government decreases spending or increases taxes to slow economic expansion

endogenous growth

growth driven by factors inside the economy

technology

knowledge that is available for use in production

medicare

mandated federal program that funds health care for people age 65 and older

consumer price index (CPI)

measure of the price level based on the consumption patterns of a typical consumer

Developments in the financial industry in recent years have resulted in a multitude of types of deposits. For the purposes of studying the money supply, the most important distinction is between chequing and savings deposits which are ________ and term deposits and other financial assets which are ________.

media of exchange; not media of exchange

If most individuals accept paper currency in transactions, and paper currency is convertible into gold, then banks can safely issue

more paper currency than the value of the gold they hold

The higher the MPC (the lower the MPS), the larger the ___

multiplier 1/1-MPC or 1/MPS estimates of US multiplier: zero to 2.5

constructive discharge

occurs when the employer causes the employees working conditions to be so intolerable that a reasonable person in the employees decision would feel compelled to quit

expansionary fiscal policy

occurs when the government increases spending or decreases taxes to stimulate the economy toward expansion

The ʺlong-run aggregate supply curveʺ, vertical at Y* , shows that

potential output is compatible with any price level

private saving

private saving = Y* - T - C

The key =aspects of the Neoclassical theory are that

the aggregate production function displays diminishing marginal returns when any one of the factors is increased on its own and constant returns to scale when all factors are increased together (and in the same proportion).

Law of diminishing marginal returns tells us that

the employment of additional workers will eventually add less to total output than the previous worker did.

Incurring an internal debt to finance a war does not pass the cost of the war on to future generations because

the opp. cost of the war was borne by the generation that fought it

A major reason that a public debt cannot bankrupt the federal government is because the federal government has

the power to levy taxes

Changes in Sales

the size of inventories are related to the level of sales

Public Debt

the total accumulation of the deficits (minus the surpluses) the Federal government has incurred through time The total public debt of $9.01 trillion represents the total amount of money owed by the Federal government to the holders of US securities: financial instruments issued by the Federal government to borrow money to finance expenditures that exceed tax revenues

government spending that is not part of GDP:

transfer payments

A decrease in aggregate supply decreases the equilibrium real domestic output and increases the price level, resulting in cost-push inflation.

true

A fall in the price level increases the real value of financial assets with fixed money values and, as a result, increases spending by the holders of these assets.

true

A rise in excess capacity, or unused existing capital goods, will reduce the demand for new capital goods and therefore reduce aggregate demand.

true

A significant decrease in aggregate demand can result in recession and cyclical unemployment.

true

The Phillips curve describes the relationship between

unemployment and the rate of change of wages

why does CPI need to be accurate?

wages and salaries are based on it

Most Canadians accept Canadian dollars in payment for goods and services in Canada because they have confidence that the dollar

will be accepted in the future

- C - G E) NS = T - G - C

The level of productivity in this economy is

Fiat money has value because it

is generally accepted

In 2012, the U.S. public debt was about:

$16.4 trillion.

-currency -checkable deposits -traveler's checks

reasons for shifts in long run aggregate supply

-resources -tech -institutions

Other Features of Equilibrium GDP

-saving and planned investment are equal (S=Ig) -there are no unplanned changes in inventories

What does APC + APS Equal?

What are the three factors that cause the AD curve to shift?

1. changes in government policies 2. changes in expectations of households 3. changes in foreign variables

2 main role of banks:

1. critical participants in the market for loanable funds 2. determine the money supply

name four types of automatic stabilizers:

1. progressive income tax rates 2. taxes on corporate profits 3. unemployment compensation 4. welfare programs

what is wrong with convergence/steady state theories

1. rare for poorer nations to catch up 2. growth didn't seem to slow in wealthy nations

three factors of economic growth:

1. resources 2. technology 3. institutions

89) Neoclassical growth theory is based on the assumption of ________ marginal returns to a single factor and ________ returns to scale exhibited by the aggregate production function. A) decreasing; constant B) increasing; constant C) increasing; increasing D) constant; decreasing E) decreasing; decreasing

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with:

A contractionary fiscal policy.

Aggregate expenditures and GDP will both decrease

All else equal, if domestic consumers begin to spend a greater fraction of their consumption expenditures on foreign-produced goods:

Both real output and the price level

An increase in aggregate demand with a short-run aggregate supply curve will increase

Aggregate demand curve to the right

An increase in the incomes of U.S. trading partners would shift the U.S.:

Explanation of AD's negative slope: Foreign Purchases Effect

As US prices rise compared to foreign prices, US exports go down

Both consumption and saving decrease

As disposable income decreases, ceteris paribus,

0.075

At the $160 billion level of disposable income, the average propensity to save is

An example of the use of money as a medium of exchange is:

Barry pays $275 with his bank debit card for tickets for an NHL play -off game

Market structure and innovation

Because it is highly risky, innovation is encouraged by strong rivalry among firms and discouraged by monopoly practices. Policies that make firms more competitive - either by lowering protective tariffs or by reducing domestic regulations that hamper competition - are likely to increase innovation.

Benefits of growth

Better living standards

The immediate-short-run aggregate supply curve represents circumstances where:

Both input and output prices are fixed.

40) Consider the equation GDP = F × (FE/F) × (GDP/FE). Which component describes the fraction of the available factors actually employed at any time? A) F B) FE C) (FE/F) D) (GDP/

C) (FE/F)

The largest component of the liabilities of the Bank of Canada is

Canadian dollars in circulation

MPC Equation

Change in Consumption/Change in Income

Consumption slope

Change in DI/change in C

MPS Equation

Change in Saving/Change in Income

Unplanned Changes in Inventories

Changes in inventories that firms did not anticipate; changes in inventories that occur because of unexpected increases or decreases of aggregate spending.

. A) an excess supply of loanable funds B) an excess supply of saving C) an excess demand for public saving D) an excess supply of financial capital E) an excess demand for loanable funds

Costs of growth

Consume less now Some people worse off (lay-off) Degradation of the environment

APC Equation

Consumption/Income

Discretionary fiscal policy will stabilize the economy most when:

Deficits are incurred during recessions and surpluses during inflations.

Countercyclical discretionary fiscal policy calls for:

Deficits during recessions and surpluses during periods of demand-pull inflation.

With the expenditures programs and the tax system shown in the diagram:

Deficits will occur at income levels below K, and surpluses above K.

Fiscal policy refers to the:

Deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the:

Determinants of aggregate demand.

Savings Equation (S)

Disposable Income (I) - Consumption (C)

Savings

Disposable income - consumption

automatic fiscal stabilizers

Even in the absence of discretionary fiscal stabilization policy, the presence of net taxes that vary with national income provides the economy with an automatic stabilizer.

At a short-run macroeconomic equilibrium, real GDP is always equal to potential GDP. Choose one: True OR False

False

Higher interest rates increase both consumption and investment spending. Choose one: True OR False

False

A price level that is inflexible downward

Fear of price wars, menu costs, and wage contracts are associated with

Prices and wages tend to be:

Flexible upward, but inflexible downward.

contractionary AD shocks - flexible wages

Flexible wages that fall rapidly in the presence of a recessionary gap provide an automatic adjustment process that pushes the economy back quickly toward potential output.

potential output as an "anchor"

Following an AD or AS shock, the short-run equilibrium level of output may be different from potential output. Any output gap is assumed to cause wages and other factor prices to adjust, eventually bringing the equilibrium level of output back to potential. In this model, therefore, the level of potential output acts like an "anchor" for the economy.

Increase per-unit production costs and shift the aggregate supply curve to the left

If Congress passed much stricter laws to control the air pollution from businesses, this action would tend to

increase in supply of national saving

In the long run, an increase in the supply of national saving reduces the real interest rate and encourages more investment. The higher rate of investment leads to a higher future growth rate of potential output.

Equilibrium and Changes in Equilibrium

Increases in AD - demand pull inflation Decreases in AD -recession and cyclical unemployment Decreases in AS - cost-push inflation Increases in AS - full employment with price level stability

Multiplier is..

Initial change in spending can cause a larger change in domestic income and output. The multiplier is the factor by which the initial change is magnified

Learning by doing

Innovation involves a large amount of "learning by doing" at all of its stages. Best innovation-managing systems enrouge such "feedbacK" from the more applied steps to the purer researchers and from users to designers

The short-run aggregate supply curve represents circumstances where:

Input prices are fixed, but output prices are flexible.

Shifts in the investment

Lower real interest rate, higher level of sales, higher business confidence shifts investment upward

importance of technological change

Many innovations are embodied in either physical or human capital. These innovations cause continual changes in the techniques of production and in the nature of what is produced. Embodied technical change leads to increases in potential output even if the amounts of labour and capital are held constant.

national saving (NS)

NS = Y* - C - G

If exports exceed imports

Net exports will be positive:

MPC is the ___ value of the slope of the consumption schedule and the MPS is the ___ value of the slope of the saving schedule.

Numerical

Aggregate expenditures curve

On a graph, the equilibrium real GDP is found at the intersection of the 45-degree line and the

Problems, Criticisms, and Complications of Implementing Fiscal Policy

Problems of timing 1. Recognition lag - the time between the beginning of recession or inflation and the certain awareness that it is actually happening 2. Administrative lag - the time the need for fiscal action is recognized and the time action is taken 3. Operational lag - the time fiscal action is taken and the time that action affects output, employment, or the price level

The fear of unwanted price wars may explain why many firms are reluctant to:

Reduce prices when a decline in aggregate demand occurs.

When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may:

Reduce worker morale and work effort, and thus lower productivity.

Saving Schedule (saving function)

S= DI- C -subtract the amount of consumption from disposable income to find the amount saved

Disposable income minus consumption

Saving equals

Shocks and Innovation

Shcks sometimes provide innovation Sharp rise in price of one input can raise costs and lower the value of output per person for some time But it may lead to a wave of innovations that reduce the need for this expensive input, and, as a side effect, greatly raises productivity. i.e. oil

Other things equal, an improvement in productivity will:

Shift the aggregate supply curve to the right.

Aggregate expenditures will equal GDP

When planned injections of investment, government spending, and exports equal leakages of saving, taxes, and imports:

The demand for money and interest rates rises

When the price level rises,

Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. If GDP is $400:

The budget will be balanced.

Larger than—and opposite in sign to—that associated with an equal change in taxes

The change in GDP associated with a change in government spending is:

The concept of scarcity in economics usually refers to a condition

A direct relationship between consumption and disposable income

The consumption schedule is:

$980

The equilibrium real GDP in this private open economy is

Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of $575 million. This bankʹs ________ is/are $75 million.

excess reserves

Growth in the labour force

This may be caused by growth in population or by increase in the fraction of the population that chooses to participate in the labour force

Per-unit production cost is:

Total input cost divided by units of output.

The public debt is held as:

Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

Which of the following statements about output gaps is true?

When actual GDP is above potential GDP, there is upward pressure on wages.

Substitution effect

When your interest rates go up Attractive to save than consume now

An increase in household wealth

Which of the following might have caused the shift from consumption schedule C1 to schedule C2?

Consider the AD/AS model. Since output in the long run is determined by Y*, the only role of the AD curve is to determine the price level. This is true because the

Y* is independent of the price level

Doug is saving money in order to purchase a new snowboard next winter. This represents using money as

a store of value

When discussing long-run economic growth, we focus on the

changes in potential output

An increase in planned inventories will decrease the investment demand.

false

Consumption rises and saving falls when disposable income increases.

false

Suppose you found a $100 bill that was lost for several years under your grandmotherʹs mattress and you decided to deposit this money in a commercial bank. If the target reserve ratio were 20 percent and all excess reserves were lent out, your new deposit of $100 would lead to an eventual expansion of the money supply of

$500

Consider a new deposit of $10 000 to the Canadian banking system. Assuming that all Canadian banks have a target reserve ratio of 2 percent, and that there is no cash drain, the banking system as a whole could create ________ as a result of this single new deposit.

$500 000 of new deposits

Consider a new deposit of $10 000 to the Canadian banking system. The bank that initially receives this deposit will find itself with

$8000 of excess cash reserves if its target reserve ratio is 20 percent

Consider a new deposit of $100 000 to the Canadian banking system. The commercial bank that initially receives this deposit will find itself with

$98 000 of excess cash reserves if its target reserve ratio is 2 percent

Leakage

(1) A withdrawal of potential spending from the income-expenditures stream via saving, tax payments or imports (2) a withdrawal that reduces the lending potential of the banking system.

If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _____________ in real GDP in the short run and ___________ in the price level in the long run. A. an increase; an increase B. a decrease; a decrease C. an increase; a decrease D. a decrease; an increase

The real-balances effect indicates that:

A higher price level will decrease the real value of many financial assets and therefore reduce spending.

65) Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from to . At the new short-run equilibrium, the price level is ________ and real GDP is ________. A) 90; 900 B) 110; 800 C) 60; 1000 D) 60; 700 E) 90; 1250

A) 90; 900

The political business cycle refers to the possibility that:

Politicians will manipulate the economy to enhance their chances of being reelected.

APS Equation

Saving/Income

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes:

The foreign purchases effect.

Marginal Propensity to Consume (MPC)

The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income

Average Propensity to Save (APS)

The fraction of total income that is saved

Business taxes increase

The investment demand curve will shift to the left if:

In recent years, the use of debit cards issued by commercial banks has skyrocketed. When you pay for a purchase at a store using a debit card, you are

authorizing an electronic transfer of deposit money from you to the merchant

Growth in human capital

Human capital can increase through either formal education or on-the-job training. Human capital can be though of as the quality of the labour force, but because of its importance we will treat it as a separate factor of production from labour

Graphically, cost-push inflation is shown as a:

Leftward shift of the AS curve.

In the AS/AD model, contractionary monetary policy works as follows

M (down) intrest rate (up), investments (down), output ( down)

increasing marginal returns - knowledge

Neoclassical growth theories gave economics the name "the dismal science" by emphasizing diminishing marginal returns under conditions of given technology. The new growth theories are more optimistic because they emphasize the unlimited potential of knowledge-driven technological change.

The aggregate supply curve (short run):

Slopes upward and to the right.

What are the four components of aggregate demand?

consumption (C), investment (I), government purchases (G), and net exports (NX)

The main source of increases in material living standards over the long term is the

continual increase in potential national income

Suppose a commercial bank has a target reserve ratio of 1 percent, but has an actual reserve ratio of 0.8 percent. This bank will likely

contract its portfolio of loans

Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will

decrease real output and increase the price level.

Assume that the marginal propensity to save is 0.1 in an economy. To reduce the level of real GDP by $50 billion in that economy to achieve a full employment level of output, it will be necessary to

decrease the AE schedule by 5 billion

An increase in the real interest rate by 4% will

decrease the equilibrium level of GDP by 200 billion

an increase in AS will

decrease the price level and increase the real domestic output

aggregate production function

describes the relationship between all the inputs used in the macroeconomy and the economy's total output

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

experiencing an inflationary output gap

One explanation for the downward slope of the aggregate demand curve is that a change in the price level results in

foreign purchases effect

automatic stabilizers

government programs that automatically implement countercyclical fiscal policy in response to economic conditions

Which component of GDP does not change as price level changes?

government purchases

discretionary outlays

government spending that can be altered when the government is setting its annual budget -monies for bridges, roads -payments to workers -defense spending

Net exports will be positive

if exports exceeds imports Net exports is the difference between exports and imports. This may be either positive or negative at any level of GDP.

A bank run is unlikely to occur in Canada today because,

if necessary, the central bank can provide all the reserves that are necessary to avoid this situation

The ʺparadox of thriftʺ refers to the understandable tendency of people who are worried about their economic situation to ________ their saving, but in aggregate this behaviour causes a ________ recession.

increase; more severe

During the Great Recession of 2007-2009 the federal government

increased spending and decreased taxes

which best explains the variability of investment?

instabilities in the level of profits

creative destruction

introduction of new products and technologies leads tot he end of other industries and jobs

The investment demand curve reveals a:

inverse (negative) relationship between Interest rate and the level of aggregate investment shows the amount of investment forthcoming at each real interest rate

fiat money

money that has no value except as the medium of exchange

In the basic AD/AS macro model, permanent increases in real GDP are possible only if

potential output is increasing

the aggregate supply curve is the relationship between the

price level and the real domestic output produced

The aggregate demand curve is the relationship between the

price level and the real domestic output purchased

The economy's aggregate supply (AS) curve shows the relationship between the

price level and the total output that firms wish to produce and sell, with technology and input prices held constant.

Investment schedule

shows the amount of investment (Ig)forthcoming at each level of GDP interest rate and investment demand curve together determine this amount

efficient taxes

taxes sufficient to fund the activities of government while impeding production and consumption decisions as little as possible

An adjustment ʺasymmetryʺ in the aggregate supply curve is shown by

the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps)

ʺAutomatic fiscal stabilizationʺ in the economy refers to

the properties of government spending and taxation that cause the simple multiplier to be reduced

Marginal Propensity to Consume (MPC)

the proportion or fraction of any change in income consumed marginal meaning extra or change in MPC = change in consumption/change in income

Important determinants of aggregate investment expenditure are

the real interest rate, changes in the level of sales, and business confidence

One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that

the recovery may be more rapid

Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). This fraction is known as

the reserve ratio

fiscal policy

the use of government budget tools, spending, and taxes to influence the macroeconomy

The major advantage of using money rather than barter is that

the use of money significantly reduces transactions costs

When the economy's real GDP exceeds its equilibrium real GDP,

there is unplanned investment in the economy

Aggregate Expenditures (AE)

this schedule shows the amount of (C+Ig) that will be spent at each possible output or income level

sexual harassment

title VII also protects employees against_______ this is the workplace. It can take two forms, 1) quid pro quo( something in exchange for something else. 2) hostile-environment harassment ( when the workplace is permeated with discriminatory intimidation.

employment discrimination

title VII prohibits against discrimination basis of race, color, religion, gender.

the most significant determinant of the level of consumer spending is disposable income

true

Discretionary fiscal policy refers to:

Intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Assume that Bank ABC has a target reserve ratio of 10 percent. If Bank ABC receives a new deposit of $100 000, the largest new loan this bank could initially make, and maintain its target reserve ratio, is

$ 90 000

If the marginal propensity to consume is 0.6 and real GDP falls by $25, this is caused by a decrease in initial spending of

$10

If all the banks in the banking system collectively have $20 million in cash reserves and have a target reserve ratio of 20 percent, the maximum amount of deposits the banking system can support is

$100 million

Suppose that the excess reserves in Toronto Dominion Bank increase by $700. Given a desired reserve ratio of 2.5 percent and no cash drain, the maximum change in deposits for the entire banking system would be

$28 000.00

Suppose the MPC is ¾. If investment spending falls by $10 billion, the level of GDP will:

$40 billion If the MPC is ¾, the multiplier is 1 / (1 - ¾) = 1 / (¼) , or 4. A drop in spending of $10 billion is multiplied by 4 to determine the change in GDP.

Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = .6, how much will the change in investment increase aggregate demand?

$50 billion.

reasons for overstating CPI inflation:

1. substitution of different goods and services 2. changes in quality 3. availability of new goods, services, and locations

Which combination of policies would be the most ex- pansionary? (a) an increase in government spending and taxes (b) a decrease in government spending and taxes (c) an increase in government spending and a decrease in taxes (d) a decrease in government spending and an increase in ·taxes

(c) An increase in government spending and a decrease in taxes Feedback: Both government spending and more money available for consumers to spend is the most expansionsary.

25. The crowding-out effect from government borrowing is reduced when (a) interest rates are rising (b) the economy is operating at full employment (c) government spending improves human capital in the economy (d) private investment spending can substitute for government spending

Describe the short-run aggregate supply curve.

1. shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms 2. slopes upward because workers and firms fail to predict accurately the future price level

Productivity measures:

Real output per unit of input.

Crowding-out effect

-an expansionary fiscal policy may increase the interest rate and reduce investment spending, thereby weakening or canceling the stimulus of the expansionary policy

keynesian economics

-focus on aggregate demand -theoretical foundation for countercyclical fiscal policy

harms of crowding out

-government's spending on loans increases interest rates since demand for loans go up -discourages private investment

two largest sources of tax

-individual income tax -social insurance tax (social security and medicare) aka payroll taxes for both

mandatory outlays

-largest portion of federal budget -social security/medicare -spending that is legally required

Why use GDP?

-life expectancy -educational levels -access to health care -crime rates

natural unemployment

-structural -frictional

Suppose that real domestic output in an economy is 50 units, the quantity of inputs is 10, and the price of each input is $2. Answer this Question on the basis of this information. The level of productivity in this economy is

In reality, the reserve ratio for Canadian commercial banks is close to ________ percent, which means that the deposit creation process is ________.

5; powerful

Refer to Figure 24-2. Suppose the economy is in equilibrium at Y1. An appropriate fiscal policy for attaining potential output (Y*) is an A) increase in personal and corporate taxes. B) decrease in current imports. C) increase in government spending and decrease in taxes. D) increase in government spending. E) increase in current consumption.

A 87)

Refer to Figure 24-2. Suppose the economy is in equilibrium at Y1. A contractionary fiscal policy would restore the economy to potential output (Y*) by shifting the A) AD to the left to intersect AS at point A. B) AS curve to the right. C) AS curve to the left to intersect AD at C. D) potential GDP and the AS curve to the left. E) AD curve to the right.

A 88)

2) In order to be considered ʺmoney,ʺ paper currency must be A) generally acceptable as a medium of exchange. B) convertible into a precious metal. C) issued by a chartered bank. D) impossible to counterfeit. E) issued by a government agency.

A) generally acceptable as a medium of exchange.

Efficiency wages

Aggregate demand decreases and real output falls, but the price level remains the same. Which factor most likely contributes to downward price inflexibility?

In which of the following sets of circumstances can we confidently expect inflation?

Aggregate supply decreases and aggregate demand increases.

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) declining government purchases D) falling prices E) increasing tax rates

B 15)

Reduce the purchasing power of household wealth and reduce consumption

An increase in the price level will:

Increase its imports and the real GDPs in other economies

An increase in the real GDP of an economy will, other things remaining constant,

Decrease the equilibrium level of GDP by $200 billion

An increase in the real interest rate by 4% will

Upward and the saving schedule downward

An increase in wealth shifts the consumption schedule

Explanation of AD's negative slope: Interest-Rate Effect

As prices rise, demand for money goes up, which will drive up its price, that is, interest rate will rise. Hence, interest-sensitive consumption spending will decline

Unplanned changes in inventories are zero

At the equilibrium level of GDP,

Flat, because firms can expand output with relatively little increase in per-unit production costs

At very low levels of output, the short-run aggregate supply curve is relatively:

households tend to spend a larger portion of

a small disposable income than a large disposable income

Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, will be eliminated if A) wages rise quickly. B) the AS curve shifts upward. C) wages and other factor prices fall sufficiently. D) real national income decreases. E) prices rise quickly.

. A) an excess demand for loanable funds B) an excess demand for investment C) an excess supply of loanable funds D) an excess demand for financial capital E) an excess supply of public saving

10) If real income grows at approximately 4 percent per year, the number of years it will take for real income to double is approximately A) 5. B) 12. C) 18. D) 36. E) 72.

116) "Automatic fiscal stabilization" in the economy refers to A) the properties of government spending and taxation that cause the simple multiplier to be increased. B) the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap. C) the properties of government spending and taxation that cause the simple multiplier to be reduced. D) the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap. E) all discretionary fiscal policies.

C) the properties of government spending and taxation that cause the simple multiplier to be reduced.

Increase when net exports are positive

Compared with a private closed economy, aggregate expenditures and GDP will

Determinants of Aggregate Demand

Consumer spending (C) Investment spending (Ig) Government spending (G) Net export spending (Xn)

Largest component of GDP

Consumption

A leftward shift of the short-run aggregate supply curve would illustrate:

Cost-push inflation is caused by an increase in production costs, such as that caused by an increase in energy prices. The higher production costs result in a lower output supplied at any given price level. This leftward shift of the aggregate supply curve results in lower equilibrium output and a higher equilibrium price level. The resulting inflation is known as cost-push inflation.

58) Suppose GDP in an economy is $144 000, the unemployment rate is 10% and there are 8000 people in the labour force. Calculate the GDP per worker for this economy. A) $10 B) $14.40 C) $18 D) $20 E) $80

D) $20

The level of real GDP in the long run is called A) short run GDP. B) low capacity GDP. C) frictional GDP. D) potential GDP.

D) potential GDP.

62) The economy's aggregate supply curve is drawn under two main assumptions. They are A) firms' unit costs are constant; prices of all factors of production are constant. B) firms' unit costs are constant; the state of technology is constant. C) firms will produce more output only if prices rise; technology improves only if prices rise. D) the prices of all factors of production are constant; the state of technology is constant. E) the prices of all factors of production are constant; productivity improves as the price level rises.

D) the prices of all factors of production are constant; the state of technology is constant.

101) 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. A) too weak; stay below B) too weak; rise above C) too strong; stay below D) too strong; rise above E) appropriate; equal

D) too strong; rise above

) A recessionary output gap is characterized by A) rising prices. B) constant prices. C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. E) real GDP falling below potential output.

118) Consider the simplest macro model with demand-determined output. Other things being equal, the ________ the value of the simple multiplier, the ________ stable is real GDP in response to shocks to autonomous spending. A) larger; more B) larger; less C) smaller; more D) smaller; less E) both B and C are correct

E) both B and C are correct

6) In the short run, changes in real GDP are primarily determined by changes in factor-utilization rates which, in turn, are due to changes in A) aggregate demand only. B) aggregate demand because increases in demand will lead to increases in output. C) aggregate supply only. D) aggregate supply because when firms increase prices they are then willing to produce more. E) both aggregate demand and aggregate supply.

E) both aggregate demand and aggregate supply.

137) The ________ associated with fiscal policy make(s)________ tuning difficult to implement successfully. A) execution lag; gross B) execution lag; fine C) decision lag; gross D) decision lag; fine E) execution and decision lags; fine

E) execution and decision lags; fine

87) Refer to Figure 24-5. Following a positive demand shock that takes the economy from E0 to E1, the movement of the economy from E1 to E2 indicates that A) a demand shock can keep real GDP above potential output permanently. B) an increase in the price level causes the AS curve to shift to the left. C) an increase in the price level causes the AD curve to shift to the left. D) the economy cannot return to potential output without government intervention. E) the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

E) the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

opportunity cost of economic growth

Economic growth, which promises more goods and services tomorrow, is achieved by consuming fewer goods today. For the economy as a whole, this sacrifice of current consumption is the primary cost of growth.

fiscal policy - increases in G purchases

Even though an increase in G purchases may have no effect on the current level of potential output, the crowding out of private investment may reduce the future growth rate of potential output.

AS shocks

Exogenous changes in input prices cause the AS curve to shift, creating an output gap. The adjustment process then reverses the initial AS shift and brings the economy back to potential output and the initial price level.

Decrease consumption and increase saving

Expectations of a recession are likely to lead households to

Induced expenditure is a type of expenditure that depends on A) Consumption B) GDP C) Savings D)Prices

GDP

Neoclassical growth theory - aggregate production function

GDP = F (L, K, H) (T) state of technology (K) physical capital employed (L) total amounts of labour (H) quality of human capital

Economic growth has four fundamental determinants:

Growth in the labour force Growth in human capital Growth in physical capital Technological improvement

Decrease the strength of the multiplier

In the aggregate demand-aggregate supply model, an increase in the price level will

Inflationary Expenditure Gap

In the aggregate-expenditures model, the amount by which the aggregate expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary level.

A foreign purchases effect

One explanation for the downward slope of the aggregate demand curve is that a change in the price level results in

Public Saving =

T - G

what does the fed do?

The US Federal Reserve conducts monetary policy for the United States and regulates financial institutions. The Fed changes the money supply through open market operations: To expand the money supply, the Fed buys bonds, increasing reserves in the banking system. To contract the money supply, the Fed sells bonds. A change in reserves changes the money supply by the change in reserves times the money multiplier, 1/r

expansionary AD shocks

The adjustment in wages and other factor prices eventually eliminates any boom caused by a demand shock; real GDP returns to its potential level.

The equilibrium price level and level of real output occur where:

The aggregate demand and supply curves intersect.

Price level and the real domestic output purchased

The aggregate demand curve is the relationship between the

Because a lower price level reduces the demand for money, which lowers the interest rate and increases desired investment

The aggregate demand curve slopes downward to the right:

output above potential (Y > Y*)

The boom that is associated with an inflationary gap generates a set of conditions - high profits for firms and unusually large demand for labour - that tends to cause wages (and other factor prices) to rise.

Human capital

The set of skills workers acquire through formal education and on-the-job training.

Consumption decreases as a percentage of disposable income increases

This graph indicates that

Technological improvement

This is brought about by innovation that introduces new products, new ways of producing existing products, and new forms of organizing economic activity.

An expansionary fiscal policy is shown as a:

Tightward shift in the economy's aggregate demand curve.

125 and $4,000

Using the original data from the table, if the quantity of real domestic output demanded increased by $1,500 and the quantity of real domestic output supplied increased by $500 at each price level, the new equilibrium price level and quantity of real domestic output would be

Equilibrium GDP

__________________ occurs when aggregate expenditures equal real domestic output, saving equals investment (S=Ig) and unplanned changes in inventories are zero.

An inflationary output gap occurs when A) actual GDP exceeds potential GDP. B) nominal GDP exceeds real GDP. C) demand for labour services is very low. D) equilibrium national income is below potential national income. E) potential GDP exceeds actual GDP.

what is the core of all growth theory?

aggregate production function aka resources and tech

Debit cards that are issued by commercial banks can be characterized as

an electronic version of a cheque

whistleblowing

an employee's disclosure to government, the press, or upper-management authorities that the employer is engaged in unsafe or illegal activities

If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes a. a recession in the short run, and an increase in the price level in the long run. b. a recession in the short run, and a decline in the price level in the long run. c. an expansion in the short run, and a decline in the price level in the long run. d. an expansion in the short run, and an increase in the price level in the long run.

b. a recession in the short run, and a decline in the price level in the long run.

An increase in aggregate demand with a short-run aggregate supply curve will increase

both real output and the price level

Because increases in living standard are determined largely by increases in per capita output, it is clear that

balanced growth is unable to explain rising living standards

The largest element of the Canadian money supply today is

bank deposits

One implication of an increase in the cash drain to the public is that the

banking systemʹs ability to create new money following a new deposit is reduced

Neoclassical growth theory

based on the idea that these four forces (labour, physical capital employed, the quality of labour's human capital, the state of technology)) of economic growth can be connected by what is called the aggregate production function

At new equilibrium

both the ral interst rate and the amount of investment are higher than at the inital equilibrium

What are menu costs? a. the costs of searching for profitable opportunities b. the costs associated with guarding against the effects of inflation c. the costs to firms of changing prices d. the costs of a fixed list of inputs

c. the costs to firms of changing prices

federal funds

deposits that private banks hold on reserve at the Fed

Which of the following factors will shift the short-run aggregate supply to the right? a. an increase in the price level b. an increase in the wage rate c. an increase in the cost of producing output d. the labor force increases

d. the labor force increases

Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since governmentʹs net tax revenues ________ during booms and ________ during recessions.

dampen; increase; decrease

budget data/GDP=

deficit scaled to the economy

impact lag

it takes time for the complete effect to take place

A new deposit to the banking system can result when

the Bank of Canada buys a government security from a firm, which then deposits the proceeds from the sale in its account at a commercial bank

If the MPC is .75 and the economy has a recessionary expenditure gap of $10 billion, then equilibrium GDP is:

$10 billion below full employment GDP (The recessionary expenditure gap is defined as the amount by which aggregate expenditures falls short of the amount required to attain full employment. In this case, a recessionary expenditure gap of $10 billion means that an additional $10 billion in expenditures is required to attain full employment. With an MPC of .75, the multiplier is 4: $10 billion of additional expenditures would increase GDP by $40 billion to achieve full employment.)

Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the Bank of Canada), all banks have a target reserve ratio of 20 percent, and there are no excess reserves. What is the amount of deposits in the banking system?

$100 million

9. Review the table in the definition. In which year did fiscal policy become more expansionary? (b) Year 3 (c) Year 4 (d) Year 5

(a) Year 2 Feedback: In year 2 the budget deficient is -3.0

two reasons for reserves

1. they must accommodate withdrawals by their depositors 2. legally bound

What to consider in macroeconomics:

-national output of goods and services -overall national employment -overall price level

Shortcomings of real GDP

-nonmarket goods -underground economy -quality of the environment -leisure time -happiness

Inflationary Expenditure gap

-will cause demand pull inflation -ends up producing either at potential output or just above potential output to due to limited supply of labor describes the amount by which an economy's aggregate expenditures at the full employment GDP exceed those just necessary to achieve the full employment level of GDP.

Conscious management of pollution was unnecessary when the world's population was 1 billion people, but such management has now become a pressing matter

...

Nonincome determinants of Consumption and Saving

1) Wealth: dollar amount of all the assets that it owns minus the dollar amount of its liabilities (debt it owes) -Events sometimes boost the value of existing wealth, when this happens households tend to increase spending and reducing saving: wealth effect 2) Borrowing: when a household borrows it can increase current consumption beyond what would be possible if its spending were limited to its disposable income--shifts consumption schedule upward 3) Expectations: future prices expectation may affect current spending and saving 4) Real interest rates: when real interest rates (those adjusted for inflation) fall, households tend to borrow more, consume more, and save less

Immediate determinants of investment

1) expected rate of return and 2) real rate of interest

Reasons for contractionary fiscal policy:

1. help fix debt 2. reduce aggregate demand if they believe the economy is expanding beyond long run capabilities

two factors of frictional unemployment

1. information availability 2. government policies

reasons why institutions foster economic growth:

1. political stability and the rule of law 2. private property rights 3. competitive markets 4. international trade 5. the flow of funds across borders 6. efficient taxes 7. stable money and prices

fiscal policies to increase aggregate supply

1. research and development tax credits 2. policies that focus on education 3. lower corporate profit tax rates 4. lower marginal income tax rates

What are the three reason why the other components of GDP change as the price level changes?

1. the wealth effect 2. the interest rate effect 3. the international effect

Consumption Schedule

A table of numbers showing the households plan to spend for consumer goods at different levels disposable income.

Investment demand curve is downward-sloping because

All components of desired investment (capital) are negatively related to the real interest rate, because, whether the investment is financed by borrowing or by using the firm's retained earnings, the real interest rate reflects the opportunity cost of using these funds.

Planned investment spending will decrease

All else equal, if the interest rate rises:

Refer to Figure 24-3. After the negative aggregate demand shock shown in the diagram (from to ), which of the following describes the adjustment process that would return the economy to its long-run equilibrium? A) Wages would eventually fall, causing the AD curve to shift to the right, returning to the original equilibrium at point A. B) Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a new equilibrium at point E. C) Wages would increase, causing the AS curve to shift to the right, reaching a new equilibrium at point E. D) Wages would increase, causing the AD curve to shift to the right, returning to the original equilibrium at point A. E) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D.

Suppose actual real GDP is $14.5 trillion and potential real GDP is $17 trillion. To close this gap through fiscal policy, the government should A) increase taxes and thus, decrease aggregate demand. B) decrease taxes and thus, increase aggregate demand. C) decrease government purchases, and thus, increase aggregate demand. D) increase government purchases, and thus, decrease aggregate demand.

91) Consider the nature of macroeconomic equilibrium. If, at a particular price level, the total output demanded is greater than that supplied by producers, then A) the price level will decline toward its equilibrium value. B) the price level will rise toward its equilibrium value. C) the aggregate demand curve will shift to the left, re-establishing an equilibrium. D) the aggregate supply curve will shift to the right, re-establishing an equilibrium. E) the aggregate supply curve will shift to the left, re-establishing equilibrium.

B) the price level will rise toward its equilibrium value.

139) A reduction in the net tax rate might lead to an increase in the growth rate of potential output if A) the simple multiplier is large. B) the tax cuts stimulate private investment. C) firms are operating at their normal capacity. D) households are not forward looking. E) the marginal propensity to consume is large.

B) the tax cuts stimulate private investment.

Which of the following causes the short-run aggregate supply curve to shift to the right? A. a decrease in the capital stock B. a higher expected future price level C. a positive technological change D. an increase in the expected price of an important natural resource

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 change in the interest rate on the vertical axis. C) 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. 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.

Which of the following government policies would be most useful at addressing the social costs of economic growth? C) worker re-training and education programs D) expansionary monetary policy E) subsidies directed at Canadian manufacturing firms

Income taxes in Canada can be considered to be automatic stabilizers because tax A) revenues are changed through discretionary fiscal policy to keep the budget balanced. B) structures can be changed when the Minister of Finance brings down a budget. C) revenues increase when income increases, thereby offsetting some of the increase in aggregate demand. D) revenues decrease when income increases, thereby intensifying the increase in aggregate demand. E) revenues are changed through discretionary fiscal policy to create surpluses in recessions.

C 104)

An important automatic fiscal stabilizer in Canada is A) the marginal propensity to import. B) government purchases of goods and services. C) the income-tax system. D) the marginal propensity to consume. E) the exchange rate.

C 105)

Automatic fiscal stabilizers are most helpful in A) making discretionary fiscal policy effective. B) removing persistent output gaps. C) reducing the intensity of business cycles. D) eliminating price fluctuations in the economy. E) promoting economic growth.

C 106)

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 = 0.7, t = 0.3, m = 0.2 B) MPC = 0.8, t = 0.2, m = 0.3 C) MPC = 0.8, t = 0.1, m = 0.2 D) MPC = 0.7, t = 0.1, m = 0.4 E) MPC = 0.9, t = 0.2, m = 0.4

C 109)

Refer to Table 24-1. How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E? A) The output gap is much larger in Economy E, so wages are changing at a faster rate. B) The size of the output gap is the same in Economies A and E, but wages are falling in A and rising in E. C) The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E. D) The output gap is larger in Economy A, yet wages are changing more slowly. E) There is insufficient data with which to observe the adjustment asymmetry.

C 40)

101) Aggregate demand shocks have a large effect on real GDP and a small effect on the price level A) the steeper the AS curve. B) on the downward-sloping portion of the AS curve. C) the flatter the AS curve. D) when the AS curve is vertical. E) if the AD curve is steep.

C) the flatter the AS curve.

95) Modern or "new" theories of long- run economic growth are based on the assumptions that technological change is mainly ________ to an economy and that investment yields ________ marginal returns. A) exogenous; constant B) exogenous; increasing C) endogenous; decreasing D) endogenous, increasing E) exogenous; diminishing

The group of three economists appointed by the president to provide fiscal policy recommendations is the:

Council of Economic Advisers.

If the full-employment GDP for the economy is at L, then we can say with certainty that the:

Cyclically adjusted budget will have a surplus.

20) If a country transfers resources from the production of consumption goods to the production of capital goods, the result will be to A) raise current living standards. B) raise current consumption. C) decrease the long- run growth rate. D) raise future consumption. E) lower future living standards.

28) Alleviation of poverty is easier in a growing economy mainly because A) everyone, including the poor, benefits equally from growth. B) poor individuals are relatively easier to be identified in a growing economy. C) individuals are more likely to object to the redistribution of income when they earn more. D) nobody has to be made worse off when the increment to income caused by growth is redistributed. E) none of the above.

The slope of the aggregate expenditure line equals the slope of the ____________________ A) Public Savings B) Budget Deficit C) Wages D) Consumption Function

What economists sometimes call the "long-run aggregate supply curve" is A) horizontal. B) positively sloped. C) negatively sloped. D) nonlinear. E) vertical.

E 68)

The economy's long-run AS curve assumes that wages and other resource prices:

Eventually rise and fall to match upward or downward changes in the price level.

Net Exports (Xn)

Exports minus imports.

Which of the following characteristics define the long run in macroeconomics

Factor prices adjust to output gaps, and technology and factor supplies are changing

If L and K both increase by 10%, then

GDP will also increase by 10%

long-run equilibrium

In the long run, real GDP is determined solely by Y*; the role of AD is only to determine the price level.

An economist who favored expanded government would recommend:

Increases in government spending during recession and tax increases during inflation.

Alpha =

Income paid to workers as a fraction of GDP 1-alpha

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will:

Increase U.S. imports and decrease U.S. exports.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to:

Increase aggregate demand.

MPC and MPS as slopes

MPC = C/DI MPS = S/DI

If the slope of a linear saving schedule decreases, then it can be concluded that

MPS has decreased

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, an increase in investment spending is depicted by:

Panel (C) only.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by:

Panels (A) and (B).

Which of the following best describes the idea of a political business cycle?

Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.

Positive and Negative net exports

Positive net exports increase aggregate expenditures and GDP Negative net exports decrease aggregate expenditures and GDP ∆Xn = $5B m = 4 ∆GDP = 4 * $5B = $20B Model: C+Ig+Xn

$20 billion

Suppose that for the entire economy, no investment projects will yield an expected real return of more than 12%. However, $10 billion worth of projects will yield expected real returns of 9.1% to 12%, an additional $10 billion will yield expected real returns of 6.1% to 9%, an additional $10 billion will yield expected real returns of 3.1% to 6%, and an additional $10 billion will yield expected real returns of 0% to 3%. If the real rate of interest is 6%, desired investment spending will be:

Fall by $40 billion

Suppose the MPC is ¾. If investment spending falls by $10 billion, the level of GDP will:

Economic growth

Sustained, long-run increases in the level of real GDP

Price level and the real domestic output produced

The aggregate supply curve is the relationship between the

A recessionary expenditure gap

The amount by which an economy's aggregate expenditures must shift upward to achieve full-employment GDP is

The Multiplier Effect

The effect on equilibrium GDP of a change in aggregate expenditures or aggregate demand (caused by a change in the consumption schedule, investment, government expenditures, or net exports)

100 and $3,000

The equilibrium price level and quantity of real domestic output will be

Marginal Propensity to Consume (MPC)

The fraction of any change in disposable income spent on consumer goods; equal to the change in consumption divided by the change in disposable income.

Marginal Propensity to Save (MPS)

The fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income.

Marginal Propensity to Save (MPS)

The fraction of any change in disposable income that households save; equal to the change in savings divided by the change in disposable income.

The growth rate of potential output may be reduced due to the crowding out of investment

When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of:

Wage contracts.

properties of the aggregate production function - diminishing marginal returns

Whenever equal increases of one factor of production are combined with a fixed amount of another factor, the increment to total production will eventually decline.

Instabilities in the level of profits

Which best explains the variability of investment?

Which of the following best describes the concept of potential output? A) The total output that can be produced when all factors of production (land, labour, and capital) are fully employed. B) The total output that can be produced when the economy is in short-run economic equilibrium. C) The total output that can be produced when all productive resources (land, labour, and capital) are used at their maximum capacity. D) The total output that could be produced in the future when technological advances allow for a higher level of output. E) The total output that could be produced if no productive resource (land, labour, and capital) was ever left idle.

If the price level increases, then a. the economy will move up and to the left along a stationary aggregate demand curve. b. the aggregate demand curve will shift to the right. c. the aggregate demand curve will shift to the left. d. none of the above

a. the economy will move up and to the left along a stationary aggregate demand curve.

What is a supply shock?

an unexpected event that causes the short-run aggregate supply curve to shift

Other things remaining constant, which would increase an economy's real GDP and employment?

an increase in the level of national income among the trading partners for the economy

Suppose aggregate output is demand-determined. The simple multiplier will increase as a result of

an increase in the marginal propensity to consume

The economy is operating at the full-employment level of output. A depreciation of the dollar will most likely result in

an increase in the price level

Suppose there is an increase in the marginal propensity to spend out of national income. The result will be

an increase in the slope of the AE curve

Historically, when gold and silver coins were used as money, their debasement resulted in

an increase in the supply of money

an inflationary gap and some temporary inflation

Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will

be negated in the long run, through the economyʹs adjustment process

In order for money to be successfully used as a medium of exchange, it must

be readily acceptable; be easily divisible; have a high value-weight ratio.

Why is the aggregate demand curve downward sloping?

because a decrease in the price level increases the quantity of real GDP demanded

Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap

decreasing wages

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 ________.

decreasing; decrease

In the long run, an increase in the supply of national saving reduces the real interest rate and encourages more investment. The higher rate of investment leads to a

higher future growth rate of potential output.

Other things being equal, a ________ marginal propensity to spend will lead to a ________ AD curve.

higher; flatter

The increase in the supply of national saving could happen either because

household consumption (C) falls or because government purchases (G) fall (or because T rises, which reduces C)

NS curve is steep suggesting that

household consumption responds only modestly to changes in the real interest rate.

increase; decrease; decrease; will be restored to potential output

increased economic activity; lower economic growth

Leakge

saving is a leakage or withdrawal of spending from the economy's circular flow of income and expenditures. Saving is what causes consumption to be less than total output or GDP.

if consumption and disposable income are equal at a particular level of income

saving must be zero at this point

Market Economies

self-interest incentives free market, voluntary trade institutions, to protect private property

An insight first fully developed by Adam Smith is that

self-interest, not benevolence, is the foundation of economic order

Consider the basic AD/AS model. Suppose that high-school graduates have better computing skills than did graduates in the past, resulting in an increase in average labor productivity. This change will

shift the AS curve to the right.

If at a particular price level real domestic output from producers is less than real domestic output desired by buyers, there will be a

shortage and the price level will rise

deficit

shortfall in revenue for a particular year's budget

The short-run aggregate supply curve:

shows the amount of real output supplied at various price levels Both the short-run and long-run aggregate supply curves show the amount of real output supplied at various prices. They differ in that the short-run curve assumes fixed input prices while in the long run, wages and salaries are assumed to fully match any change in the price level. The immediate-short-run aggregate supply curve is constructed assuming both input and output prices are fixed.

Describe aggregate supply

shows the relationship between the price level and the quantity of real GDP that firms are willing to produce

yield curve

shows the relationship between interest rates and bonds' time to maturity. Fed policy intended to shift the yield curve might instead change its shape, and therefore not have the intended impact on investment and output.

As the macro economy adjusts from the short run to the long run,

wages and other factor prices adjust to close output gaps

Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, would be eliminated if

wages and other factor prices fell quickly

Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, would be eliminated if

wages and other factor prices fell quickly.

medium of exchnage

what people trade for goods and services

A recessionary output gap is characterized by A) real GDP falling below potential output. B) real output that varies one-for-one with aggregate demand. C) rising prices. D) real GDP exceeding potential output. E) constant prices.

A 14)

Refer to Figure 24-1. If the economy is currently producing output of Y0 , the economy's automatic adjustment process will have the A) AS curve shifting to the right until point A is reached. B) AD curve shifting to the right until point B is reached. C) economy remaining where it is. D) vertical line at Y* shifting to the left until it gets to Y0 . E) none of the above.

A 25)

Refer to Figure 24-2. Suppose the economy is in equilibrium at Y1. The economy's automatic adjustment process will restore potential output, Y*, through A) wage increases and a leftward shift of the AS curve. B) a leftward shift of the AD to intersect both the AS and potential GDP at A. C) wage increases and a rightward shift in the AS curve. D) wage decreases and a rightward shift of the AD curve. E) an increase in potential GDP to intersect both the AD and AS curves at B.

A 27)

Suppose there is 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; a small increase B) small increase; a large decrease C) small increase; a large increase D) large increase; no change E) large increase; a small decrease

A 52)

Suppose there is a relatively steep AS curve. If the AD curve shifts to the left, then the price level will ________ and national output will ________. A) fall sharply; decrease slightly. B) increase slightly; significantly increase C) increase sharply; increase slightly D) fall sharply; will not change. E) increase slightly; significantly decrease

A 53)

Consider the basic AD/AS macro model. An expansionary AD shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) increase; increase; increase further; will be restored to potential output B) increase; decrease; increase further; will be restored to potential output C) decrease; decrease; decrease further; will decrease further D) increase; decrease; increase further; will increase further E) decrease; decrease; decrease further; will be restored to potential output

A 55)

Consider the basic AD/AS macro model. An expansionary AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run. A) a positive; an even larger B) a positive; a smaller C) a positive; no D) a negative; no E) a negative; a positive

A 57)

Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) leftward; AS C) rightward; AD D) leftward; AD E) none of the above.

A 59)

In the basic AD/AS model, which of the following is a defining characteristic of the adjustment process that takes the economy from the short run to the long run? A) factor prices are assumed to respond to output gaps B) factor supplies are assumed to be varying C) firms cannot operate near their normal capacity D) the level of potential output fluctuates with the price level E) technology used in production is endogenous

A 6)

Refer to Figure 24-4. After the positive aggregate supply shock shown in the diagram, which of the following would shift the AS curve leftward during the economy's adjustment process? A) an increase in wages and other factor prices B) an increase in the unemployment rate C) an increase in factor supplies D) a decrease in wages and other factor prices E) an increase in labour productivity

A 64)

What is sometimes called the "long-run aggregate supply curve" shows the relationship between the price level and aggregate supply over a time period long enough to permit A) wages and other factor prices to adjust. B) changes in the capital stock. C) changes in technology to occur. D) changes in the size of the resource base to occur. E) all of the above

A 69)

Consider the AD/AS model. Since output in the long run is determined by Y*, the only role of the AD curve is to determine the price level. This is true because the A) Y* is independent of the price level. B) aggregate demand curve is vertical. C) aggregate demand curve is horizontal. D) Y* depends on the price level. E) AS curve is upward sloping.

A 72)

Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will A) decrease real output and increase the price level. B) increase real output and decrease the price level. C) decrease real output and leave the price level unchanged. D) leave real output unaffected and increase the price level. E) decrease real output and decrease the price level.

A 73)

Refer to Figure 24-3. If the economy is currently in equilibrium at E3, the concept of asymmetrical adjustment of the AS curve suggests that A) the return of the economy to potential output may be very slow without government intervention. B) the economy will attain potential output faster if there is no intervention by the government. C) the economy will never return to potential output. D) the price level is constant regardless of the level of equilibrium income. E) a decrease in the price level will induce a rightward shift of AS.

A 77)

The economy's output gap is defined as the A) difference between actual GDP and potential GDP. B) result of economic growth. C) constant factor in the long run. D) level of total output that would be produced if capacity utilization is at the normal rate. E) difference between nominal GDP and real GDP.

A 8)

Suppose the economy begins in a long-run equilibrium with Y = Y*. A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a ________ shift of ________. A) leftward; the aggregate supply curve B) rightward; the aggregate demand curve C) rightward; the aggregate supply curve D) leftward; the aggregate demand curve E) none of the above.

A 80)

Fiscal policy refers to the A) households' attempts to change saving to encourage growth. B) government's use of spending and taxing policies to influence aggregate demand and aggregate supply. C) business sector's influence on investment and GDP. D) government's attempts to maintain a vertical AS curve so as to stabilize output. E) government's use of trade-related policy tools to influence the net export function, thereby influencing GDP.

Which of the following characteristics define the short run in macroeconomics? A) Factor prices adjust to output gaps, and technology and factor supplies are constant. B) Factor prices are exogenous, and technology and factor supplies are constant. C) Factor prices are exogenous, technology and factor prices are endogenous. D) Factor prices are exogenous, and technology and factor supplies are changing. E) Factor prices adjust to output gaps, and technology and factor prices are changing.

B 2)

The Phillips curve provides a theoretical link between A) inflation and the demand for money. B) the goods market and the labour market. C) the goods market and productivity. D) labour markets and foreign-exchange markets. E) the liquidity preference and investment demand schedules.

B 29)

In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of A) the adjustment process. B) the long run. C) the short run. D) the business cycle model. E) the national accounts model.

B 4)

Consider an economy that is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in world demand for this country's goods. In the short run, ________. In the long run, ________. A) real GDP rises and the price level falls; real GDP returns to its original level with a lower 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 falls and the price level rises; real GDP is below its original level with a higher price level D) real GDP and the price level both fall; real GDP is below its original level with a lower price level E) real GDP and the price level both rise; real GDP is above its original level with a higher price level

B 54)

Refer to Figure 24-4. The positive aggregate supply shock results in a new short-run equilibrium where the price level is ________ and real GDP is ________. A) 110; 1300 B) 90; 1200 C) 60; 1000 D) 60; 1300 E) 90; 750

B 63)

What is sometimes called the "long-run aggregate supply curve" relates the aggregate price level to real GDP A) when national income is at less than potential income. B) after factor prices have fully adjusted to eliminate output gaps. C) when technology is allowed to change. D) in the short run. E) when wages are in adjustment but prices are unstable.

B 67)

Refer to Figure 24-1. If the economy is currently producing output of Y0 and the government initiates an expansionary fiscal policy adequate to close the output gap, the result will likely be A) that the AS curve and the AD curve will shift right simultaneously until the new equilibrium occurs at potential national income. B) that the AD curve will shift to the right until point B is reached. C) no change in either price level or output, since expansionary fiscal policy is ineffective. D) the vertical line at Y* will shift to the left, intersecting the AS and AD curves at Y0. E) that the AS curve will shift to the right until point A is reached.

B 83)

A recessionary output gap implies that A) the intersection of AD and AS occurs where real GDP exceeds potential output. B) there is upward pressure on wages. C) the demand for all factor services will be relatively low. D) the economy's resources are being used at more than their normal capacity. E) none of the above.

C 11)

An inflationary output gap would generate which of the following conditions in the economy? A) There is much idle capacity. B) There is downward pressure on wages. C) Workers have a relatively large amount of bargaining power with employers. D) There is an unusually small demand for labour. E) Firms are making low profits.

C 12)

An inflationary output gap is characterized by A) real GDP falling below potential output. B) constant prices. C) real GDP exceeding potential output. D) real output that varies one-for-one with aggregate demand. E) falling prices.

C 13)

If the short-run macroeconomic equilibrium occurs with real GDP les than Y*, the economy is A) in an inflationary gap. B) operating at full capacity. C) in a recessionary gap. D) threatened with an acceleration of inflation. E) at its full-employment level of output.

C 17)

If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is A) operating at full capacity. B) at its full-employment level of output. C) in an inflationary output gap. D) in a recessionary output gap. E) threatened with a demand shock.

C 18)

If wages rise faster than increases in labour productivity, then unit labour costs will A) not change because only total labour costs change. B) rise and the AS curve will shift right. C) rise and the AS curve will shift left. D) fall and the AS curve will shift left. E) fall and the AS curve will shift right.

C 19)

If the economy is experiencing an inflationary output gap, the adjustment process operates as follows: A) wages fall, unit costs rise, and the AS curve shifts leftward. B) wages fall, unit costs fall, and the AS curve shifts rightward. C) wages rise, unit costs rise, and the AS curve shifts leftward. D) wages do not adjust, but the AD curve shifts to the right. E) wages fall, unit costs fall, and the AD curve shifts rightward.

C 22)

As the macro economy adjusts from the short run to the long run, A) aggregate supply shocks cause deviations from potential output. B) aggregate demand shocks cause deviations from potential output. C) wages and other factor prices adjust to close output gaps. D) wages and other factor prices remain constant. E) potential output is adjusting to close inflationary or recessionary gaps.

C 34)

The experience of many economies suggests that A) upward pressures on wages are largely ineffective in booms. B) downward pressure on wages during slumps results in sharply increased labour costs. C) downward pressure on wages during slumps is not as intense as upward pressure on wages during booms. D) slumps and booms are not common; the economy is usually in equilibrium at potential output. E) unit labour costs fall quickly during booms.

C 44)

The wage-adjustment process is asymmetrical because A) factor prices fluctuate more frequently than goods prices. B) employers delay wage increases in a boom but lay off workers quickly during a slump. C) wages rise quickly in a boom but fall slowly during a slump. D) goods prices rise more quickly than factor prices. E) taxes rise quickly in a boom but do not fall during a slump.

C 46)

Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, would be eliminated if A) real national income decreased. B) wages rose quickly. C) wages and other factor prices fell quickly. D) the AS curve shifted upward. E) prices rose quickly.

C 51)

In the basic AD/AS macro model, which of the following events would cause stagflation? A) a large increase in labour productivity B) a large increase in business confidence C) a large increase in the price of raw materials D) a large increase in the net tax rate E) a large decrease in wages

C 60)

Refer to Figure 24-4. Following the positive AS shock shown in the diagram, the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 90; 750 B) 60; 1000 C) 110; 1000 D) 60; 1300 E) 90; 1200

C 65)

Following any AD or AS shock, economists typically assume that the adjustment process continues until A) the AD and AS curves intersect each other at the correct price level. B) Y* adjusts to its long-run equilibrium level. C) the output gap is at a stable level. D) real GDP returns to Y*. E) factor prices have returned to their levels previous to the shock.

Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap? A) decreasing investment B) increasing government purchases C) rising prices D) decreasing wages E) reduction in taxes

D 16)

A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices adjust and the A) AD curve shifts to the left rapidly. B) AS curve shifts to the left only very slowly. C) AS curve shifts to the right very rapidly. D) AS curve shifts to the left fairly rapidly. E) none of the above-- the AS curve remains unchanged.

D 20)

Refer to Figure 24-1. If the economy is currently in a short-run equilibrium at Y0, the economy is experiencing A) a long-run equilibrium. B) a labour shortage. C) an inflationary output gap. D) a recessionary output gap. E) potential output growth.

D 24)

Which of the following characteristics define the long run in macroeconomics? A) Factor prices are exogenous, and technology and factor supplies are constant. B) Factor prices are exogenous, and technology and factor supplies are changing. C) Factor prices adjust to output gaps, and technology and factor supplies are constant. D) Factor prices adjust to output gaps, and technology and factor supplies are changing. E) Factor prices are exogenous, technology and factor prices are exogenous.

D 3)

Which of the following describes the distinction between the Phillips curve and the AS curve? A) 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. B) 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. C) The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis. D) 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. E) There is no distinction: the two curves are essentially the same thing.

D 30)

Refer to Table 24-1. Which of the economies are experiencing an inflationary gap? A) Economies A and B B) Economies B and C C) Economies C and D D) Economies D and E E) none of the economies

D 37)

Refer to Table 24-1. Which of the following statements explains why wages are rising in Economy E? A) Potential output is rising, putting upward pressure on wages. B) The aggregate demand curve is shifting to the right, causing wages to rise. C) The inflationary gap generates lower profits for firms because workers are demanding higher wages. D) The inflationary gap generates excess demand for labour, which causes wages to rise. E) The aggregate supply curve is shifting to the right, which is causing wages to rise.

D 41)

The "adjustment asymmetry" in the AS curve implies that A) wages are very flexible in the downward direction. B) booms can persist for a long time without causing increases in wages and prices. C) wages and prices are equally sticky in both directions. D) unemployment can persist for a while without causing large decreases in wages and prices. E) prices are sticky but wages are not.

D 45)

Consider the basic AD/AS macro model. An expansionary AD shock would have ________ output effect in the short run and ________ output effect in the long run. A) a positive; a positive B) no; a positive C) no; no D) a positive; no E) not enough information to know

D 56)

Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) leftward; AD B) rightward; AS C) leftward; Y* D) leftward; AS E) rightward; AD

D 58)

Refer to Figure 24-4. The initial effect of a positive AS shock results in ________. A) an inflationary output gap of 550 B) a recessionary output gap of 250 C) an inflationary output gap of 300 D) an inflationary output gap of 200 E) a recessionary output gap of 450

D 62)

Which of the following is a defining characteristic of the AD/AS macro model in the long run? A) factor prices are assumed to be fixed B) the level of potential output is constant C) technology used in production is constant D) changes in real GDP are determined by the changes in potential output E) factor supplies are assumed to be fixed

D 7)

The "long-run aggregate supply curve", vertical at Y* , shows that A) potential output will fall as prices rise. B) potential output is compatible with one particular price level. C) potential output will rise as prices rise. D) potential output is compatible with any price level. E) prices will always rise in the long run.

D 70)

Consider the basic AD/AS macro model. A negative AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) increase; decrease; increase further; will be restored to potential output B) increase; increase; increase further; will be restored to potential output C) decrease; decrease; decrease further; will decrease further D) decrease; decrease; decrease further; will be restored to potential output E) increase; decrease; decrease; will be restored to potential output

Refer to Figure 24-1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the A) AD curve will eventually shift to the right and return the economy to its full-employment level of output. B) level of output will decrease below Y0. C) economy will quickly move to point A. D) economy will eventually move to point B. E) economy will only move gradually toward point A as wages slowly adjust.

Which of the following statements about output gaps is true? A) When actual GDP is below potential GDP, there is upward pressure on wages. B) When actual GDP is above potential GDP, there is downward pressure on wages. C) When actual GDP is above potential GDP, there is downward pressure on output prices. D) When actual GDP is below potential GDP, there is upward pressure on output prices. E) When actual GDP is above potential GDP, there is upward pressure on wages.

E 32)

What is sometimes called the "long-run aggregate supply curve" shows the relationship between the price level and the amount of output ________ have adjusted to output gaps. A) supplied by firms before all factor prices B) demanded by households before all factor prices C) demanded by households after all factor prices D) supplied by firms after all output prices E) supplied by firms after all factor prices

E 33)

Refer to Table 24-1. Which of the following statements best describes the situation facing Economy B? A) There is a recessionary gap of $40 billion and wages are falling slowly. B) There is an inflationary gap of $40 billion and wages are rising. C) There is no output gap and wages are stable. D) There is an output gap of $20 billion and wages are rapidly adjusting. E) There is a recessionary gap of $20 billion and wages are falling slowly.

E 38)

Refer to Table 24-1. Consider Economy E. Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy? A) The intersection of the AD and AS curves coincide with the long-run aggregate supply curve. B) The AD curve has shifted to the right and the economy is in a short-run disequilibrium position. C) The AS curve has shifted to the left and the economy is in a short-run disequilibrium position. D) The intersection of the AD and AS curves is to the left of Y*. E) The intersection of the AD and AS curves is to the right of Y*.

E 39)

The "adjustment asymmetry" in aggregate supply refers to the A) difference between actual and potential output. B) economy's path toward potential output. C) changing slope of the AS curve. D) different relative sizes of inflationary versus recessionary gaps. E) different speeds at which the economy adjusts to positive and negative output gaps.

E 47)

Which of the following is a defining characteristic of the AD/AS macro model in the short run? A) technology used in production is endogenous and variable B) the level of potential output fluctuates with the price level C) firms cannot operate near their normal capacity D) factor supplies are assumed to be flexible E) factor prices are assumed to be constant

E 5)

Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will A) always reverse itself. B) set off an endless cycle of price rises and increases in unemployment. C) result in a price level lower than that preceding the demand shock. D) allow a stable expansion of real income over time. E) be negated in the long run, through the economy's adjustment process.

E 50)

Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP A) and the price level are determined by "long-run aggregate supply". B) is determined by AD and the price level is determined by the AS curve. C) is determined by aggregate demand and the price level by potential output. D) and the price level are determined by aggregate demand. E) is determined by potential output and the price level by aggregate demand.

E 71)

Refer to Figure 24-2. Suppose the economy is in equilibrium at Y1. The government could use discretionary fiscal policy to close the output gap by A) an increase in personal and corporate income taxes. B) a decrease in government purchases. C) an increase in government purchases. D) an increase in current interest rates. E) both A and B would work.

E 86)

One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that A) inflation will not be as stimulated. B) the economy will overshoot potential GDP and a boom will be underway. C) price level will rise higher than otherwise. D) the recovery will be slower, thereby causing less disruption. E) the recovery may be more rapid.

E 89)

government outlays

spending and transfer payments

workers compensation law

state statutes establishing an administrative procedure for compensating workers' injuries that arise out of—or in the course of—their employment, regardless of fault (typically domestic, agricultural, temporary, and of common carriers are excluded, but minors are covered); requirements: • existence of an employment relationship • accidental injury that occurred on the job or in the regardless of fault; if accepted, employee cannot sue and employer avoids liability unless intentional injury

Easier for a growing economy to be generous toward its less fortunate citizens - or neighbours- than it is for a

static economy

Commercial banks in Canada

have a positive reserve ratio

An economy may not quickly and automatically eliminate a recessionary output gap because wages

have a tendency to be sticky downward

Consider the basic AD/AS model. A rise in an input price like unit labor costs would be expected to create a new macroeconomic equilibrium which in comparison to the original equilibrium has a price level that is

higher and a real GDP that is lower.

Higher rate of investment therefore leads to a

higher future growth rate of potential output.

Greater interest charges on the public debt can lead to

higher taxes, and thus reduced incentives to work and invest

ital occurs whenever there is

positive (net) investment in hte economyh.

Consider a new deposit of $10 000 to the Canadian banking system. The commercial bank that initially receives this deposit will find itself with

$9 000 of excess cash reserves if its target reserve ratio is 10 percent

If all the commercial banks in the banking system collectively have $300 million in cash reserves and are satisfying their target reserve ratio of 20 percent, what is the amount of deposits they have?

$1500 million

An economy is in a recession and the government decides to increase spending by $4 billion. The MPC is 0.8. What would be the full increase in real GDP from the change in government spending?

$20 billion

10. If the cyclically adjusted' budget shows a deficit of about $200 billion and the actual budget shows a deficit of about $250 billion over a several-year period, it can be concluded that there is a (a) cyclical deficit (b) recognition lag (c) crowding-out effect (d) political business cycle

(a) cyclical deficit Cyclical Adjusted Deficit: A projection of the government's budget deficit assuming the economy is at a normal level of activity. This is done by presupposing that consumer spending and taxes remain unchanged however, it does not take into account the effect of the change in national income to costs of government debt or that the budget deficit itself is a government policy.

6. If the slope of line T were steeper, there would be (a) more built-in stability for the economy (b) less built-in stability for the economy (c) no change in the built-in stability for the economy (d) the need for more emphasis on discretionary fiscal policy

(a) more built-in stability for the economy

24. The crowding-out effect of borrowing to finance an increase in government expenditures (a) reduces current spending for private investment (b) increases the privately owned stock of real capital (c) reduces the economic burden on future generations (d) increases incentives to innovate

(a) reduces current spending for private investment

20. Incurring an internal debt to finance a war does not pass the cost of the war on to future generations because (a) the opportunity cost of the war was borne by the generation that fought it (b) the government need not pay interest on internally held debts (c) there is never a need for government to refinance the debt (d) wartime inflation reduces the relative size of the debt

(a) the opportunity cost of the war was borne by the generation that fought it

22. Which is an important consequence of the public debt of the United States? (a) It decreases the need for U.S. securities. (b) It transfers a portion of the U.S. output to foreign nations. (c) It reduces the income inequality in the United States. (d) It leads to greater saving at every level of disposable income.

(b) It transfers a portion of the U.S. output to foreign nations.

15. Current thinking about discretionary fiscal policy among mainstream economists is that it should be designed to (a) counteract the effects of monetary policy (b) contribute to long-run economic growth (c) "fine-tune" the economy in the short run but not in the long run (d) control inflationary pressure but not be used to fight recession

(b) contribute to long-run economic growth Feedback: There is general agreement, however, that fiscal policy should be designed so that its incentives and investments strengthen long-term productivity and economic growth.

11. If the cyclically adjusted deficit as a percentage of GDP is zero one year, and there is a cyclically adjusted budget surplus the next year, it can be concluded that (a) fiscal policy is expansionary (b) fiscal policy is contractionary (c) the federal government is borrowing money (d) the federal government is lending money

(b) fiscal policy is contractionary Feedback: Since there was a surplus...there was less government spending.

12. During the Great Recession of 2007-2009 the federal government (a) decreased spending and increased taxes (b) increased spending and decreased taxes (c) decreased spending and decreased taxes (d) increased spending and increased taxes

(b) increased spending and decreased taxes Feebback: This is the most expansionary set of meaasures the federal government can not...increase spending the decrease taxes so consumers can spend more.

14. The crowding-out effect of an expansionary (deficit) fiscal policy is the result of government borrowing in the money market that (a) increases interest rates and net investment spending in the economy (b) increases interest rates and decreases net investment spending (c) decreases interest rates and increases net investment spending (d) decreases interest . rat.es and net investment spending 15. Current thinking

(b) increases interest rates and decreases net investment spending Feedback: An expansionary fiscal policy may, by raising the level of interest rates in the economy, reduce investment spending and weaken the effect of the policy on real GDP. The extent of this crowding-out effect depends on the condition of the economy.

4. When government tax revenues change automatically and in a counter-cyclical direction over the course of the business cycle, this is an example of (a) the political business cycle (b) non-discretionary fiscal policy (c) the cyclically adjusted budget (b) crowding out

(b) non-discretionary fiscal policy Feedback: Nondiscretionary fiscal 1>91icy does not require Congress to take any action and is a built-in stabilizer for the economy. The economy has a progressive.tax system that provides such automatic or built-in stability. When GDP increases, net tax revenues will increase to reduce inflationary pressure and when GDP declines, net tax revenues will fall to stimulate the economy.

13. The length of time involved for the fiscal action taken by Congress to affect output, employment, or the price level is referred to as the (a) administrative lag (b) operational lag (c) recognition lag (d) fiscal lag

(b) operational lag

7. If the slope of line T were flatter, there would be (a) larger cyclical deficits produced as GDP moved from Y3 to Y2 (b) smaller cyclical deficits produced· as GDP moved from Y3 to Y2 (c) larger cyclically adjusted deficits produced as GDP moved from Y 3 to Y 2 (d) smaller cyclically adjusted deficits produced as GDP moved from Y3 to Y2

(b) smaller cyclical deficits produced· as GDP moved from Y3 to Y2

21. Which would be a consequence of the retirement of the internally held (U.S.-owned) portion of the public debt? (a) a reduction in the nation's productive capacity (b) a reduction in the nation's standard of living (c) a redistribution of the nation's wealth among its citizens (d) a decrease in aggregate demand in the economy

17. To place the public debt in perspective based on the wealth and productive capacity of the economy, it is more meaningful to (a) examine its absolute size (b) calculate the interest payments on the debt (c) measure it relative to the gross domestic product (d) compare it to imports, exports, and the trade deficit

8. Actions by the federal government to increase the progressivity of the tax system (a) flatten the slope of line T and increase built-in stability (b) flatten the slope of line T and decrease built-in stability (c) steepen the slope of_ line T and increase built-in' stability (d) steepen the slope of line T and decrease built-in stability

5. If the economy is to have built-in stability, when real GDP falls, (a) tax revenues ·and· government transfer payments both should fall (b) tax revenues and government transfer payments both should rise (c) tax revenues should fall and government transfer payments should rise (d) tax revenues should rise and government transfer payments should fall

19. A major reason that a public debt cannot bankrupt the federal government is because the federal government has (a) an annually balanced budget (b) the Social Security trust fund (c) the power to levy taxes (d) a strong military defense

3. Which combination of fiscal policies would be the most contractionary? (a) an increase in government spending and taxes (b) a decrease in government spending and taxes (c) an increase in government spending and a decrease in taxes (d) a decrease in government spending and an increase in taxes

(d) a decrease in government spending and an increase in taxes Feedback: Reducing government spending and increasing taxes will reduct GDP. There will be less money to spend by the government (roads/bridges) and consumers (clothes and going to Cavalier games) Contractionary fiscal policy is enacted to counter inflationary pressure in the economy by cutting government spending, raising taxes, or a combination of the two.

23. Greater interest charges on the public debt can lead to (a) fewer purchases of U.S. securities by foreigners (b) more private investment spending in the economy (c) lower taxes, and thus greater incentives to work and invest (d) higher taxes, and thus reduced incentives to work and invest

(d) higher taxes, and thus reduced incentives to work and invest

Components of GDP

-Consumption -Investment -Government Purchases -Net Exports

money supply is made up of:

-currency -deposits

Successive increments of investment associated with an innovation often yields a range of increasing marginal returns as costs that are incurred in earlier investment expenditure provide publicly available knowledge and experience and as costumer attitudes and abilities become more receptive to new products.

...

Technology is constantly advancing, and many things that seemed impossible a generation ago will be commonplace a generation from now. Such technological advance makes any absolute limits to economic growth less likely

...

.40

If consumption spending increases from $358 to $367 billion when disposable income increases from $412 to $427 billion, it can be concluded that the marginal propensity to consume is

0.6 change in disposable income spending/change in increase

Other important considerations

1) switching to real GDP: relationship between real domestic output and consumption (and saving) instead of consumption (and saving) and disposable income 2) Changes along schedules: movement from one point to another on a consumption schedule is a change in the amount consumed and is solely caused by a change in real GDP. 3) Simultaneous shifts: changes in wealth, expectations, interest rates, and household debts will shift the consumption schedules in one direction and the saving schedule in the opposite direction. 4) Taxation: shift the consumption and saving schedules in the same direction (increase will reduce both) 5) Stability: relatively stable unless altered by major tax increases or decreases

Shifts of the investment demand curve result of changes in:

1) the acquisition, maintenance, and operating cost of capital goods 2) business taxes 3) technology 4) the stocks of capital goods on hand 5) expectations

MPS+MPC=

1, the fraction consumed MPC plus the fraction saved MPS must exhaust the whole change in income.

Expansionary fiscal policy

1. Increased government spending 2. Decreased taxes 3. Combined government spending increases and tax reductions to increase AD and raise real GDP

Public debt

1. Treasury bills (short-term) 2. Treasury notes (medium-term) 3. Treasury bonds (long-term) 4. US saving bonds (long-term, nonmarketable bonds)

fiscal policy can use what two things:

1. government spending 2. taxes or a combo of both

two possible reasons for inflation

1. large government debts 2. money supply can temporarily stimulate an economy toward more rapid growth rates

three types of government outlays

1. mandatory outlays 2. discretionary spending 3. interest payments

why did Solow say technological advancements were exogenous

1. many happened by chance 2. easier when creating mathematical equation

3 primary uses of GDP data:

1. measure living standards 2. measure economic growth 3. determine whether an economy is experiencing recession or expansion

three functions of money:

1. medium of exchange 2. unit of account 3. store of value

Fed's primary responsibilities:

1. monetary policy 2. central banking 3. bank regulation

resources

1. natural resources 2. physical capital 3. human capital

Assumes that prices are stuck or inflexible even as the economy moves near potential GDP

A major limitation of the aggregate expenditures model is that it

shortcomings of fiscal policy:

1. time lags 2. crowding out 3. saving shifts

quantity of money can affect what two things:

1. unemployment 2. real GDP

If in an economy a $150 billion increase in investment spending creates $150 billion of new income in the first round of the multiplier process and $105 billion in the second round, the multiplier and the marginal propensity to consume will be, respectively,

3.33 and 0.70

Answer the question on the basis of the following information. An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. Refer to the information. If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the per-unit cost of production will rise by about:

30 percent.

If taxes were $5, government purchases of goods and services $10, planned investment $6, and net exports zero, equilibrium real GDP would be

310 298 consumption p 648

In the diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply curves, respectively, are lines:

4 and 3.

If the investment schedule is $60 at each level of output, the equilibrium level of real GDP will be

400

If the MPC in an economy is 0.75, government could eliminate a recessionary expenditure gap of $50 billion by decreasing taxes by

66.7 billion

Real GDP

= DI

) A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices adjust and the A) AS curve shifts to the left fairly rapidly. B) AS curve shifts to the left only very slowly. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) none of the above— the AS curve remains unchanged.

) In the basic AD/AS macro model, permanent increases in real GDP are possible only if A) potential output is increasing. B) the correct fiscal policy is implemented. C) the economy's automatic stabilizers are allowed to operate. D) the aggregate supply curve is vertical. E) aggregate demand responds positively to demand shocks

) Refer to Figure 24-1. If the economy is currently in a short-run equilibrium at Y0, the economy is experiencing A) a recessionary output gap. B) an inflationary output gap. C) a labour shortage. D) a long-run equilibrium. E) potential output growth

100) With respect to long- run economic growth, one rationale for the idea that there may be increasing marginal returns to investment is that A) the investment costs to "followers" are lower than those for "pioneers". B) as further investment takes place the economy moves upward to the left along the marginal product schedule. C) initial investment shifts the the aggregate demand schedule to the left, making further investment less costly. D) initial investment shifts the the investment demand schedule to the left, making further investment less costly. E) as further investment takes place the economy moves down to the right along the marginal product schedule.

104) Given the enormous world population growth of recent decades, the present needs and aspirations of the world's population can likely only be met through A) increasing knowledge and technological improvements. B) enormous increases in financial capital. C) relatively small increases in the saving rates of the developing economies. D) coordination of fiscal and monetary policies. E) reductions in the world's capital stock, as a means of controlling the exhaustion of natural resources.

106) Which of the following statements is true of new growth theory, and not true of Neoclassical growth theory? A) it can explain improved living standards over the long term. B) it cannot explain improved living standards over the long term. C) economic growth is the result of innovation. D) economic growth does not have an impact on resource exhaustion. E) economic growth depends only on population growth.

107) Investment in innovation is often considered to have increasing marginal returns because A) of market development costs and the "public good" nature of knowledge. B) R&D costs are negligible relative to firms' total costs. C) innovation is mostly through "leaning by doing". D) new products increase firms' profits. E) none of the above.

17) Refer to Figure 26- 1. The area marked Area 1 represents A) the opportunity cost incurred by Economy B for sacrificing current consumption, as compared to Economy A. B) the value of the investment in capital goods undertaken by Economy B. C) the opportunity cost incurred by Economy A for sacrificing current consumption, as compared to Economy B. D) the value of consumption from Year 0 to Year X in Economy A. E) the value of the investment in capital goods undertaken by Economy A.

18) Refer to Figure 26- 1. Suppose Economy A jumps to the path of Economy B at Year 0 by increasing the share of GDP that is saved. In that case, which of the following statements about Economy A is true? A) By Year Y, the increase in consumption made possible by the economy's higher growth rate equals the consumption sacrificed in earlier years. B) By Year X, Economy A is saving and investing the same share of its national income as it would have been had it stayed on its original path. C) By Year X, Economy A is better off in terms of material living standards for having jumped to the path of Economy B. D) By jumping to a new growth path at Year 0, Economy A has increased the share of national income that is consumed. E) Economy A will not be able to regain the losses in consumption it incurs by jumping to the path of Economy B.

25) Long- run economic growth can help alleviate the problems of poverty by A) generating more resources that can be used to reduce income inequality. B) creating new low- paying jobs for the unemployed. C) reallocating income away from low- value production to increase the incentives for high- value production. D) increasing investment in human capital. E) requiring increased saving on the part of most of the population.

34) Consider a closed economy in the long run. A country with a low national saving rate (as a fraction of real GDP) is likely to have A) a low growth rate because sustained high investment is not possible with low saving. B) an AS curve moving continually to the right. C) trouble achieving potential real national income in the short run. D) either a high or low growth rate depending on the investment schedule. E) a high growth rate because aggregate expenditure will be high out of any given income.

36) Which of the following statements concerning national saving is true? A) An increase in the rate of saving will lead to a short- run reduction in national income, but to higher economic growth in the long run. B) A country's saving rate is unrelated to its growth rate. C) An increase in the rate of saving will lead to a reduction in consumption and therefore to both a short- run and a long- run decrease in national income. D) An increase in the rate of saving will cause an immediate increase in national income, but may cause a drop in national income in the long- run. E) An increase in the rate of saving will always be offset by a reduction in private investment.

40) For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to A) decrease and the flow of investment to increase. B) increase and the flow of investment to increase. C) decrease and the flow of investment to decrease. D) increase and the flow of national saving to fall. E) increase and the flow of investment to decrease.

50) In the long run, an increase in the demand for investment pushes ________ the real interest rate, encourages ________ saving by households, and leads to a ________ future growth rate of potential output. A) up; more; higher B) down; less; lower C) up; more; lower D) up; less; lower E) down; less; higher

59) The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor will eventually A) decrease the average product of the factor. B) lead to a decrease in total output by the factor. C) lead to an increase in the marginal output of the factor. D) lead to an increase in the material standard of living. E) increase the average product of the factor.

65) "Embodied technical change" is said to occur when A) older capital equipment is replaced with different, more productive, capital. B) the capital- labour ratio is increasing. C) innovations in the organization of production take place which do not involve changes in the form of capital used. D) the labour force acquires new skills that can be used across a wide range of industries. E) techniques of managerial control are improved.

66) A central assumption of the Neoclassical growth model is that A) there are diminishing marginal returns to a single factor. B) there are increasing marginal returns to capital investment. C) long- run growth arises only from technological innovation. D) long- run growth arises from correcting market failures. E) there are constant marginal returns to investment.

69) In Neoclassical growth theory, average material living standards in an economy could fall when A) additional units of capital are added to the other factors. there is equal percentage growth in capital and labour inputs. technology improves. additional units of labour are added to the other factors. there is a decline in the population. D 70) In Neoclassical growth theory, increasing the amount of capital employed in production ________ the average standard of living as long as the marginal product of capital exceeds zero. A) unambiguously raises B) at first raises but eventually reduces C) has no effect on D) unambiguously reduces E) at first reduces but eventually raises

76) According to the Neoclassical growth model, which of the following scenarios explains progressively smaller increase in per capita GDP? A) an increase in the capital stock B) an equal increase in both population and the stock of capital C) an increase in population D) a decrease in unemployment rates E) an equal increase in population and output

80) According to the Neoclassical growth theory, sustained rising material living standards can only be explained by A) technological change. growth in physical capital. growth in human capital. balanced growth of labour and capital. growth in the labour force. A 81) Sustained economic growth in the long run would be fostered by A) technological improvements embodied in physical or human capital. B) expansionary fiscal policy. C) expansionary monetary policy. D) elimination of an output gap. E) decreasing excise taxes on consumer goods.

83) If a country experiences growth in "total factor productivity", then A) there is some growth in real GDP that cannot be accounted for by growth in capital or the labour force. B) all growth in real GDP can be explained by growth in the capital stock. C) material standards of living are falling. D) none of the growth in real GDP can be accounted for by growth in capital and the labour force. E) all growth in real GDP can be explained by growth in the labour force.

94) Consider an aggregate production function Y = F(K, L) that displays diminishing marginal returns to labour. If the amount of capital is held constant and the amount of labour used in production is increasing, then A) each additional unit of labour will add less to total output than the previous unit of labour. B) each additional unit of labour will add more to total output than the previous unit of labour. C) there are increasing returns to scale. D) there are constant returns to scale. E) total output increases in proportion to the increases in labour.

A recessionary output gap implies that A) the demand for all factor services will be relatively low. B) the intersection of AD and AS occurs where real GDP exceeds potential output. C) the economy's resources are being used at more than their normal capacity. D) there is upward pressure on wages. E) there is excess demand for most factors of production.

As the macro economy adjusts from the short run to the long run, A) wages and other factor prices adjust to close output gaps. B) potential output is adjusting to close inflationary or recessionary gaps. C) wages and other factor prices remain constant. D) aggregate demand shocks cause deviations from potential output. E) aggregate supply shocks cause deviations from potential output.

Assume the economy is in long-run equilibrium. Now assume that there is a large increase in demand for U.S. exports. Which of the following best explains how the economy will adjust back to long-run equilibrium? A. Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level. B. Aggregate demand will decrease, restoring the original equilibrium price and quantity. C. Aggregate demand will increase, restoring the original equilibrium price and quantity. D. Short-run aggregate supply will increase (shift rightward) as firms and workers adjust to the new price level.

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) increase real GDP and lower the price level. B) affect only the level of real GDP. C) affect only the price level. D) decrease real GDP and raise the price level. E) decrease real GDP and the price level.

Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock would have ________ output effect in the short run and ________ output effect in the long run. A) a positive; no B) a positive; a positive C) no; a positive D) no; no E) not enough information to know

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 leftward unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP. A) too weak; stay below B) too weak; rise above C) too strong; stay below D) too strong; rise above E) appropriate; equal

Consider the market for loanable funds. Holding everything else constant, if the federal government eliminates incentives to save, then as a result A) the supply for loanable funds increases and the equilibrium real interest rate increases. B) the supply for loanable funds decreases and the equilibrium real interest rate increases. C) the supply for loanable funds increases and the equilibrium real interest rate decreases. D) the demand for loanable funds decreases and the equilibrium real interest rate increases.

If aggregate demand just increased, which of the following may have caused the increase? A) an increase in government purchases. B) an increase in the interest rate. C) an increase in the price level. D) and increase in imports.

If real GDP exceeded potential GDP and inflation was increasing, which of the following would be an appropriate fiscal policy? A) increase taxes. B) increase government purchases. C) increase interest rates. D) decrease taxes.

If the MPC is 0.8, a $600 increase in disposable income will lead to a ________ increase in consumption. A) $480 B) $750 C) $3000 D) $1200

Imagine a graph that shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential GDP? The new equilibrium will be A. where the new aggregate demand curve intersects the original short-run aggregate supply curve, on the long-run aggregate supply curve. B. where the new aggregate demand curve intersects the original short-run aggregate supply curve, to the left of the long-run aggregate supply curve. C. where the new aggregate demand curve intersects the original short-run aggregate supply curve, to the right of the long-run aggregate supply curve. D. where the aggregate demand curve without the government's action intersects the original short-run aggregate supply curve.

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP, there will be A) Inflation B) Recession

Income taxes in Canada can be considered to be automatic stabilizers because tax A) revenues increase when income increases, thereby offsetting some of the increase in aggregate demand. B) revenues decrease when income increases, thereby intensifying the increase in aggregate demand. C) structures can be changed when the Minister of Finance brings down a budget. D) revenues are changed through discretionary fiscal policy to keep the budget balanced. E) revenues are changed through discretionary fiscal policy to create surpluses in recessions.

Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for attaining potential output (Y*) is a(n) A) increase in personal and corporate tax rates. B) increase in government spending. C) increase in current consumption. D) decrease in personal and corporate taxes. E) decrease in current imports.

Refer to Figure 24-2. Suppose the economy is in equilibrium at Y1. The economy's automatic adjustment process will restore potential output, Y*, through A) wage increases and a leftward shift of the AS curve. B) wage increases and a rightward shift in the AS curve. C) wage decreases and a rightward shift of the AD curve. D) an increase in potential GDP to intersect both the AD and AS curves at B. E) a leftward shift of the AD to intersect both the AS and potential GDP at A.

Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from to . The initial effect is A) a recessionary output gap of 100. B) a recessionary output gap of 300. C) a recessionary output gap of 550. D) an inflationary output gap of 200. E) an inflationary output gap of 100.

Refer to Figure 24-7. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing the net tax rate. C) increasing government purchases. D) decreasing government transfer payments. E) implementing an expansionary fiscal policy

Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is at its original level with a lower price level B) real GDP and the price level both fall; real GDP is above 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 falls and the price level rises; real GDP is below its original level with a higher price level

Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economy's natural adjustment process to operate is that A) it will reduce the upward pressure on the price level that would otherwise occur. B) if private-sector expenditures increase on their own, the policy will stabilize real GDP. C) it will shorten what might otherwise be a long recession. D) it will reduce the downward pressure on the price level that would otherwise occur. E) it will close the output gap.

Suppose the economy is in long-run equilibrium. Now suppose that many firms expect the future profitability of their investment spending to be increasing. According to the AD-AS model, what happens to prices and output in the new short run equilibrium? A) Prices will be higher, output will be higher. B) Prices will be higher, output will be at its potential level. C) Prices will be lower, output will be higher. D) Prices will be lower, output will be lower.

Suppose the economy is in long-run equilibrium. Now suppose there is an unexpected increase in the price of oil. According to the AD-AS model, what happens to prices and output in the short run? (Hint: Do they increase, decrease, or remain the same?) Answer: Prices _______________ , Output ______________ A) Increase, decrease B) Decrease, Decrease C) Increase, Increase D) Decrease, Increase

Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output? A) The growth rate of potential output may be reduced due to the crowding out of investment. B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy. C) Potential output will drop below its starting point because of the crowding out of investment. D) The growth rate of potential output will rise due to the higher level of aggregate demand. E) The level of potential output is fixed and will not be affected by fiscal policy.

Which of the following is usually the cause of stagflation? A. a supply shock as a result of an unexpected increase in the price of a natural resource B. an increase in investment as a result of a reduction in interest rates C. a decline in net exports as a result of a change in the exchange rate D. a reduction in government purchases

On a graph, the equilibrium real GDP is found at the intersection of the 45-degree line and the

aggregate expenditures curve

The Solow residual is an estimate of changes in A) technology. B) economic growth. C) human capital.

The costs of economic growth include: A) the effects on workers whose skills are made obsolete by technical change. B) current saving must be sacrificed to increase investment in capital goods. C) reduced interest rates.

The individual income tax rate is decreased. This is: A) part of an expansionary fiscal policy, B) part of a contractionary fiscal policy, or C) not part of fiscal policy.

The interest rate effect refers to the fact that a higher price level results in A. higher interest rates and lower investment. B. lower interest rates and lower investment. C. higher interest rates and higher investment. D. lower interest rates and higher investment.

The short-run aggregate supply curve slopes upward because of all of the following reasons except A. in the short run, an unexpected change in the price of an important resource can change the cost to firms. B. in the short run, as prices of final goods and services increase, some firms are very slow to adjust their prices, thus their sales increase. C. in the short run, as prices of final goods and services increase, input prices react more slowly. D. in the short run, prices of final goods and services adjust slowly due to the existence of menu costs.

What economists sometimes call the "long-run aggregate supply curve" is A) vertical. B) horizontal. C) nonlinear. D) negatively sloped. E) positively sloped.

What would be the effect of an unexpected increase in the price of oil an unexpected increase in the price of oil on a graph showing aggregate demand and short-run aggregate supply that is initially in equilibrium? The effect of an unexpected increase in the price of oil an unexpected increase in the price of oil will be for the A. short-run aggregate supply curve to shift up B. short-run aggregate supply curve to shift down. C. aggregate demand curve to shift down. D. aggregate demand curve to shift up.

Which of the following factors does not cause the aggregate demand curve to shift? A. a change in the price level B. a change in the expectations of households and firms C. a change in foreign variables D. a change in government monetary or fiscal policies

Refer to Table 24-1. Which of the economies is operating at its long-run equilibrium? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E

Which of the following statements about fiscal policy is the best description of "fine tuning"? A) The government continuously alters its spending and taxing plans to hold real GDP at potential. B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap. D) The government decreases tax rates to decrease an inflationary gap. E) The government uses automatic stabilizers to reduce any output gaps.

108) Which of the following makes technological change endogenous in the new growth theories? A) innovation is largely through "learning by doing" B) the "private good" nature of knowledge C) the negative relationship between innovation and adverse economic shocks D) the negative relationship between innovation and competitive markets E) the cheap and instantaneous diffusion of technological knowledge among firms

A 109) Resource exhaustion is not considered to be among the main factors that limit economic growth because A) the population growth rate is decreasing over time and projected to be negative in the future. B) technological advances change the nature of production over time and also make more resources available for extraction. C) different types of inputs are used in production over time. D) resources can be obtained from other planets as technology advances. E) none of the above. Answer: B

Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government's net tax revenues ________ during booms and ________ during recessions. A) dampen; increase; decrease B) magnify; increase; decrease C) magnify; decrease; increase D) dampen; decrease; increase E) does not affect; are constant; are constant

A 110)

In the long run, aggregate demand is ________ for determining real GDP, and the paradox of thrift ________. A) not important; does not apply B) stable and important; applies C) the most important influence; does not apply D) not important; applies E) the only influence; applies

A 112)

In the basic AD/AS macro model, the "paradox of thrift" is only a short-run phenomenon because A) in the long run output is determined by potential output. B) consumers base their consumption expenditures only on their lifetime income. C) savings are transformed into expenditures in the long run. D) consumers exhibit cyclical consumption behaviour. E) the marginal propensity to consume is fixed in the long run.

A 114)

Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the ________ the output gap being suffered, an argument supporting ________ . A) larger; gross tuning B) smaller; crowding out C) smaller; fine tuning D) larger; crowding out E) larger; fine tuning

A 115)

Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output? A) The growth rate of potential output may be reduced due to the crowding out of investment. B) The level of potential output is fixed and will not be affected by fiscal policy. C) Potential output will drop below its starting point because of the crowding out of investment. D) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy. E) The growth rate of potential output will rise due to the higher level of aggregate demand.

A 119)

The main source of increases in material living standards over the long term is the A) continual increase in potential national income. B) positive slope of the aggregate supply curve. C) continuous outward shift of aggregate demand. D) continual avoidance of recessionary gaps. E) maintenance of a continuous inflationary gap.

A 81)

An inflationary output gap occurs when A) actual GDP exceeds potential GDP. B) demand for labour services is very low. C) potential GDP exceeds actual GDP. D) equilibrium national income is below potential national income. E) nominal GDP exceeds real GDP.

A 9)

Investment Demand Curve

A curve that shows the amounts of investment demanded by an economy at a series of real interest rates

Investment Demand Curve

A curve that shows the amounts of investment demanded by an economy at a series of real interest rates.

Expected future sales

A decrease in investment demand would be a consequence of a decline in

In the diagram, a shift from AS1 to AS2 might be caused by:

A decrease in the prices of domestic resources.

Explanation of AD's negative slope: Real balances effect

A higher price level reduces the purchasing power of money (savings). Therefore, the higher price level means less consumption spending

Describe the international effect.

A higher price level will make U.S. goods relatively more expensive compared to other countries' goods. This will reduce exports, increase imports, and, therefore, reduce net exports.

Describe the interest rate effect.

A higher price level will tend to increase interest rates. Higher interest rates will reduce investment spending by firms as borrowing costs rise. Additionally, higher interest rates will also reduce consumption spending.

Cost-push inflation

A leftward shift of the short-run aggregate supply curve would illustrate:

monetary policy

A policy of influencing the economy through changes in the banking system's reserves that influence the money supply and credit availability in the economy.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it is experiencing:

A positive GDP gap.

Constant returns to scale

A situation which output increases in proportion to the change in all input as the scale of production is increased

Aggregate Expenditures Schedule

A table of numbers showing the total amount spent on final goods and final services at different levels of real GDP.

Investment Schedule

A table of numbers that shows the amounts firms plan to invest at various possible values of real GDP.

Saving Schedule

A table of numbers that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income.

Lump-sum Tax

A tax that collects a constant amount (the tax revenue of government is the same) at all levels of GDP.

Technical Change

A technical change is a term used in economics to describe a change in the amount of output produced from the same amount of inputs. A technical change is not necessarily technological as it might be organizational, or due to a change in a constraint such as regulation, input prices, or quantities of inputs.

44) Consider a small economy where GDP is $100 000. Factor supply is 1000 units and the factor utilization rate is 0.8. What is a simple measure of productivity (GDP per factor employed) in this economy? A) $125 B) $800 C) $100 D) $125 000 E) $1000

A) $125

60) Suppose Bank ABC has a target reserve ratio of 10%, no excess reserves, and it receives a new deposit of $500 000. This bank will initially expand its loans by A) $450 000. B) $50 000. C) $500 000. D) $4.5 million. E) $5 million.

A) $450 000.

129) Suppose the government embarks on an infrastructure program, spending $8 billion on the construction of new roads and bridges. What is the size of the multiplier if the AS curve is vertical? A) 0 B) greater than 1 C) less than 1 D) infinity E) insufficient information to solve

A) 0

133) Refer to Figure 23-5. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 4, then what is the value of the multiplier? A) 1.2 B) 1.4 C) 4 D) 2.8 E) 3.2

A) 1.2

108) Which of the following would cause a positive aggregate demand shock, but leave the aggregate supply curve unaffected? A) A free trade agreement between Canada and the United States that leads Canadian businesses to increase investment expenditures. B) A severe drought lasting for six months that destroys agricultural and forestry production. C) A medical report confirming that improved health for Canadian workers caused fewer lost days of production. D) An improvement in the computer literacy of workers. E) A substantial increase in world oil prices.

A) A free trade agreement between Canada and the United States that leads Canadian businesses to increase investment expenditures.

Which of the following discretionary policies both restrains the growth of government and helps return the economy to full employment? A) A tax cut in a recession B) A tax increase during inflation C) An increase in government spending during a recession D) A decrease in government spending in a recession

A) A tax cut in a recession Feedback: Notes...the key phrase in the question is 'restrains the growth of government'. A decrease in government spending in a recession would decrease the size of government, but it would also be counterproductive. Tax cuts in a recession would expand GDP while also restraining the size of government.

25) Refer to Figure 24-1. If the economy is currently producing output of Y0, the economy's automatic adjustment process will have the A) AS curve shifting to the right until point A is reached. B) vertical line at Y* shifting to the left until it gets to Y0. C) AD curve shifting to the right until point B is reached. D) economy remaining where it is. E) level of potential output falling.

A) AS curve shifting to the right until point A is reached.

20) A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices adjust and the A) AS curve shifts to the left fairly rapidly. B) AS curve shifts to the left only very slowly. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) none of the above— the AS curve remains unchanged.

A) AS curve shifts to the left fairly rapidly.

An increase in the incomes of U.S. trading partners would shift the U.S.: A) Aggregate demand curve to the right B) Aggregate demand curve to the left C) Aggregate supply curve to the right D) Aggregate supply curve to the left

A) Aggregate demand curve to the right Feedback: Higher incomes abroad will lead U.S. trading partners to increase their purchases of U.S.-produced goods. The resulting increase in U.S. net exports will add to aggregate demand in the U.S., leading to increased real output and a higher price level.

43) Refer to Table 24-1. In which economy is there the most unused capacity? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E

A) Economy A

Suppose the MPC is ¾. If investment spending falls by $10 billion, the level of GDP will: A) fall by $40 billion B) fall by $30 billion C) fall by $10 billion D) fall by $7.5 billion

A) Fall by $40 billion Feedback: If the MPC is ¾ (.75), the multiplier is 1 / (1 - ¾) = 1 / (¼ or .25) , or 4. A drop in spending of $10 billion is multiplied by 4 to determine the change in GDP.

2. ________ of unemployment during ________ make it easier for workers to ________ wages. A) High levels; a recession; accept lower B) High levels; an expansion; negotiate higher C) Low levels; an expansion; accept lower D) Low levels; a recession; negotiate higher

A) High levels; a recession; accept lower

The effectiveness of an expansionary fiscal policy will be reduced if: A) Increased government borrowing increases interest rates, causing a reduction in private investment B) It is accompanied by a cut in Social Security taxes as well C) The price level falls D) Stock prices rise

A) Increased government borrowing increases interest rates, causing a reduction in private investment Feedback: This so-called "crowding-out effect" will lead to a lower than expected increase in aggregate demand, as decreases in private investment partially offset increases in other expenditures. However, the likelihood of this effect may be small when GDP is substantially below its potential.

All else equal, if the interest rate rises: A) planned investment spending will decrease B) the investment demand curve will shift upward C) the investment demand curve will shift to the left D) the investment demand curve will shift to the right

A) Planned investment spending will decrease

52) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.1 and a marginal propensity to import of 0.1. Economy B has a marginal propensity to consume of 0.6, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Suppose there is a decrease in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) The AD curve shifts farther to the left in Economy A than Economy B. B) The AD curve shifts farther to the right in Economy A than Economy B. C) The AD curve shifts to the left the same amount in both economies. D) The AD curve shifts to the right the same amount in both economies. E) The simple multiplier is larger in Economy B.

A) The AD curve shifts farther to the left in Economy A than Economy B.

122) Consider the following news headline: "Threat of widespread labour unrest leads to generous wage increases in several industries." Choose the statement below that best describes the likely macroeconomic effects. A) The AS curve shifts to the left; the price level rises and real GDP falls. B) The AS curve shifts to the right; the price level falls and real GDP rises. C) The AD curve shifts to the left; the price level falls and real GDP falls. D) The AD curve shifts to the right; the price level rises and real GDP rises. E) The AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP falls.

A) The AS curve shifts to the left; the price level rises and real GDP falls.

If the slope of the consumption line is .8: A) the MPC is .8 B) the MPS is .8 C) the MPC is 1/.2 D) the MPS is 1/.2

A) The MPC is .8 Feedback: The MPC is the change in consumption for a given change in income. This is also the definition of the slope of the consumption line.

92) If the AS curve is vertical and there is a decrease in aggregate demand, the result is A) a decrease in the price level with no change in real GDP. B) an equal decrease in national income. C) an increase in the price level. D) an increase in national income. E) no change in either price level or real GDP.

A) a decrease in the price level with no change in real GDP.

130) Which of the following statements about fiscal policy is the best description of "fine tuning"? A) The government continuously alters its spending and taxing plans to hold real GDP at potential. B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap. D) The government decreases tax rates to decrease an inflationary gap. E) The government uses automatic stabilizers to reduce any output gaps.

A) The government continuously alters its spending and taxing plans to hold real GDP at potential.

134) Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output? A) The growth rate of potential output may be reduced due to the crowding out of investment. B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy. C) Potential output will drop below its starting point because of the crowding out of investment. D) The growth rate of potential output will rise due to the higher level of aggregate demand. E) The level of potential output is fixed and will not be affected by fiscal policy.

A) The growth rate of potential output may be reduced due to the crowding out of investment.

8) Which of the following best describes the concept of potential output? A) The total output that can be produced when all factors of production (land, labour, and capital) are fully employed. B) The total output that can be produced when the economy is in short-run economic equilibrium. C) The total output that can be produced when all productive resources (land, labour, and capital) are used at their maximum capacity. D) The total output that could be produced in the future when technological advances allow for a higher level of output. E) The total output that

A) The total output that can be produced when all factors of production (land, labour, and capital) are fully employed.

. Why does the short run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand? A) Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices. B) Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices. C) Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices. D) Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices

A) Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices

83) Consider the AD/AS model. Since output in the long run is determined by Y*, the only role of the AD curve is to determine the price level. This is true because the A) Y* is independent of the price level. B) aggregate demand curve is vertical. C) aggregate demand curve is horizontal. D) Y* depends on the price level. E) AS curve is upward sloping.

A) Y* is independent of the price level.

14) Other things being equal, a rise in the price level will imply ________ in wealth for the bondholder and ________ in the wealth of the issuer of the bond. A) a decline; an increase B) a decline; a decline C) a decline; no change D) an increase; a decline E) an increase; an increase

A) a decline; an increase

69) The economy's AS curve will shift upward in the short run if there is A) a deterioration in technology. B) a decrease in the cost of capital. C) a decrease in nominal wages. D) a decrease in the price level. E) an improvement in technology.

A) a deterioration in technology.

13) Suppose there is an exogenous increase in the domestic price level. Which of the individuals listed below would experience an increase in wealth? A) a person with a 25-year home mortgage B) a person with cash under the mattress C) a person with deposits in a bank savings account D) a person with a government bond that promises to pay the holder $1000, 5 years hence E) a person with a corporate bond that promises to repay the face value of the bond in the future

A) a person with a 25-year home mortgage

60) Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock would have ________ output effect in the short run and ________ output effect in the long run. A) a positive; no B) a positive; a positive C) no; a positive D) no; no E) not enough information to know

A) a positive; no

64) Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from to . The initial effect is A) a recessionary output gap of 100. B) a recessionary output gap of 300. C) a recessionary output gap of 550. D) an inflationary output gap of 200. E) an inflationary output gap of 100.

A) a recessionary output gap of 100.

23) On a graph that shows the derivation of the AD curve, an exogenous change in the price level causes A) a shift in the AE curve and a movement along the AD curve. B) a shift in both the AE and AD curves. C) a movement along the AE curve and a shift in the AD curve. D) a movement along the AE curve but not along the AD curve. E) a movement along both the AE and AD curves.

A) a shift in the AE curve and a movement along the AD curve.

3) Doug is saving money in order to purchase a new snowboard next winter. This represents using money as A) a store of value. B) a unit of account. C) a medium of deferred payment. D) method of barter. E) a medium of exchange.

A) a store of value.

5) When you are estimating your monthly income and expenses, money is being used as A) a unit of account. B) a standard unit of deferred payment. C) a money substitute. D) a store of value. E) a medium of exchange.

A) a unit of account.

7) Potential GDP is defined as the level of aggregate output at which A) all factors of production are fully employed. B) all factors of production are employed 24 hours per day, 7 days per week. C) the unemployment rate is zero. D) there is only cyclical and structural unemployment. E) there is only cyclical and frictional unemployment, and capital equipment is being used at 100% capacity.

A) all factors of production are fully employed.

33) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is . Now, suppose the AE curve shifts to and we move to a new equilibrium level of GDP at and point E on . A possible cause of this change in equilibrium is A) an increase in government purchases. B) an increase in the net tax rate. C) a decrease in desired investment. D) a decrease in desired net exports. E) an exogenous fall in the price level.

A) an increase in government purchases.

21) The Canada Deposit Insurance Corporation (CDIC) was set up to protect A) depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit. B) depositors with Canadian dollar accounts in any Canadian financial institution for up to a maximum of $100 000 per institution. C) member financial institutions in case of non payment of loans from the government. D) member financial institutions in case of non-payment of loans from borrowers. E) depositors of any currency in any Canadian financial institution for up to a maximum of $100 000 per institution.

A) depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit

7) The economy's output gap is defined as the A) difference between actual GDP and potential GDP. B) level of total output that would be produced if capacity utilization is at its normal rate. C) difference between actual national income and desired aggregate expenditure. D) result of economic growth. E) difference between nominal GDP and real GDP.

A) difference between actual GDP and potential GDP.

17) Other things being equal, as the price level rises exogenously, the aggregate expenditure (AE) function shifts A) down and the economy will move upward to the left along the AD curve. B) down and the economy will move downward to the right along the AD curve. C) upward and the economy moves upward to the left along the AD curve. D) upward and the economy moves downward to the right along the AD curve. E) to the right and the AD curve will also shift to the right.

A) down and the economy will move upward to the left along the AD curve.

7) The biggest disadvantage of a barter system compared to one that uses money is that A) each trade requires a double coincidence of wants. B) commodities are difficult to transport and therefore inefficient for exchange. C) a standardized unit of account cannot exist in a barter system. D) it is difficult to find goods to trade in a barter system that satisfy the needs of society. E) commodities are difficult to use as a store of value.

A) each trade requires a double coincidence of wants.

60) Inflationary gaps are typically associated with A) excess demand for factors and higher-than normal factor-utilization rates. B) excess demand for factors and lower-than-normal factor-utilization rates. C) excess supply of factors and higher-than-normal factor-utilization rates. D) excess supply of factors and lower-than-normal factor-utilization rates. E) excess supply of factors and normal factor-utilization rates.

A) excess demand for factors and higher-than normal factor-utilization rates.

4) A former governor of the Bank of Canada argued that interest rates must be increased in order to reduce inflation, and this would ultimately result in lower interest rates. This apparent contradiction can be explained by noting that A) higher interest rates in the short run put downward pressure on inflation which, in turn, lowers demand for borrowed funds, thus decreasing interest rates in the long run. B) higher interest rates promote saving which increases the supply of funds for lending and, other things constant, drives the "price" of borrowing down. C) interest rates move in cycles and therefore tend to rise before they fall. D) the Governor of the Bank of Canada is typically a patronage appointment with little formal training or knowledge of economic theory. E) increasing interest rates increases inflation in the short run, but decreases inflation in the long run.

A) higher interest rates in the short run put downward pressure on inflation which, in turn, lowers demand for borrowed funds, thus decreasing interest rates in the long run.

24) Which of the following provides the best explanation for why GDP may increase over long periods of time? A) increase in capital stock B) increase in emigration C) increase in mortality rates D) increase in interest rates E) increase in unemployment

A) increase in capital stock

109) Refer to Figure 24-7. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing the net tax rate. C) increasing government purchases. D) decreasing government transfer payments. E) implementing an expansionary fiscal policy.

A) increasing the net tax rate.

110) Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economy's natural adjustment process to operate is that A) it will reduce the upward pressure on the price level that would otherwise occur. B) if private-sector expenditures increase on their own, the policy will stabilize real GDP. C) it will shorten what might otherwise be a long recession. D) it will reduce the downward pressure on the price level that would otherwise occur. E) it will close the output gap.

A) it will reduce the upward pressure on the price level that would otherwise occur.

61) On the basis of both theory and empirical evidence, most economists believe that changes in monetary policy have A) no long-run effect on real GDP but a substantial long-run effect on inflation. B) no effect on real GDP or inflation in the long run. C) no effect on real GDP or factor utilization in the short run. D) important long-run effects by changing real interest rates. E) powerful effects on real GDP and factor prices both in the short run and in the long run.

A) no long-run effect on real GDP but a substantial long-run effect on inflation.

93) In the basic AD/AS macro model, permanent increases in real GDP are possible only if A) potential output is increasing. B) the correct fiscal policy is implemented. C) the economy's automatic stabilizers are allowed to operate. D) the aggregate supply curve is vertical. E) aggregate demand responds positively to demand shocks.

A) potential output is increasing.

58) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is at its original level with a lower price level B) real GDP and the price level both fall; real GDP is above 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 falls and the price level rises; real GDP is below 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

113) Income taxes in Canada can be considered to be automatic stabilizers because tax A) revenues increase when income increases, thereby offsetting some of the increase in aggregate demand. B) revenues decrease when income increases, thereby intensifying the increase in aggregate demand. C) structures can be changed when the Minister of Finance brings down a budget. D) revenues are changed through discretionary fiscal policy to keep the budget balanced. E) revenues are changed through discretionary fiscal policy to create surpluses in recessions.

A) revenues increase when income increases, thereby offsetting some of the increase in aggregate demand.

70) Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y*

A) rightward; AS

38) Since 1985, Canada's potential GDP has been A) rising steadily. B) falling steadily. C) relatively stable. D) volatile, but with an upward trend. E) volatile, but with a downward trend.

A) rising steadily.

37) Consider the relationship between the AE curve and the AD curve. A fall in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income A) shifts the AD curve to the left. B) shifts the AD curve to the right. C) causes a movement along the AD curve. D) causes a movement along the AE curve. E) causes a shift of the AE curve but no movement of the AD curve.

A) shifts the AD curve to the left.

28) GDP can be represented by the equation: GDP = F × (Fe/F) × (GDP/Fe). The term Fe represents A) the number of employed factors. B) output per capita. C) the factor-utilization rate. D) factor productivity. E) income per person.

A) the number of employed factors.

63) A decrease in aggregate supply in the short run is A) shown by a shift to the left of the AS curve. B) shown by a shift to the right of the AS curve. C) interpreted to mean that more national output will be supplied at any given price level. D) caused by a decrease in the price level. E) caused by an increase in the price level.

A) shown by a shift to the left of the AS curve.

106) Suppose firms are currently producing output at a level beyond their normal capacity. In this situation, the AS curve will be relatively ________ and a positive AD shock will result in ________. A) steep; an increase in the price level with a small increase in real GDP B) flat; an equal increase in the price level and in real GDP C) flat; a very small increase in prices but a large increase in real GDP D) flat; a very small decrease in the price level and a decrease in real GDP E) steep; a decrease in the price level and a very small decrease in real GDP

A) steep; an increase in the price level with a small increase in real GDP

58) The aggregate supply curve relates the price level to the quantity of output that firms would like to produce and sell, given the assumption that A) technology and the prices of all factors of production remain constant. B) unit costs remain constant. C) all firms are price takers. D) all firms are price setters. E) technology and the prices of all factors of production do not remain constant.

A) technology and the prices of all factors of production remain constant.

9) Consider the basic AD/AS model. In the short run, a shift of the aggregate supply curve would lead to a change in real GDP by mostly changing A) the amount of labour employed. B) the amount of land (natural resources) available to the economy. C) the prices of factors of production. D) the productivity of capital. E) the level of investment.

A) the amount of labour employed.

11) A recessionary output gap implies that A) the demand for all factor services will be relatively low. B) the intersection of AD and AS occurs where real GDP exceeds potential output. C) the economy's resources are being used at more than their normal capacity. D) there is upward pressure on wages. E) there is excess demand for most factors of production.

A) the demand for all factor services will be relatively low.

37) An estimate for the value of potential GDP can be generated by observing and recording A) the economy's total supply of factors, their normal rates of utilization, and factor productivity. B) the economy's total supply of factors, the costs of those factors, and their productivity. C) the economy's total output, its total cost and demand for that output. D) the total available capacity for production in the Canadian economy. E) the level of actual GDP when the unemployment rate is zero.

A) the economy's total supply of factors, their normal rates of utilization, and factor productivity.

49) In the short run, aggregate demand and aggregate supply shocks cause output gaps, which in turn, cause fluctuations in A) the factor utilization rate. B) the normal factor utilization rate. C) the natural rate of unemployment. D) factor supply. E) productivity.

A) the factor utilization rate.

15) A characteristic of the short run in macroeconomics is that A) the output gap opens or closes as the economy moves through the phases of the business cycle. B) the output gap is constant because the capital stock cannot change. C) actual GDP is always less than potential GDP. D) actual GDP is always greater than potential GDP. E) actual GDP is always growing at the same rate as potential GDP.

A) the output gap opens or closes as the economy moves through the phases of the business cycle.

46) The AD curve shows the relationship between A) the price level and the equilibrium level of demand-determined national income. B) AS and real national income. C) real national income and AE. D) AS and AE. E) the price level and desired consumption.

A) the price level and the equilibrium level of demand-determined national income.

29) GDP can be represented by the equation: GDP = L × [E/L] × [GDP/E] where L is the total supply of labour and E is the level of employment. In this equation, the term [GDP/E] represents A) the productivity of labour. B) the ratio of the population unemployed. C) one minus the unemployment rate. D) output per unit of capital. E) the unemployment rate.

A) the productivity of labour.

111) Aggregate demand (AD) shocks have a smaller effect on real GDP and a larger effect on the price level A) the steeper the AS curve. B) on the downward-sloping portion of the AS curve. C) the flatter the AS curve. D) on the upward-sloping portion of the AS curve. E) if the AD curve is flatter.

A) the steeper the AS curve.

102) 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 leftward unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP. A) too weak; stay below B) too weak; rise above C) too strong; stay below D) too strong; rise above E) appropriate; equal

A) too weak; stay below

79) What economists sometimes call the "long-run aggregate supply curve" is A) vertical. B) horizontal. C) nonlinear. D) negatively sloped. E) positively sloped.

A) vertical.

35) As the macro economy adjusts from the short run to the long run, A) wages and other factor prices adjust to close output gaps. B) potential output is adjusting to close inflationary or recessionary gaps. C) wages and other factor prices remain constant. D) aggregate demand shocks cause deviations from potential output. E) aggregate supply shocks cause deviations from potential output.

A) wages and other factor prices adjust to close output gaps.

When planned injections of investment, government spending, and exports equal leakages of saving, taxes, and imports:

AE will equal GDP Equilibrium GDP is characterized by the equality of GDP and aggregate expenditures. Equilibrium is achieved if the total outflows and total inflows of spending are equal.

A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices adjust and the

AS curve shifts to the left fairly rapidly

A common assumption among macroeconomists is that when real GDP is less than potential output, factor prices adjust and the

AS curve shifts to the right only very slowly

Efficiency wages are:

Above-market wages that bring forth so much added work effort that per-unit production costs are lower than at market wages.

Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.:

Aggregate demand curve would shift to the right.

Remain unchanged and aggregate supply would decrease

All else equal, if the price of each input increases from $2 to $4, productivity would

The MPS is .2

Along a particular saving schedule, each change in disposable income of $15 billion generates an additional $3 billion in saving. Therefore:

Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)?

An appreciation of the U.S. dollar.

Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward:

An excess of government expenditures over tax receipts.

Decrease aggregate demand and decrease aggregate supply

An increase in business taxes will tend to

The interest-rate effect suggests that:

An increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

New growth theories emphasize the possibility of increasing returns that remain for considerable periods of time

As investment in some new area, product, or production technology proceeds through time, new increments of investment are more productive than previous increments.

Describe the wealth effect.

As the price level increases, the real value of household wealth falls, and so will consumption. In contrast, if the price level declines, real household wealth rises and so does consumption.

Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit:

At any level of GDP below $400.

. D) investment demand shifts to I1D, national saving shifts to NS1, and the quantity of national saving rises to I3. E) none of the above.

. D) the real interest rate falls because of the decrease in the budget surplus. E) the real interest rate rises because of the decrease in the budget surplus.

102) In new theories of "endogenous growth", increasing marginal returns to investment can occur for all of the following reasons EXCEPT: A) investment costs for followers can be less than for pioneers. B) low risk is associated with the process of innovation for technological leaders. C) knowledge provides the input that allows investment to produce increasing returns. D) many investments require large fixed costs, the benefits of which are available to subsequent firms. E) early investors create an infrastructure favorable to followers.

105) Modern growth theories are more optimistic than Neoclassical growth theories because the former emphasize the unlimited potential of _________. A) modern labour B) knowledge- driven technological change C) economic theory D) modern capital E) more educated government policy making

23) For a given level of technology, a more rapid rate of economic growth can probably be achieved only if a country's citizens are prepared to A) pay more taxes. B) sacrifice some present consumption. C) decrease interest rates. D) increase their demand for goods and services. E) redistribute income.

27) Consuming fewer goods today in order to invest resources in capital goods is the ________ of economic growth. A) investment cost B) opportunity cost C) total cost D) social cost E) external cost

3) The compounding of economic growth rates means that A) a large increase in investment today has little effect on national income over the long run. B) small changes in sustained growth rates can have a significant impact on national income over several decades. C) a 2 percent annual growth rate of GDP will double national income in 27 years. D) consumers should not save, given the low real returns that compounding produces. E) a 10 percent annual rate of return will double an investment in less than 6 years.

37) A decrease in government tax revenues, everything else being equal, will cause a(n)________ through the effect on aggregate consumption. A) increase in the growth rate B) decrease in national saving C) increase in national saving D) none of the aboveNthere will be no effect on national saving

38) For a given level of private saving, a decrease in the government's budget deficit ________ the long- run rate of economic growth. A) will reduce B) will increase C) will leave unchanged D) will diminish E) none of the above

4) If per capita GDP in a richer country grows at a faster annual rate than in a poorer country, A) the gap between their standards of living will close over time as long as the rate of population growth is higher in the poorer country. B) the gap between their standards of living will widen over time. C) the difference in their living standards will not change over time. D) whether the gap in living standards widens or closes over time depends on the absolute size of the relative growth rates. E) the gap between their standards of living will close over time.

51) Data from most industrialized countries show that countries with high investment rates (as a percentage of GDP) tend to be countries A) with the highest levels of GDP. B) with high rates of economic growth. C) with the highest levels of per capita GDP. D) with the lowest rate of national saving. E) with a negative relationship between investment and the rate of economic growth.

52) Consider a closed economy with real GDP in the long run of $400, consumption expenditures of $250, government purchases of $75, and net tax revenue of $20. What is the level of national saving? A) $230 B) $75 C) $55 D) $225 E) $95

54) Refer to Table 26- 1. What is the level of public saving for this economy? A) $150 B) - $150 C) - $200 D) - $50 E) $200

60) The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor eventually cause the A) marginal product of the factor to increase at an increasing rate. B) marginal product of the factor to fall. C) material standard of living to increase. D) average product of the factor to increase. E) marginal product of the factor to increase but at a decreasing rate.

87) The so- called "Solow residual" A) is an alternative to a measure of "total factor productivity". B) is an underestimate of the amount of technological change when embodied technological progress occurs. C) is an overestimate of the amount of technological change when embodied technological progress occurs. D) takes embodied technological change into consideration. E) refers to the amount of GDP growth that cannot be explained by the growth in technological change.

92) Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5 percent each and total output (Y) increases by 5 percent as a result, then this production function is displaying A) diminishing marginal returns. B) constant returns to scale. C) a change in technology. D) increasing returns to scale. E) decreasing returns to scale.

97) The "new" theories of growth emphasize that basic research ________ to price and profit signals. A) and product development are both unrelated B) and product development are both directly related C) is unaffected by but product development is directly related D) is directly related and product development is inversely related E) is directly related and population growth is inversely related

A reduction in the net tax rate might lead to an increase in the growth rate of potential output if A) the simple multiplier is large. B) the tax cuts stimulate private investment. C) firms are operating at their normal capacity. D) households are not forward looking. E) the marginal propensity to consume is large.

An economy may not quickly and automatically eliminate a recessionary output gap because wages A) never change in response to changes in the demand for labour. B) have a tendency to be sticky downward. C) have a tendency to fall too quickly. D) have a tendency to rise too quickly. E) are flexible but prices have a tendency to be sticky downward.

An increase in taxes to prevent real GDP from rising above potential GDP would cause the inflation rate to _______________ and real GDP to _________________ . A) decrease; increase B) decrease; decrease C) increase; decrease D) increase; increase

An inflationary output gap would generate which of the following conditions in the economy? A) Firms are making low profits. B) Workers have a relatively large amount of bargaining power with employers. C) There is an unusually small demand for labour. D) There is downward pressure on wages. E) There is much idle capacity.

Assume that the economy is in long-run equilibrium. Now, assume that there is an unexpected increase in the price of oil. When the economy returns to long-run equilibrium again A. real GDP will be lower and the unemployment rate and the price level will be higher compared to the initial equilibrium value prior to the increase in price of oil. B. real GDP, the unemployment rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil. C. the unemployment rate will be the same, but real GDP will be lower and the price level higher compared to the initial equilibrium value prior to the increase in the price of oil. D. real GDP and the unemployment rate will be the same but the price level will be higher compared to the initial equilibrium value prior to the increase in the price of oil.

Consider the market for loanable funds for a closed economy in the long run. Other things being equal, a country with a high national saving rate will tend to have: A) either a high or low growth rate depending on the investment demand schedule. B) a high growth rate because sustained high investment is possible with high saving. C) trouble achieving potential real national income in the short run.

Assume the economy is in long-run equilibrium. Now assume that there is a large increase in demand for U.S. exports. At the new long-run equilibrium, A. real GDP and the price level will be higher but the unemployment rate will remain the same compared to the initial equilibrium, prior to the increase in exports. B. real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports. C. real GDP and price level will be higher and the unemployment rate will be lower compared to the initial equilibrium, prior to the increase in exports. D. real GDP, the unemployment rate and the price level all will remain the same compared to the initial equilibrium, prior to the increase in exports.

Briefly explain whether an expansionary fiscal policy will cause each of the following variables to increase or decrease: (ii) The unemployment rate A. Decrease the unemployment rate by decreasing the labor force. B. Decrease the unemployment rate by increasing production. C. Increase the unemployment rate by increasing wages. D. Increase the unemployment rate by decreasing employment.

Consider the AD/AS macro model. The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in A) the AS curve. B) potential GDP. C) either the AS curve or potential GDP. D) either the AD or AS curves. E) the intersection of the AD and AS curves.

Consider the Neoclassical growth model. The effect of an increase in population (or the labour force) in an economy, with everything else held constant, is A) a decrease in the capital-output ratio. B) a decrease in per capita output. C) an inward shift of the production possibilities boundary.

Consider the basic AD/AS diagram. The vertical line at Y* shows the relationship between the price level and the amount of output ________ have adjusted to output gaps. A) demanded by households after all factor prices B) supplied by firms after all factor prices C) demanded by households before all factor prices D) supplied by firms before all factor prices E) supplied by firms after all output prices

Consider the global recession that began in late 2008. In terms of the AD/AS model, which of the following statements best describes the macroeconomic effect on Canada's economy? A) The AD curve shifted to the right due to reduced demand for Canadian exports, which created a recessionary gap. B) The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap. C) The AS curve shifted to the right due to increased factor prices, which created a recessionary gap. D) The AS curve shifted to the left due to increased factor prices, which created a recessionary gap. E) Potential GDP fell, which reduced actual national income.

The wealth effect refers to the fact that A. when the price level falls, the nominal value of assets rises, while the real value of assets remains the same. B. when the price level falls, the real value of household wealth rises, and so will consumption. C. when income rises, consumption rises. D. All of the above.

Expansionary fiscal policy has a ________ multiplier effect on equilibrium real GDP, and contractionary fiscal policy has a ________ multiplier effect on equilibrium real GDP. A. negative; positive B. positive; negative C. negative; negative D. positive; positive

FIGURE 26-1 15) Refer to Figure 26- 1. Which of the following statements best describes what we know about the difference between the two economies at Year 0? A) Economy B's households are consuming a larger percentage of GDP than Economy A's households. B) Economy A's households are consuming a larger percentage of GDP than Economy B's households. C) There is no opportunity cost of economic growth for Economy A at Year 0. D) Economy A has a higher level of real GDP at Year 0 than Economy B. E) There is no opportunity cost for economic growth for Economy B at Year 0.

Fiscal policy refers to the A) government's attempts to maintain a vertical AS curve so as to stabilize output. B) government's use of spending and taxing policies to influence equilibrium real GDP. C) government's use of trade-related policy tools to influence the net export function, thereby influencing GDP. D) business sector's influence on investment and GDP. E) households' attempts to change saving to encourage growth

Following any AD or AS shock, economists typically assume that the adjustment process continues until A) the AD and AS curves intersect each other at the correct price level. B) real GDP returns to Y*. C) factor prices have returned to their levels previous to the shock. D) Y* adjusts to its long-run equilibrium level. E) the output gap is at a stable level.

Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the ________ the output gap being suffered, an argument supporting ________. A) larger; fine tuning B) larger; gross tuning C) smaller; fine tuning D) smaller; crowding out E) larger; crowding out

How does the dynamic model of aggregate supply and aggregate demand explain inflation? A. by showing that if total production in the economy grows faster than total spending, prices will rise B. by showing that if total spending in the economy grows faster than total production, prices will rise C. by showing that increases in labor productivity usually lead to increases in prices D. None of the above.

If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes? A. In this case, Congress and the president should enact policies that decrease government spending and increase taxes. B. In this case, Congress and the president should enact policies that increase government spending and decrease taxes. C. In this case, Congress and the president should enact policies that increase government spending and increase taxes. D. In this case, Congress and the president should enact policies that decrease government spending and decrease taxes.

If a country transfers resources from the production of consumption goods to the production of capital goods, the result will be to: B) raise future consumption. C) raise current living standards. D) decrease the long-run growth rate. E) lower future living standards.

In the aggregate expenditure model, when is planned investment greater than actual investment? A. Planned investment always equals actual investement in the aggregate expenditure model. B. When there is an unplanned decrease in inventories. C. When there is no unplanned change in inventories. D. When there is an unplanned increase in inventories.

In the long run, aggregate demand is ________ for determining real GDP, and the paradox of thrift ________. A) not important; applies B) not important; does not apply C) the only influence; applies D) the most important influence; does not apply E) stable and important; applies

Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for closing the output gap is A) a decrease in personal income taxes. B) a decrease in government purchases. C) an increase in current interest rates. D) an increase in government purchases. E) a decrease in corporate income-tax rates.

Refer to Figure 24-3. Following the negative AD shock shown in the diagram (from to ), the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 110; 1000 B) 60; 1000 C) 90; 900 D) 110; 800 E) 90; 1250

Refer to Figure 24-6. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing the net tax rate. C) decreasing government purchases. D) decreasing government transfer payments. E) implementing a contractionary fiscal policy.

Refer to Table 24-1. Which of the following statements explains why wages are rising in Economy E? A) The inflationary gap generates lower profits for firms because workers are demanding higher wages. B) The inflationary gap generates excess demand for labour, which causes wages to rise. C) The aggregate supply curve is shifting to the right, which is causing wages to rise. D) The aggregate demand curve is shifting to the right, causing wages to rise. E) Potential output is rising, putting upward pressure on wages.

Suppose the economy has a high level of unemployment and a low level of aggregate output. Which of the following policies could the government implement to alleviate these conditions? A) automatic fiscal stabilizers B) an expansionary fiscal policy that increases government purchases C) an expansionary fiscal policy that increases tax rates D) a contractionary fiscal policy that increases government purchases E) a contractionary fiscal policy that increases tax rates

The corporate income tax rate is increased. This is: A) Part of an expansionary fiscal policy B) Part of a contractionary fiscal policy C) Not part of fiscal policy

The table below shows aggregate values for a hypothetical economy. Suppose that this economy has real GDP equal to potential output. Potential GDP $2500 Net Tax Revenues $50 Government Purchases $200 Investment $100 Consumption $2350 Net Exports - $135 TABLE 26-1 53) Refer to Table 26- 1. What is the level of private saving for this economy? A) $300 B) $100 C) $50 D) $150 E) $200

The theory of economic growth concentrates on the ________ over the long run, not on ________. A) factor utilization rates; growth of the supplies of factors B)growth of potential output; fluctuations of output around potential C) growth of real GDP; growth of potential GDP

What is sometimes called the "long-run aggregate supply curve" shows the relationship between the price level and aggregate supply over a time period long enough to permit A) changes in the capital stock. B) wages and other factor prices to adjust. C) changes in technology to occur. D) changes in the size of the resource base to occur. E) population to increase.

When the government runs a budget deficit, we would expect to see that A) private saving will fall. B) investment will fall. C) G + TR < T. D) public saving is positive.

Which of the following statements about fiscal policy is the best example of "gross tuning"? A) The government continuously alters its spending and taxing plans to hold real GDP at potential. B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap. D) The government decreases tax rates to decrease an inflationary gap. E) The government uses automatic stabilizers to reduce any output gaps

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) increasing; decrease B) decreasing; decrease C) increasing; increase D) decreasing; increase E) decreasing; equal one

B 103)

"Automatic fiscal stabilization" in the economy refers to A) the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap. B) the properties of government spending and taxation that cause the simple multiplier to be reduced. C) the properties of government spending and taxation that cause the simple multiplier to be increased. D) the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap. E) all of the above

B 107)

The "paradox of thrift" refers to the understandable tendency of worried people to ________ their saving, but in aggregate it causes a ________ recession. A) increase; shorter B) increase; more severe C) decrease; less severe D) increase; less severe E) decrease, more severe

B 111)

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 ________. A) increased potential output; a higher price level B) increased economic activity; lower economic growth C) increased real GDP; higher economic growth D) a higher price level; lower real GDP E) a higher price level; unemployment

B 120)

The ________ associated with fiscal policy make(s)________ tuning difficult to implement successfully. A) execution lag; fine B) execution and decision lags; fine C) decision lag; gross D) decision lag; fine E) execution lag; gross

B 122)

All items below decrease short-run aggregate supply except A) a decrease in the labor force. B) an increase in the expected future price level. C) positive technological change. D) a decrease in capital.

Refer to Figure 24-1. Suppose the economy is currently in a short-run equilibrium with output of Y0. The appropriate fiscal policy response, to attain potential output (Y*), is A) an increase in corporate income taxes. B) an increase in government purchases or reduction in income taxes or a combination of both. C) a reduction in government purchases of goods and services. D) an increase in interest rates to encourage increased saving. E) an increase in personal income taxes.

B 84)

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

B 91)

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 leftward unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP. A) too strong; stay below B) too weak; stay below C) too strong; rise above D) too weak; rise above E) appropriate; equal

B 92)

The amount by which government expenditures exceed revenues during a particular year is the:

Budget deficit.

42) Consider a small economy where factor supply is 4000 units, the factor utilization rate is 0.8 and a simple measure of productivity (GDP per factor employed) is $50. This economy's GDP is A) $40 000. B) $160 000. C) $200 000. D) $320 000. E) $500 000.

B) $160 000.

41) Consider a small economy where factor supply is 1000 units, the factor utilization rate is 0.9 and a simple measure of productivity (GDP per factor employed) is $80. This economy's GDP is A) $7200. B) $72 000. C) $80 000. D) $88 888. E) $90 000.

B) $72 000.

32) Consider a new deposit of $10 000 to the Canadian banking system. The bank that initially receives this deposit will find itself with A) $1000 of excess cash reserves if its target reserve ratio is 10%. B) $8000 of excess cash reserves if its target reserve ratio is 20%. C) no excess reserves if there is no reserve requirement. D) $10 000 of excess cash reserves if its target reserve ratio is 100%. E) $2000 of excess cash reserves if its target reserve ratio is 10%.

B) $8000 of excess cash reserves if its target reserve ratio is 20%.

The amount by which federal tax revenues exceed federal government expenditures during a particular year is the:

Budget surplus.

59) Suppose that real GDP in an economy is $750 000 and real GDP per worker is $250. If the employment rate in this economy is 80%, then there are A) 3000 people in the labour force in this economy. B) 3750 people in the labour force in this economy. C) 33 000 people in the labour force in this economy. D) 150 000 people in the labour force in this economy. E) 600 000 people in the labour force in this economy.

B) 3750 people in the labour force in this economy.

68) Refer to Figure 24-3. Following the negative AD shock shown in the diagram (from to ), the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 110; 1000 B) 60; 1000 C) 90; 900 D) 110; 800 E) 90; 1250

B) 60; 1000

The consumption schedule is: A) An inverse relationship between consumption and the price level B) A direct relationship between consumption and disposable income C) An inverse relationship between consumption and saving D) An inverse relationship between consumption and the tax rateT

B) A direct relationship between consumption and disposable income Feedback: The consumption schedule shows consumption spending at each level of disposable income. Higher income generates greater consumption.

21) A common assumption among macroeconomists is that when real GDP is less than potential output, factor prices adjust and the A) AS curve shifts to the left fairly rapidly. B) AS curve shifts to the right only very slowly. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) None of the above - the AS curve remains unchanged.

B) AS curve shifts to the right only very slowly.

Which of the following might have caused the shift from consumption schedule C1 to schedule C2? A) An increase in disposable income B) An increase in household wealth C) An increase in household debt D) An increase in taxes

B) An increase in household wealth Feedback: An increase in household wealth may cause households to feel less need to save. This "wealth effect" would then lead households to spend a greater proportion of their incomes, as shown in the move from C1 to C2.

Built-in stabilizers: A) Automatically increase the size of deficits when the economy experiences demand-pull inflation B) Avoid the problems associated with the administrative lag of discretionary fiscal policy C) Automatically produce a budget that is balanced over the business cycle D) Tend to offset the impact of discretionary fiscal policy

B) Avoid the problems associated with the administrative lag of discretionary fiscal policy Feedback: Built-in stabilizers automatically move the government's budget toward surplus during expansions and toward deficit during recessions without requiring explicit government action. Thus, there is no lag between the recognition of a problem and Congress taking appropriate action.

27) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0 . The corresponding point on the aggregate demand curve is point A) A. B) B. C) C. D) D. E) E.

B) B.

At very low levels of output, the short-run aggregate supply curve is relatively: A) Flat, because firms are reluctant to give their current workers raises when output is so low B) Flat, because firms can expand output with relatively little increase in per-unit production costs C) Steep, because increasing output will cause relative large increases in per-unit production costs D) Steep, because increasing output will cause aggregate demand to increase

B) Flat, because firms can expand output with relatively little increase in per-unit production costs Feedback: When there are large numbers of unemployed workers and idle machines, firms can put these resources back to work with little upward pressure on per-unit costs. Further, expanded output will not likely result in cost-increasing bottlenecks or input shortages.

. In the long run, A) LRAS and SRAS lie on the same line. B) GDP = potential GDP C) Unemployment is below its natural rate. D) Unemployment is above its natural rate.

B) GDP = potential GDP

Refer to the graph in the definition. Suppose the full-employment level of GDP is Q1, but a significant decline in investment demand has pushed the economy into recession as shown by the decline in aggregate demand to AD2. Currently, output is at Q3 and there is a negative GDP gap (Q3 - Q1) of $100 billion. If the multiplier is 5, which of the following would most likely move the economy back to its full potential? A) A tax cut of $20 billion B) Increased government spending of $20 billion C) A tax cut of $100 billion D) Increased government spending of $100 billion

B) Increased government spending of $20 billion Feedback: If the multiplier is 5, a $20 billion increase in government spending will shift aggregate demand from AD2 back to AD1 and restore GDP to its full-employment level. A tax cut of more than $20 would be required to accomplish the goal, as part of a tax cut would be saved rather than added as new spending.

Suppose the full-employment level of GDP is $250 billion in a hypothetical economy. Currently, aggregate expenditures total $270 billion. Which of the following would be most in accord with appropriate fiscal policy? A) Lower tax rates on corporate income B) Reducing or limiting personal deductions and credits when figuring personal income taxes C) Expanded spending on new domestic security programs D) Decreases in interest r

B) Reducing or limiting personal deductions and credits Feedback: This economy has a large positive GDP gap and is likely experiencing demand-pull inflation. A contractionary fiscal policy would be appropriate, and would entail either higher taxes or reduced government spending. Reducing the size of personal deductions and credits would increase the amount households pay in taxes.

112) Consider the global recession that began in late 2008. In terms of the AD/AS model, which of the following statements best describes the macroeconomic effect on Canada's economy? A) The AD curve shifted to the right due to reduced demand for Canadian exports, which created a recessionary gap. B) The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap. C) The AS curve shifted to the right due to increased factor prices, which created a recessionary gap. D) The AS curve shifted to the left due to increased factor prices, which created a recessionary gap. E) Potential GDP fell, which reduced actual national income.

B) The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap.

Along a particular saving schedule, each change in disposable income of $15 billion generates an additional $3 billion in saving. Therefore: A) the MPS is .3 B) the MPS is .2 C) the APC is .8 D) the slope of the consumption schedule is .7

B) The MPS is .2 Feedback: The MPS is the ratio of the change in saving to the change in disposable income that brought it about. In this example, the MPS is $3 / $15 = .2.

131) Which of the following statements about fiscal policy is the best example of "gross tuning"? A) The government continuously alters its spending and taxing plans to hold real GDP at potential. B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap. D) The government decreases tax rates to decrease an inflationary gap. E) The government uses automatic stabilizers to reduce any output gaps.

B) The government cuts taxes to remove a large and persistent recessionary gap.

42) Refer to Table 24-1. Which of the following statements explains why wages are rising in Economy E? A) The inflationary gap generates lower profits for firms because workers are demanding higher wages. B) The inflationary gap generates excess demand for labour, which causes wages to rise. C) The aggregate supply curve is shifting to the right, which is causing wages to rise. D) The aggregate demand curve is shifting to the right, causing wages to rise. E) Potential output is rising, putting upward pressure on wages.

B) The inflationary gap generates excess demand for labour, which causes wages to rise.

Of the following groups, the largest proportion of the total public debt is held by: A) foreign individuals and institutions B) U.S. government agencies, including the Federal Reserve C) State and local governments D) U.S. banks and other financial institutions

B) U.S. government agencies, including the Federal Reserve Feedback: Of these four distinct groups, the amount held by Federal government agencies (including the Federal Reserve System) is the largest (about 43% of the total).

67) Refer to Figure 24-3. After the negative aggregate demand shock shown in the diagram (from to ), which of the following describes the adjustment process that would return the economy to its long-run equilibrium? A) Wages would eventually fall, causing the AD curve to shift to the right, returning to the original equilibrium at point A. B) Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a new equilibrium at point E. C) Wages would increase, causing the AS curve to shift to the right, reaching a new equilibrium at point E. D) Wages would increase, causing the AD curve to shift to the right, returning to the original equilibrium at point A. E) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D.

B) Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a new equilibrium at point E.

12) An inflationary output gap would generate which of the following conditions in the economy? A) Firms are making low profits. B) Workers have a relatively large amount of bargaining power with employers. C) There is an unusually small demand for labour. D) There is downward pressure on wages. E) There is much idle capacity.

B) Workers have a relatively large amount of bargaining power with employers.

97) Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for closing the output gap is A) a decrease in personal income taxes. B) a decrease in government purchases. C) an increase in current interest rates. D) an increase in government purchases. E) a decrease in corporate income-tax rates.

B) a decrease in government purchases.

70) Other things being equal, the AS curve will shift downward if there is A) a decrease in labour productivity. B) a decrease in the cost of capital inputs. C) a decrease in the price level. D) an increase in the price level. E) an increase in nominal wages.

B) a decrease in the cost of capital inputs.

135) Refer to Figure 23-3. Which of the following statements correctly describes the difference between the multipliers (in response to an increase in autonomous expenditure) in Economy A and Economy B? The multiplier in Economy A is ________ while the multiplier in Economy B is ________. A) almost zero; equal to one B) almost zero; equal to the simple multiplier C) equal to the simple multiplier; almost zero D) equal to one; almost zero E) equal to one; equal to the simple multiplier

B) almost zero; equal to the simple multiplier

real interest rates

are nominal interest rates adjusted for expected inflation: = Nominal interest rate − Expected inflation.

95) Over the horizontal range of the economy's AS curve (assuming such a range exists), a rightward shift of the AD curve will result in A) an increase in prices and no change in real GDP. B) an increase in real GDP and no change in prices. C) an increase in both real GDP and prices. D) a decrease in both real GDP and prices. E) a decrease in real GDP but no change in prices.

B) an increase in real GDP and no change in prices.

71) A rightward shift in the economy's AS curve implies that A) at any given price level, a lower level of output will be supplied. B) at any given price level, a higher level of output will be supplied. C) there is a decrease in aggregate supply. D) there is a demand shock. E) the same output will be produced, but only at a higher price level.

B) at any given price level, a higher level of output will be supplied.

45) One reason why the aggregate demand (AD) curve slopes downward is that A) aggregate expenditure increases as the price level rises. B) decreases in the price level cause increases in private-sector wealth which lead to increases in desired consumption. C) increased production results in lower production costs. D) when the price level falls firms must be more competitive when output increases. E) when the price level falls consumers increase their saving rate.

B) decreases in the price level cause increases in private-sector wealth which lead to increases in desired consumption.

After an unexpected increase in the price of oil, the long-run adjustment ________ the price level and ________ the unemployment rate as they return to their original levels. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases

B) decreases; decreases

106) Refer to Figure 24-6. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing the net tax rate. C) decreasing government purchases. D) decreasing government transfer payments. E) implementing a contractionary fiscal policy.

B) decreasing the net tax rate.

41) A rightward shift in the aggregate demand (AD) curve could result from a rise in A) induced imports. B) desired investment. C) the net tax rate. D) desired saving. E) the price level.

B) desired investment.

26) Refer to Figure 24-1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the A) economy will eventually move to point B. B) economy will only move gradually toward point A as wages slowly adjust. C) economy will quickly move to point A. D) level of output will decrease below Y0. E) AD curve will eventually shift to the right and return the economy to its full-employment level of output.

B) economy will only move gradually toward point A as wages slowly adjust.

126) If the economy's AS curve is completely horizontal, the multiplier in the AD/AS model is A) infinitely large. B) equal to the simple multiplier. C) smaller than the simple multiplier. D) is zero. E) negative.

B) equal to the simple multiplier.

3) A former Governor of the Bank of Canada argued that high interest rates tend to accompany high inflation because inflation A) causes the Canadian dollar to appreciate which again fuels inflation even more. B) erodes the value of the dollar and therefore lenders need to be compensated through higher interest rates. C) reduces banks' profits who then respond by lowering their lending rates. D) increases housing prices so younger Canadians are made worse off. E) lowers short term interest rates and acts as an incentive to borrow money.

B) erodes the value of the dollar and therefore lenders need to be compensated through higher interest rates.

39) Suppose Bank ABC has a target reserve ratio of 2%. If Bank ABC receives a new deposit of $50 million it will immediately find itself with A) excess cash reserves of $10 million. B) excess cash reserves of $49 million. C) excess cash reserves of $49.5 million. D) excess cash reserves of $1 million. E) no excess cash reserves.

B) excess cash reserves of $49 million.

55) For the economy as a whole, high rates of factor utilization are associated with A) downward pressure on wage rates. B) excess demand in factor markets. C) increasing unemployment rates. D) excess supply in factor markets. E) downward shifts in the AS curve.

B) excess demand in factor markets.

22) In the long run, changes to real GDP are most likely to be caused by an increase in A) interest rates. B) factor productivity. C) factor-utilization rates. D) desired consumption. E) factor prices.

B) factor productivity.

94) Fiscal policy refers to the A) government's attempts to maintain a vertical AS curve so as to stabilize output. B) government's use of spending and taxing policies to influence equilibrium real GDP. C) government's use of trade-related policy tools to influence the net export function, thereby influencing GDP. D) business sector's influence on investment and GDP. E) households' attempts to change saving to encourage growth.

B) government's use of spending and taxing policies to influence equilibrium real GDP.

51) An economy may not quickly and automatically eliminate a recessionary output gap because wages A) never change in response to changes in the demand for labour. B) have a tendency to be sticky downward. C) have a tendency to fall too quickly. D) have a tendency to rise too quickly. E) are flexible but prices have a tendency to be sticky downward.

B) have a tendency to be sticky downward.

116) Consider the basic AD/AS model. A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium, which in comparison to the original equilibrium, has a price level that is A) higher and a real GDP that is higher. B) higher and a real GDP that is lower. C) higher and a real GDP that is the same. D) lower and a real GDP that is higher. E) lower and a real GDP that is lower.

B) higher and a real GDP that is lower.

6) Consider a simple macro model with a given price level and demand-determined output. An exogenous change in the domestic price level changes equilibrium real GDP A) in the same direction. B) in the opposite direction. C) by the same amount in the same direction. D) by the same amount in the opposite direction. E) by a lesser amount in either direction.

B) in the opposite direction.

64) Which of the following policies is most likely to have an effect on GDP in the long run? A) increase government purchases B) increase labour productivity C) change factor utilization rates D) increase consumption E) reduce unemployment rates

B) increase labour productivity

44) One reason why the aggregate demand (AD) curve slopes downward is that A) aggregate expenditure increases as the price level rises. B) increases in the price level cause consumers to substitute foreign goods for domestic goods. C) increased production results in lower production costs. D) when the price level falls firms must be more competitive when output increases. E) when the price level falls consumers increase their saving rate.

B) increases in the price level cause consumers to substitute foreign goods for domestic goods.

Which of the following exemplifies the crowding-out effect? An increase in government spending: A) is financed by increasing the money supply, reducing interest rates and causing net exports to fall B) is financed by borrowing, raising interest rates and causing private investment to fall C) causes taxes to rise automatically, reducing consumption spending D) causes the price level to rise, reducing net exports

B) is financed by borrowing, raising interest rates and causing private investment to fall Feedback: The crowding-out effect refers to the decrease in private investment spending which may accompany an expansionary fiscal policy financed by government borrowing from the public. An expansionary fiscal policy may generate increased spending by government and consumers but reduced spending by investors.

105) Consider the basic AD/AS model. Suppose firms are currently producing beyond their normal capacity. A change in AD leads to a relatively A) large change in price level and a large change in real GDP. B) large change in price level and a small change in real GDP. C) small change in price level and a large change in real GDP. D) small change in price level and a small change in real GDP. E) no change in both price and output.

B) large change in price level and a small change in real GDP.

128) Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the ________ the output gap being suffered, an argument supporting ________. A) larger; fine tuning B) larger; gross tuning C) smaller; fine tuning D) smaller; crowding out E) larger; crowding out

B) larger; gross tuning

1) Other things being equal, a rise in the domestic price level A) causes a decrease in real saving. B) lowers the real value of all assets denominated in money units. C) makes domestic goods more attractive to foreigners. D) makes foreign goods less attractive to domestic residents. E) raises the real burden of repaying a fixed money value debt.

B) lowers the real value of all assets denominated in money units.

35) Without a central bank, commercial banks in Canada would probably hold ________ reserves than they do now, resulting in a ________ money supply than at present. A) less; larger B) more; smaller C) more; larger D) less; smaller E) the same; the same .

B) more; smaller

63) Suppose a student deposits into a downtown bank a $200 cheque that she received from her parents in the suburbs. This transaction alone would A) increase the money supply by an indeterminate amount. B) not change the money supply. C) decrease the money supply. D) decrease the money supply by $1000 if the target reserve ratio was 20%. E) increase the money supply by $1000 if the target reserve ratio was 20%

B) not change the money supply.

124) In the long run, aggregate demand is ________ for determining real GDP, and the paradox of thrift ________. A) not important; applies B) not important; does not apply C) the only influence; applies D) the most important influence; does not apply E) stable and important; applies

B) not important; does not apply

63) In the long run, many economists argue that fiscal policy is ineffective because it has little effect on A) nominal GDP. B) potential GDP. C) nominal interest rates. D) the price level. E) the inflation rate.

B) potential GDP.

89) Consider the AD/AS macro model. The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in A) the AS curve. B) potential GDP. C) either the AS curve or potential GDP. D) either the AD or AS curves. E) the intersection of the AD and AS curves.

B) potential GDP.

36) Following any AD or AS shock, economists typically assume that the adjustment process continues until A) the AD and AS curves intersect each other at the correct price level. B) real GDP returns to Y*. C) factor prices have returned to their levels previous to the shock. D) Y* adjusts to its long-run equilibrium level. E) the output gap is at a stable level.

B) real GDP returns to Y*.

48) Consider the relationship between the AE curve and the AD curve. A decline in the amount of desired net exports at each level of national income A) shifts the AD curve to the right. B) shifts the AD curve to the left. C) causes a movement up along the AD curve. D) causes a movement down along the AD curve. E) causes an upward shift of the AE curve but no movement of the AD curve.

B) shifts the AD curve to the left.

36) Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income A) shifts the AD curve to the left. B) shifts the AD curve to the right. C) causes a movement along the AD curve. D) causes a movement along the AE curve. E) causes a shift of the AE curve but no movement of the AD curve.

B) shifts the AD curve to the right.

47) Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired investment expenditure at each level of national income A) shifts the AD curve to the left. B) shifts the AD curve to the right. C) causes a movement along the AD curve. D) causes a movement along the AE curve. E) causes a shift of the AE curve but no movement of the AD curve.

B) shifts the AD curve to the right.

130) When the price level varies, the multiplier is ________ the simple multiplier. A) larger than B) smaller than C) definitionally the same as D) not comparable to E) equal to

B) smaller than

120) Consider the following news headline: "Governments plan massive hospital construction programs across the country." Choose the statement below that best describes the likely macroeconomic effects. A) the AD curve shifts to the left; the price level falls and real GDP falls B) the AD curve shifts to the right; the price level rises and real GDP rises C) the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate D) the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate E) the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises

B) the AD curve shifts to the right; the price level rises and real GDP rises

93) Consider the AD/AS model. An increase in government purchases will have no impact on equilibrium real GDP if A) the AS curve slopes upward. B) the AS curve is vertical. C) the AS curve is horizontal. D) the marginal propensity to spend is very small. E) the simple multiplier is very small.

B) the AS curve is vertical.

34) Changes in factor-utilization rates are considered important for explaining short-run changes in real GDP because A) wages increase and decrease rapidly in the short run, dampening the effect of factor utilization. B) the employment ratio of labour and the amount of excess capacity respond quickly to changes in aggregate demand or supply. C) additions to the labour force occur more frequently than changes in the utilization rate. D) changes to the capital stock are almost impossible to make in the short run. E) land and capital can change only in the short run.

B) the employment ratio of labour and the amount of excess capacity respond quickly to changes in aggregate demand or supply.

103) Consider the basic AD/AS model with an upward-sloping AS curve. A positive aggregate demand shock will cause A) a decrease in the price level. B) the equilibrium point to move rightward along the AS curve. C) a movement along the AD curve to the right. D) a shift to the right in the AS curve. E) the unemployment rate to remain constant.

B) the equilibrium point to move rightward along the AS curve.

4) Other things being equal, when the domestic price level falls exogenously, A) Canadian goods become more expensive relative to foreign goods. B) the net export function shifts upward. C) the aggregate expenditure function shifts downward. D) imports of foreign goods rise. E) the net export function shifts downward.

B) the net export function shifts upward.

52) Changes in any of the following variables contribute to changes in GDP. Which one typically changes most over short periods of time? A) the number of workers who are available to work B) the number of employed workers as a portion of the number of workers available to work C) the output produced per worker D) the number of workers who are available to work and the output produced per worker E) the labour-force participation rate

B) the number of employed workers as a portion of the number of workers available to work

90) Consider the nature of macroeconomic equilibrium. If, at a particular price level, aggregate output demanded is less than that supplied by producers, then A) the price level will rise toward its equilibrium value. B) the price level will decline toward its equilibrium value. C) the aggregate demand curve will shift to the right, re-establishing an equilibrium. D) the aggregate supply curve will shift to the left, re-establishing an equilibrium. E) the aggregate supply curve will shift to the right, re-establishing an equilibrium.

B) the price level will decline toward its equilibrium value.

impact of expansionary monetary policy

Because monetary policy can affect inflation expectations as well as nominal interest rates, the effect of monetary policy on interest rates can be uncertain. This uncertainty has led the Fed to follow monetary rules instead of discretionary policy.

6) The major advantage of using money rather than barter is that A) money is the only convenient way to store oneʹs wealth. B) the use of money significantly reduces transactions costs. C) money stays where you put it, whereas a cow often has to be fenced in. D) in the barter system there is no way to express values of commodities. E) money has more value than real good

B) the use of money significantly reduces transactions costs.

26) A bank run is unlikely to occur in Canada today because A) if necessary, the central bank can provide all the reserves that are necessary to avoid this situation. B) there is relatively little demand for cash at present. C) the commercial banks hold enough government securities that are convertible into cash. D) the commercial banks are required by law to maintain 100% of their deposits in cash. E) banking is done mostly electronically.

B) there is relatively little demand for cash at present.

19) Relatively small annual changes in factor productivity are A) easy to calculate across many industries. B) thought to be an important cause of long-run economic growth. C) not important to long-run growth but are the dominant source of short-run changes in GDP. D) the only important source of changes in potential GDP. E) always cancelled out by changes in the growth in factor supplies.

B) thought to be an important cause of long-run economic growth.

80) What is sometimes called the "long-run aggregate supply curve" shows the relationship between the price level and aggregate supply over a time period long enough to permit A) changes in the capital stock. B) wages and other factor prices to adjust. C) changes in technology to occur. D) changes in the size of the resource base to occur. E) population to increase.

B) wages and other factor prices to adjust.

9) Most Canadians accept Canadian dollars in payment for goods and services in Canada because they have confidence that the dollar A) is fully convertible into gold. B) will be accepted in the future. C) is fully convertible into American dollars at a set exchange rate. D) is accepted by foreigners as more stable than their own currency. E) is fully backed by the British pound sterling.

B) will be accepted in the future.

"Automatic fiscal stabilization" in the economy refers to A) the properties of government spending and taxation that cause the simple multiplier to be increased. B) the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap. C) the properties of government spending and taxation that cause the simple multiplier to be reduced. D) the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap. E) all discretionary fiscal policies.

101) According to some modern theories of long- run growth, successive increments of investment have ________ returns since some fixed costs are ________ for subsequent firms. A) decreasing; higher B) decreasing; lower C) increasing; lower D) constant; identical E) increasing; higher

2) In the long run, changes in average material living standards are best shown by A) population growth. B) improvements in monetary policy. C) growth in real per capita GDP. D) improvements in fiscal policy. E) growth in real GDP.

35) Consider the market for loanable funds for a closed economy in the long run. Other things being equal, a country with a high national saving rate will tend to have A) a high growth rate because aggregate expenditure will be high out of any given income. B) trouble achieving potential real national income in the short run. C) a high growth rate because sustained high investment is possible with high saving. D) either a high or low growth rate depending on the investment demand schedule. E) an AS curve moving continually to the left.

39) For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to A) increase and the flow of investment to increase. B) decrease and the flow of national saving to decrease. C) decrease and the flow of national saving to increase. D) increase and the flow of investment to decrease. E) increase and the flow of national saving to decrease.

5) If GDP in a richer country grows at the same annual rate as in a poorer country, the A) gap between their standards of living will widen over time. B) difference in their living standards will not change over time. C) gap between their standards of living will close over time as long as the rate of population growth is lower in the poorer country. D) gap between their standards of living will close over time as long as the rate of population growth is lower in the richer country. E) gap between their standards of living will close over time.

84) The growth of "total factor productivity", or the "Solow residual", is equal to the growth in real GDP A) accounted for by changes in all factors of production but excluding technological changes. B) that cannot be accounted for by changes in the labour force. C) that cannot be accounted for by changes in the quantities of labour and capital. D) that cannot be accounted for by changes in technology. E) accounted for by changes in all factors of production and including technological changes.

96) The "new" theories of economic growth emphasize that the pace of technological change is ________ to economic signals, and that it is ________ to the economic system. A) unresponsive; exogenous B) responsive; exogenous C) responsive; endogenous D) unresponsive; endogenous E) unresponsive; unrelated

A reduction in the net tax rate might lead to an increase in the growth rate of potential output if A) firms are operating at their normal capacity. B) households are not forward looking. C) the tax cuts stimulate private investment. D) the simple multiplier is large. E) the marginal propensity to consume is large.

An important asymmetry in the behaviour of the AS curve is that A) prices are sticky but wages are not. B) positive output gaps can persist for a long time without causing increases in wages and prices, whereas negative output gaps lead to immediate reductions in wages and prices. C) negative output gaps can persist for a while without causing large decreases in wages and prices, whereas positive output gaps lead more quickly to increases in wages and prices. D) wages are very flexible in the downward direction, but not in the upward direction. E) wages and prices are equally sticky in both directions.

Assume that the economy is in long-run equilibrium. Now, assume that there is an unexpected increase in the price of oil. As a result of higher oil prices, the A. short-run aggregate supply curve will shift right. B. aggregate demand curve will shift left. C. short-run aggregate supply curve will shift left. D. long-run aggregate supply curve will shift left.

Assume that the economy is in long-run equilibrium. Now, assume that there is an unexpected increase in the price of oil. The new short-run equilibrium will be A. where the original short-run aggregate supply curve intersects the original aggregate demand curve. B. where the new short-run aggregate supply curve, the original aggregate demand curve, and a new long-run aggregate supply curve intersect. C. where the new short-run aggregate supply curve intersects the original aggregate demand curve. D. where the new short-run aggregate supply curve, the original aggregate demand curve, and original long-run aggregate supply curve intersect.

Assume the economy is in long-run equilibrium. Now assume that there is a large increase in demand for U.S. exports. As a result of increased demand for U.S. exports, the A. long-run aggregate supply curve will shift left. B. aggregate demand curve will shift left. C. aggregate demand curve will shift right. D. short-run aggregate supply curve will shift left.

If there is an increase in expected future incomeexpected future income, then this will result in A. an upward movement along the consumption function. B. the consumption function shifting down. C. the consumption function shifting up. D. a downward movement along the consumption function.

Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government's net tax revenues ________ during booms and ________ during recessions. A) magnify; increase; decrease B) magnify; decrease; increase C) dampen; increase; decrease D) dampen; decrease; increase E) does not affect; are constant; are constant

Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will A) allow a stable expansion of real income over time. B) always reverse itself. C) be negated in the long run, through the economy's adjustment process. D) result in a price level lower than that preceding the demand shock. E) set off an endless cycle of price rises and increases in unemployment

Consider the basic AD/AS macro model in long-run equilibrium. A negative AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) decrease; decrease; decrease further; will decrease further B) decrease; decrease; decrease further; will be restored to potential output C) increase; decrease; decrease; will be restored to potential output D) increase; decrease; increase further; will be restored to potential output E) increase; increase; increase further; will be restored to potential output

Consider the basic AD/AS macro model in long-run equilibrium. A permanent expansionary AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run. A) a positive; no B) a negative; no C) a positive; an even larger D) a positive; a smaller E) a negative; a positive

Consider the basic AD/AS macro model, initially in a long-run equilibrium. A positive AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) decrease; decrease; decrease further; will decrease further B) decrease; increase; decrease further; will be restored to potential output C) decrease; increase; return to its initial level; will be restored to potential output D) increase; increase; decrease; will be restored to potential output E) increase; increase; return to its initial level; will be restored to potential output

Consumption spending is $18 million, planned investment spending is $4 million, actual investment spending is $4 million, government purchases are $6 million, and net export spending is $1.5 million. Based on this information, which of the following is true? A) Aggregate Expenditure is less than GDP. B) Aggregate Expenditure is more than GDP. C) Aggregate Expenditure is equal to GDP. D) There are unplanned changes in inventories.

Defense spending is increased. This is: A) Part of an expansionary fiscal policy B) Part of a contractionary fiscal policy C) Not part of a fiscal policy

Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is A) part of an expansionary fiscal policy, B) part of a contractionary fiscal policy, or C) not part of fiscal policy.

How can government policies shift the aggregate demand curve to the right? A. by increasing business taxes B. by increasing personal income taxes C. by increasing government purchases D. All of the above.

How would an increase in interest rates affect investment? A. Real investment spending remains unchanged. B. Real investment spending may increase, decrease or remain the same depending on the rate of inflation. C. Real investment spending declines. D. Real investment spending increases.

If the economy in the short run is experiencing a recessionary gap, we are likely to see A) severe and widespread labour shortages. B) quickly rising output prices. C) many workers receiving employment-insurance benefits. D) the number of employment-insurance recipients the lowest ever. E) consumers optimistic about the future.

If the economy is experiencing an inflationary output gap, the adjustment process operates as follows: A) wages do not adjust, but the AD curve shifts to the right. B) wages fall, unit costs fall, and the AD curve shifts rightward. C) wages rise, unit costs rise, and the AS curve shifts leftward. D) wages rise, unit costs rise, and the AS curve shifts rightward. E) wages fall, unit costs fall, and the AS curve shifts rightward.

If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is A) at its full-employment level of output. B) experiencing a recessionary output gap. C) experiencing an inflationary output gap. D) threatened with a demand shock. E) operating at full capacity.

If wages rise faster than increases in labour productivity, then unit labour costs will A) fall and the AS curve will shift left. B) fall and the AS curve will shift right. C) rise and the AS curve will shift left. D) rise and the AS curve will shift right. E) not change because only total labour costs change.

In the long run in the AD/AS macro model we can say that A) both real GDP and the price level are determined by aggregate demand. B) both real GDP and the price level are determined by Y*. C) long-run real GDP is determined by Y* and the long-run price level by the AD curve. D) real GDP is determined by aggregate demand and the price level by Y*. E) long-run real GDP is determined by aggregate demand and the price level is determined solely by the AS curve.

Refer to Figure 24-5. If the economy is currently in equilibrium at E3, the concept of asymmetrical adjustment of the AS curve suggests that A) the economy will attain potential output faster if there is no intervention by the government. B) a decrease in the price level will induce a rightward shift of AS. C) the return of the economy to potential output may be very slow without government intervention. D) the economy will never return to potential output. E) the price level is constant regardless of the level of equilibrium income.

Refer to Figure 24-5. The economy is not in long-run equilibrium at E1 because the A) AD1 curve will shift back to AD0 due to an increase in the price level. B) AD1 curve will shift back to the left due to a fall in current consumption. C) AS will shift to the left due to an increase in wages. D) AS will shift to the left due to an increase in the price level. E) AS will shift to the right due to a decrease in the price level.

Refer to Figure 24-7. If the government takes no action to close the existing output gap, then A) the AD curve will shift down until it intersects with the AS curve at point D. B) the AD curve will shift up until it intersects with the AS curve at point B. C) the AS curve will shift to the left until it intersects with the AD curve at point C. D) the AS curve will shift to the right until it intersects with the AD curve at point E. E) the AS curve can either shift to the right or left depending on the fiscal policy.

Refer to Table 24-1. Consider Economy E. Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy? A) The AD curve has shifted to the right and the economy is in a short-run disequilibrium position. B) The AS curve has shifted to the left and the economy is in a short-run disequilibrium position. C) The intersection of the AD and AS curves is to the right of Y*. D) The intersection of the AD and AS curves is to the left of Y*. E) The intersection of the AD and AS curves coincide with the long-run aggregate supply curve

Refer to Table 24-1. Which of the following statements best describes the situation facing Economy B? A) There is a recessionary gap of $40 billion and wages are falling slowly. B) There is an inflationary gap of $40 billion and wages are rising. C) There is a recessionary gap of $20 billion and wages are falling slowly. D) There is no output gap and wages are stable. E) There is an output gap of $20 billion and wages are rapidly adjusting.

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, ________. 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 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 falls and the price level rises; real GDP is below its original level with a higher price level

Suppose actual real GDP is $1 trillion lower than potential GDP. Congress and the president would like to bring the economy back to long-run equilibrium, which of the following would be an appropriate policy if the MPC = 0.8. A) Decrease interest rates. B) Decrease taxes by $0.2 trillion. C) Increase government purchases by $0.2 trillion. D) Decrease taxes by $0.2 trillion and increase government purchases by $0.2 trillion.

Suppose the economy begins in a long-run equilibrium with Y = Y*. A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a ________ shift of ________. A) rightward; the aggregate supply curve B) rightward; the aggregate demand curve C) leftward; the aggregate supply curve D) leftward; the aggregate demand curve E) rightward; Y*

Suppose the following conditions are present in the economy: - firms are facing lower-than normal sales and have reduced output -there is an excess supply of labour and firms are starting to reduce their workforces Which of the following statements describes the adjustment that will happen in the AD/AS macro model? A) Output is below potential; aggregate demand will fall, causing the AD curve to shift to the left. The price level will fall until equilibrium is restored at . B) The economy is in equilibrium at , but wages are falling. The AS curve will shift to the right until a new equilibrium is reached at a lower price level. C) Output is below potential; wages will eventually fall; the AS curve will slowly shift to the right until equilibrium is restored at . D) Output is above potential; wages will fall, causing the AS curve to shift to the right until equilibrium is restored at . E) Output is above potential; aggregate demand will fall, causing the AD curve to shift to the left until equilibrium is restored at .

The "long-run aggregate supply curve," vertical at Y*, shows that A) potential output will rise as prices rise. B) potential output will fall as prices rise. C) potential output is compatible with any price level. D) potential output is compatible with one particular price level. E) prices will always rise in the long run.

The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to ________ their saving, but in aggregate this behaviour causes a ________ recession. A) decrease, more severe B) decrease; less severe C) increase; more severe D) increase; less severe E) increase; shorter

The Federal Reserve lowers the target for the federal funds rate. This is: A) part of an expansionary fiscal policy, B) part of a contractionary fiscal policy, or C) not part of fiscal policy.

The growth rate of potential output might be decreased by an expansionary fiscal policy if A) the budget deficits are persistent. B) the simple multiplier is small. C) the policy crowds out private investment. D) public investment has high productivity. E) the composition of output is not altered.

The national saving curve is upward sloping because an increase in the real interest rate: A) decreases the supply of private saving. B) leads to an increase in investment demand. C) leads households to reduce their current consumption.

The use of government purchases (G) as a fiscal policy tool can have an effect on long-run growth in the economy. Under what circumstances might an increase in G cause the level of potential output () to increase? A) If the increase in G crowds out private investment. B) If the increase in G causes a permanent increase in the marginal propensity to consume, which causes a permanent rightward shift of the AD curve. C) If the increase in G is spent on public infrastructure that increases the productivity of private-sector production. D) If the increase in G leads to a permanent increase in the level of autonomous saving in the economy. E) If the increase in G is offset by an equal decrease in C, I, and NX.

The international-trade effect refers to the fact that an increase in the price level will result in A. a decrease in exports and a decrease in imports. B. an increase in exports and an increase in imports. C. a decrease in exports and an increase in imports. D. an increase in exports and a decrease in imports.

What are the four main determinants of investment? A. Expectations of future profitability, interest rates, disposable income and cash flow. B. Expectations of future profitability, interest rates, exchange rate and cash flow. C. Expectations of future profitability, interest rates, taxes and cash flow. D. Disposable income, interest rates, taxes and cash flow.

What changes should they make if they decide a contractionary fiscal policy is necessary? A. In this case, Congress and the president should enact policies that increase government spending and increase taxes. B. In this case, Congress and the president should enact policies that decrease government spending and decrease taxes. C. In this case, Congress and the president should enact policies that decrease government spending and increase taxes. D. In this case, Congress and the president should enact policies that increase government spending and decrease taxes.

What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP? A. Inventories increase, GDP increases, and employment decreases. B. Inventories decrease, GDP decreases, and employment increases. C. Inventories decrease, GDP increases, and employment increases. D. Inventories increase, GDP increases, and employment increases.

What would be the effect of an increase in investor optimism an increase in investor optimism on a graph showing aggregate demand and short and long-run aggregate supply that is initially in long-run equilibrium? The short-run effect of an increase in investor optimism an increase in investor optimism will be for the A. short-run aggregate supply curve to shift left. B. aggregate demand curve to shift down C. aggregate demand curve to shift up. D. short-run and long-run aggregate supply curves to shift right.

Which of the following is a major difference between the AD-AS model and the dynamic AD-AS model? The dynamic AD-AS model assumes A. AD only includes consumption, investment, and government purchases, while the AD-AS model assumes AD includes consumption, investment, government purchases and net exports. B. the SRAS is stable and will not shift, while the AD-AS model assumes the SRAS can only change with an exogenous event such as oil price changes. C. potential GDP increases continually, while the AD-AS model assumes the LRAS does not change. D. the economy does not experience long-run growth, while the AD-AS model assumes there is constant inflation in the economy.

The growth rate of potential output might be decreased by an expansionary fiscal policy if A) public investment has high productivity. B) the simple multiplier is small. C) the policy crowds out private investment. D) the composition of output is not altered. E) the budget deficits are persistent.

C 123)

Consider the basic AD/AS macro model, initially in a long-run equilibrium. A positive AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) increase; increase; return to its initial level; will be restored to potential output B) decrease; increase; decrease further; will be restored to potential output C) decrease; increase; return to its initial level; will be restored to potential output D) decrease; decrease; decrease further; will decrease further E) increase; increase; decrease; will be restored to potential output

C 66)

C) $20 billion Feedback: All projects whose return exceeds the real rate of interest will be undertaken. In this example, the $10 billion whose returns are between 9.1% and 12% and the $10 billion whose returns are between 6.1% and 9% will be undertaken, for a total of $20 billion.

43) Consider an economy where factor supply is 2.5 million units, the factor utilization rate is 0.85 and a simple measure of productivity (GDP per factor employed) is $200. This economy's GDP is A) $2.125 million. B) $200 million. C) $425 million. D) $500 million. E) $525 million.

C) $425 million.

If the MPC is .63, the multiplier is: A) 1 / .63 B) 1 - .37 C) 1 / .37 D) .63 / .37

C) 1 / .37 Feedback: The multiplier is the inverse of the fraction of income that is not respent—that is, it is the inverse of the marginal propensity to save. In this example, the MPS is 1 - .63 = .37.

16) Basic functions of the Bank of Canada include 1) acting as lender of last resort to private non-financial corporations; 2) acting as banker for the commercial banks. 3) regulating the money supply. A) 1, 2, and 3 B) 3 only C) 2 and 3 D) 2 only E) 1 only

C) 2 and 3

131) Refer to Figure 23-5. Suppose that an increase in government purchases by 50 causes the AD curve to shift to the right, as shown. The simple multiplier is ________ and the multiplier is ________. A) 6; 1.2 B) 2.8; 1.2 C) 4; 1.2 D) 4; 2.8 E) 4; 3.2

C) 4; 1.2

86) Refer to Figure 24-5. The economy is not in long-run equilibrium at E1 because the A) AD1 curve will shift back to AD0 due to an increase in the price level. B) AD1 curve will shift back to the left due to a fall in current consumption. C) AS will shift to the left due to an increase in wages. D) AS will shift to the left due to an increase in the price level. E) AS will shift to the right due to a decrease in the price level.

C) AS will shift to the left due to an increase in wages.

See the graph n the definition. An expansionary fiscal policy is best represented by graph: A) A B) B C) C D) D

C) C Feedback: An expansionary fiscal policy (cutting taxes or increasing government spending) will push the aggregate demand curve to the right: expenditures increase for any given price level.

Real GDP Rate of Wage Change Economy A 300 -1.0% Economy B 320 -0.5% Economy C 340 0% Economy D 360 +3.5% Economy E 380 +6.0% TABLE 24-1 37) Refer to Table 24-1. Which of the economies is operating at its long-run equilibrium? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E

C) Economy C

1) Which of the following are the defining assumptions of the short run in macroeconomics? A) Factor prices are exogenous, and technology and factor supplies are changing. B) Factor prices adjust to output gaps, and technology and factor supplies are constant. C) Factor prices are exogenous, and technology and factor supplies are constant. D) Factor prices adjust to output gaps, and technology and factor prices are changing. E) Factor prices are exogenous, technology and factor prices are endogenous.

C) Factor prices are exogenous, and technology and factor supplies are constant.

. If short-run aggregate supply increases (shifts to the right) by less than long-run aggregate supply, then, at the short-run equilibrium, A) GDP will be above potential GDP. B) aggregate demand will increase. C) GDP will be below potential GDP. D) GDP will be equal to potential GDP.

C) GDP will be below potential GDP

22) Which of the following entries would appear on the assets side of a commercial bankʹs balance sheet? A) chequable deposits B) shareholdersʹ equity C) Government of Canada securities D) Government of Canada deposits E) savings deposits

C) Government of Canada securities

140) The use of government purchases (G) as a fiscal policy tool can have an effect on long-run growth in the economy. Under what circumstances might an increase in G cause the level of potential output ( ) to increase? A) If the increase in G crowds out private investment. B) If the increase in G causes a permanent increase in the marginal propensity to consume, which causes a permanent rightward shift of the AD curve. C) If the increase in G is spent on public infrastructure that increases the productivity of private-sector production. D) If the increase in G leads to a permanent increase in the level of autonomous saving in the economy. E) If the increase in G is offset by an equal decrease in C, I, and NX.

C) If the increase in G is spent on public infrastructure that increases the productivity of private-sector production.

119) Consider a simple macro model with demand-determined output. Which of the following parameters will produce the strongest automatic stabilizer? A) MPC = 0.8, t = 0.2, m = 0.3 B) MPC = 0.7, t = 0.3, m = 0.2 C) MPC = 0.7, t = 0.1, m = 0.4 D) MPC = 0.9, t = 0.2, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2

C) MPC = 0.7, t = 0.1, m = 0.4

46) Suppose the following conditions are present in the economy: - firms are facing lower-than normal sales and have reduced output -there is an excess supply of labour and firms are starting to reduce their workforces Which of the following statements describes the adjustment that will happen in the AD/AS macro model? A) Output is below potential; aggregate demand will fall, causing the AD curve to shift to the left. The price level will fall until equilibrium is restored at . B) The economy is in equilibrium at , but wages are falling. The AS curve will shift to the right until a new equilibrium is reached at a lower price level. C) Output is below potential; wages will eventually fall; the AS curve will slowly shift to the right until equilibrium is restored at . D) Output is above potential; wages will fall, causing the AS curve to shift to the right until equilibrium is restored at . E) Output is above potential; aggregate demand will fall, causing the AD curve to shift to the left until equilibrium is restored at .

C) Output is below potential; wages will eventually fall; the AS curve will slowly shift to the right until equilibrium is restored at .

Higher prices of imported resources will: A) Move the economy downward and to the right along the aggregate demand curve B) Make the aggregate demand curve steeper C) Shift the aggregate supply curve to the left D) Shift the aggregate demand curve to the left

C) Shift the aggregate supply curve to the left Feedback: Higher input costs reduce the amount of real domestic output supplied at any given price level. The resulting leftward shift of the supply curve will move the economy upward and to the left along its aggregate demand curve (reduced output at a higher price level.)

The short-run aggregate supply curve: A) Assumes that wages and salaries fully match any change in the price level B) Is a vertical line located at the full-employment level of output C) Shows the amount of real output supplied at various price levels D) Becomes increasingly flatter as output expands

C) Shows the amount of real output supplied at various price levels Feedback: Both the short-run and long-run aggregate supply curves show the amount of real output supplied at various prices. They differ in that the short-run curve assumes fixed input prices while in the long run, wages and salaries are assumed to fully match any change in the price level. The immediate-short-run aggregate supply curve is constructed assuming both input and output prices are fixed.

29) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0 . Now, suppose there is an exogenous rise in the price level to P1 . Which of the following statements describes the likely macroeconomic effects? A) The AE curve shifts to , a new equilibrium is established at point U, and the AD curve shifts from to , and equilibrium from point B to point D. B) The AE curve shifts to , a new equilibrium is established at point W, and the economy moves from point B to point C along . C) The AE curve shifts to , a new equilibrium is established at point U, and the economy moves from point B to point A along D) The AE curve shifts to , a new equilibrium is established at point W, and the AD curve shifts from to , and equilibrium moves from point B to point D.

C) The AE curve shifts to AE1 , a new equilibrium is established at point U, and the economy moves from point B to point A along AD0

31) 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 change in the interest rate on the vertical axis. C) 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. 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.

C) 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.

100) Refer to Figure 23-3. Suppose the price level in Economy A is above P0 . Which of the following statements describes what would occur? A) The AD curve would shift to the right until macro equilibrium is reached. B) Real GDP would be above its equilibrium level which would put downward pressure on the price level until it reaches macro equilibrium at . C) The amount of output supplied by firms is greater than total desired expenditure; excess supply will put downward pressure on the price level until it reaches macro equilibrium at . D) Real GDP would be below its equilibrium level which would put upward pressure on the price level until it reaches macro equilibrium. E) The AS curve would shift to the left until macro equilibrium is reached.

C) The amount of output supplied by firms is greater than total desired expenditure; excess supply will put downward pressure on the price level until it reaches macro equilibrium at P0.

40) Refer to Table 24-1. Consider Economy E. Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy? A) The AD curve has shifted to the right and the economy is in a short-run disequilibrium position. B) The AS curve has shifted to the left and the economy is in a short-run disequilibrium position. C) The intersection of the AD and AS curves is to the right of Y*. D) The intersection of the AD and AS curves is to the left of Y*. E) The intersection of the AD and AS curves coincide with the long-run aggregate supply curve.

C) The intersection of the AD and AS curves is to the right of Y*.

39) Refer to Table 24-1. Which of the following statements best describes the situation facing Economy B? A) There is a recessionary gap of $40 billion and wages are falling slowly. B) There is an inflationary gap of $40 billion and wages are rising. C) There is a recessionary gap of $20 billion and wages are falling slowly. D) There is no output gap and wages are stable. E) There is an output gap of $20 billion and wages are rapidly adjusting.

C) There is a recessionary gap of $20 billion and wages are falling slowly.

. Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run? A) Prices will decline. B) Aggregate demand will shift to the left. C) Unemployment will decline. D) Output will decline.

C) Unemployment will decline

nominal interest rate

are the interest rates we see and pay.

98) Refer to Figure 23-3. Which of the following statements best describes the supply side of Economy A in its current equilibrium position? A) Unit costs are rising, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level. B) Firms are producing well below their capacity and are willing to produce more only if prices rise. C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase. D) Firms are producing well below their capacity and are willing to produce more output with no increase in price. E) Unit costs are rising, but firms are able to produce more output because there is excess capacity in the economy.

C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase.

In the short run, a reduction in aggregate demand is: A) Likely to cause a reduction in the price level B) Unlikely to cause a reduction in the price level because of the interest rate effect C) Unlikely to cause a reduction in the price level because of menu costs and efficiency wages D) Likely to cause a reduction in aggregate supply

C) Unlikely to cause a reduction in the price level because of menu costs and efficiency wages Feedback: Among other reasons, prices tend to be inflexible downward because changing prices is costly and because wage cuts can negatively affect morale and productivity.

104) If the economy's AS curve is very steep and there is a negative aggregate demand shock, the result will be A) an increase in the price level and a decrease in real national income. B) an increase in both the price level and real national income. C) a decrease in the price level with almost no change in real national income. D) a decrease in the price level and an increase in real national income. E) no change in either price level or output.

C) a decrease in the price level with almost no change in real national income.

Stagflation is often a result of A) a decrease in aggregate demand. B) an increase in aggregate demand. C) a negative supply shock. D) an increase in aggregate supply.

C) a negative supply shock

124) Suppose the economy is hit by a shock and we observe that the price level has decreased whereas real GDP has increased. We can conclude that this shock was A) a positive AD shock. B) a negative AD shock. C) a positive AS shock. D) a negative AS shock. E) a negative technology shock.

C) a positive AS shock.

51) An economy's stock of capital increases directly because of A) an increase in interest rates. B) high levels of immigration. C) a positive flow of investment. D) a decrease in business cycles. E) low levels of saving.

C) a positive flow of investment.

61) Consider the basic AD/AS macro model in long-run equilibrium. A permanent expansionary AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run. A) a positive; no B) a negative; no C) a positive; an even larger D) a positive; a smaller E) a negative; a positive

C) a positive; an even larger

48) The utilization rate for physical capital is called the A) physical utilization rate. B) investment utilization rate. C) capacity utilization rate. D) stock of capital utilization rate. E) normal utilization rate.

C) capacity utilization rate.

34) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is . Now, suppose the AE curve shifts to and we move to a new equilibrium level of GDP at and point C on . A possible cause of this change in equilibrium is A) an increase in autonomous consumption. B) an increase in desired investment. C) an exogenous fall in the price level. D) an exogenous rise in the price level. E) an increase in desired net exports.

C) an exogenous fall in the price level.

102) If the economy's AS curve is upward sloping, a positive aggregate demand shock will result in A) an increase in prices but not output. B) an increase in output but not prices. C) an increase in both output and prices. D) a decrease in both output and prices. E) a decrease in output and an increase in prices.

C) an increase in both output and prices.

73) Refer to Figure 24-4. The initial effect of a positive AS shock results in A) a recessionary output gap of 250. B) a recessionary output gap of 450. C) an inflationary output gap of 200. D) an inflationary output gap of 300. E) an inflationary output gap of 550.

C) an inflationary output gap of 200.

73) The economy's AS curve is often assumed to be relatively flat at low levels of real GDP. The underlying reasoning is that A) consumer demand for most goods tends to be non-responsive to price when output is low. B) consumer demand for most goods tends to be very responsive to price when output is low. C) at low levels of output, firms are faced with unused capacity and thus can increase output without significantly increasing their costs. D) the price level is constant. E) profits are normally high in this section of the AS curve, so firms are willing to expand output.

C) at low levels of output, firms are faced with unused capacity and thus can increase output without significantly increasing their costs.

12) In recent years, the use of debit cards issued by commercial banks has skyrocketed. When you pay for a purchase at a store using a debit card, you are A) creating an electronic debt to the merchant. B) authorizing the transfer of bank notes from you to the merchant. C) authorizing an electronic transfer of deposit money from you to the merchant. D) authorizing an electronic transfer of a money substitute from you to the merchant. E) authorizing the transfer of cash from your bank account to the merchantʹs bank account.

C) authorizing an electronic transfer of deposit money from you to the merchant.

53) Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will A) allow a stable expansion of real income over time. B) always reverse itself. C) be negated in the long run, through the economy's adjustment process. D) result in a price level lower than that preceding the demand shock. E) set off an endless cycle of price rises and increases in unemployment.

C) be negated in the long run, through the economy's adjustment process.

82) The aggregate supply curve tends to be relatively steep when GDP is above potential output because firms are operating above ________ and ________ are rising rapidly. A) equilibrium output; unit costs B) profit-maximizing output; total costs C) capacity; unit costs D) equilibrium output; total costs E) equilibrium output; average costs

C) capacity; unit costs

19) The AD curve relates the price level to A) desired aggregate expenditure. B) desired consumption. C) equilibrium real GDP if output is demand determined. D) equilibrium nominal GDP if output is demand determined. E) equilibrium savings and wealth.

C) equilibrium real GDP if output is demand determined.

18) If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is A) at its full-employment level of output. B) experiencing a recessionary output gap. C) experiencing an inflationary output gap. D) threatened with a demand shock. E) operating at full capacity.

C) experiencing an inflationary output gap.

56) For the economy as a whole, changes in the factor-utilization rate are associated with short-run fluctuations in output because A) firms cannot change their prices in the short run. B) potential output is affected by the factor-utilization rate in the short run. C) factor prices can only fully adjust in the long run. D) the short-run fluctuations in factor supplies and productivity cancel each other out. E) it is cheaper for firms to let their inventories accumulate than to employ more workers.

C) factor prices can only fully adjust in the long run.

Refer to the graph in the definition. Suppose aggregate demand falls from AD1 to AD2. In the short run, this will cause output to: A) fall to Q2 and the price level to P2 B) fall to Q2 but the price level to remain at P1 C) fall to Q3 but the price level to remain at P1 D) remain unchanged but the price level will fall to P2

C) fall to Q3 but the price level to remain at P1 Feedback: In the short run, product prices tend to be inflexible downward, so that any reduction in aggregate demand has its full impact on real GDP rather than the price level.

7) Other things being equal, when the price level rises, the real value of money holdings ________; when the domestic price level falls, the real value of money holdings ________. A) rises; falls B) falls; is not affected C) falls; rises D) is not affected; falls E) is not affected; rises

C) falls; rises

85) The concept of "demand-determined output" requires ________ to remain constant as output increases. A) technology of production B) government purchases C) firms' unit costs D) labour productivity E) the ratio of price setters to price takers

C) firms' unit costs

61) The economy's aggregate supply (AS) curve is assumed to slope upward because A) inputs become more expensive at higher levels of output. B) inputs become less expensive at higher levels of output. C) firms' unit costs rise as output increases. D) firms' unit costs fall as output increases. E) aggregate demand increases at higher levels of national income.

C) firms' unit costs rise as output increases.

Potential GDP is also referred to as A) balanced-budget GDP B) realized GDP C) full-employment GDP D) politico-economic GDP

C) full-employment GDP

34) Which of the following statements about reserve ratios at Canadian commercial banks is true? Commercial banks in Canada A) have a reserve ratio of zero. B) have a reserve ratio of 100%. C) have a positive reserve ratio. D) are required by the Bank Act to hold required reserves. E) never have excess reserves.

C) have a positive reserve ratio.

1) Many economists argue that Japan's remarkable long-run growth rate between 1950 and 1990 was largely due to Japan's A) excessive amounts of money invested into research and development. B) high consumption rate for high quality electronic products. C) high national saving rate. D) restrictive trade barriers which eliminated foreign competition. E) skilled labour force that developed over those forty years.

C) high national saving rate.

2) Other things being equal, a country with a high national saving rate may have a ________ long-run growth rate because more saving increases the ________. A) high; interest rate and encourages more investment B) high; wealth of people and increases future consumption C) high; availability of funds, thus lowering the interest rate D) low; consumption in the long run E) low; unemployment and decreases wages in the long run

C) high; availability of funds, thus lowering the interest rate

109) If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand increases, we expect the AE function to shift to a A) higher level and stay there. B) higher level, but then shift part of the way down to its original position as the price level rises. C) higher level but then return to its original position as the price level rises. D) lower level and stay there. E) lower level, but then return to its original position as the price level rises.

C) higher level but then return to its original position as the price level rises.

62) On the basis of both theory and empirical evidence, most economists believe that changes in fiscal policy have A) long-run effects on potential GDP but have little impact on short-run real GDP. B) major effects on the incentive to save in the short run. C) important short-run effects on real GDP and factor utilization but are less effective in changing potential GDP in the long run. D) no effect on factor utilization in the short run or on factor prices in the long run. E) powerful effects on real GDP and factor prices both in the short run and in the long run.

C) important short-run effects on real GDP and factor utilization but are less effective in changing potential GDP in the long run.

72) Consider the basic AD/AS macro model in long-run equilibrium. A negative AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) decrease; decrease; decrease further; will decrease further B) decrease; decrease; decrease further; will be restored to potential output C) increase; decrease; decrease; will be restored to potential output D) increase; decrease; increase further; will be restored to potential output E) increase; increase; increase further; will be restored to potential output

C) increase; decrease; decrease; will be restored to potential output

123) The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to ________ their saving, but in aggregate this behaviour causes a ________ recession. A) decrease, more severe B) decrease; less severe C) increase; more severe D) increase; less severe E) increase; shorter

C) increase; more severe

4) Other things being equal, the purchasing power of money is A) inversely related to the level of aggregate demand. B) directly related to the level of aggregate demand. C) inversely related to the price level. D) directly related with the cost of living. E) directly related to the price level.

C) inversely related to the price level.

55) 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) small increase; a large increase B) small increase; a large decrease C) large increase; a small increase D) large increase; a small decrease E) large increase; no change

C) large increase; a small increase

91) Suppose the economy begins in a long-run equilibrium with Y = Y*. A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a ________ shift of ________. A) rightward; the aggregate supply curve B) rightward; the aggregate demand curve C) leftward; the aggregate supply curve D) leftward; the aggregate demand curve E) rightward; Y*

C) leftward; the aggregate supply curve

11) The currency that is in circulation in Canada today is A) fractionally backed by gold. B) fully backed by gold held at the central bank. C) not officially backed by anything. D) backed by the U.S. dollar. E) backed by the euro.

C) not officially backed by anything.

83) The aggregate supply curve is usually assumed to get progressively steeper at relatively higher levels of output because A) of increasing factor prices. B) of increasing productivity of the factors of production. C) of diminishing marginal productivity of the factors of production. D) of rising competition among price setters. E) of excess capacity at higher levels of output.

C) of diminishing marginal productivity of the factors of production.

30) GDP can be represented by the equation: GDP = L × [E/L] × [GDP/E]. In this equation, the term [E/L] represents A) the productivity of labour. B) the ratio of the population unemployed. C) one minus the unemployment rate. D) the level of employment at a given period of time. E) the labour force.

C) one minus the unemployment rate.

56) The economy's aggregate supply (AS) curve shows the relationship between the price level and the total A) investment that firms wish to make, with input prices given. B) investment that firms wish to make, as input prices vary. C) output that firms wish to produce and sell, with input prices given. D) output that firms wish to produce and sell, as input prices vary. E) wealth accumulated by households, with national income given.

C) output that firms wish to produce and sell, with input prices given.

21) When an economy experiences sustained growth in real GDP, A) actual GDP is greater than potential GDP. B) actual GDP is less than potential GDP. C) potential GDP is likely to be increasing. D) factor prices are likely to be decreasing. E) wage rates will decrease slowly as factor-utilization rates decrease.

C) potential GDP is likely to be increasing.

81) The "long-run aggregate supply curve," vertical at Y*, shows that A) potential output will rise as prices rise. B) potential output will fall as prices rise. C) potential output is compatible with any price level. D) potential output is compatible with one particular price level. E) prices will always rise in the long run.

C) potential output is compatible with any price level.

20) The study of the long run in macroeconomics focuses A) on changes to actual GDP but not on changes in potential GDP. B) equally on potential GDP and actual GDP. C) primarily on changes to potential GDP. D) primarily on changes to the output gap, with a constant level of potential output. E) primarily on the supply of factors of production.

C) primarily on changes to potential GDP.

43) Consider the basic AD/AS model in the short run. When there is a change in autonomous desired expenditure, the simple multiplier is equal to the A) product of the horizontal shift of the AD curve times the change in autonomous expenditure. B) product of the vertical movement along the AD curve times the change in autonomous expenditure. C) ratio of the horizontal shift of the AD curve to the change in autonomous expenditure. D) ratio of the vertical movement along the AD curve to the change in autonomous expenditure. E) ratio of the vertical shift of the AD curve to the change in autonomous expenditure.

C) ratio of the horizontal shift of the AD curve to the change in autonomous expenditure.

89) Macroeconomic equilibrium is described as the combination of A) potential output and price level that is on both the AD curve and AS curve. B) real GDP and price level that is on both the AD curve and 45-degree line. C) real GDP and price level that is on both the AD curve and AS curve. D) all individual demand curves and all individual supply curves. E) all individual demand curves and potential GDP.

C) real GDP and price level that is on both the AD curve and AS curve.

57) 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, ________. 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 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 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

19) If wages rise faster than increases in labour productivity, then unit labour costs will A) fall and the AS curve will shift left. B) fall and the AS curve will shift right. C) rise and the AS curve will shift left. D) rise and the AS curve will shift right. E) not change because only total labour costs change.

C) rise and the AS curve will shift left.

10) Consider a simple macro model with demand-determined output. An exogenous increase in the domestic price level will A) shift both the net export function and the AE curve upward. B) shift the net export function upward and the AE curve downward. C) shift both the net export function and the AE curve downward. D) shift the net export function downward and the AE curve upward. E) pivot the net export function and the AE curve upward.

C) shift both the net export function and the AE curve downward.

78) Consider the basic AD/AS model. Suppose that a rising percentage of high-school graduates are illiterate, resulting in a decrease in average labour productivity. This change will A) shift the AD curve to the left. B) shift the AD curve to the right. C) shift the AS curve to the left. D) shift the AS curve to the right. E) cause a movement to the right along the AS curve.

C) shift the AS curve to the left.

35) When accounting for changes in real GDP, changes in the factor-utilization rate are most important in the A) long run because firms need time to hire more workers or acquire additional capital. B) long run because firms adapt to wage changes and hire more workers. C) short run because firms react to changes in demand by increasing production from existing facilities. D) short run because firms immediately build new plants to satisfy changes in demand. E) short run because firms need time to adjust their price lists.

C) short run because firms react to changes in demand by increasing production from existing facilities.

42) Consider the basic AD/AS macro model. The simple multiplier is reflected by the A) horizontal distance between initial macroeconomic equilibrium and the new intersection of AD and AS in response to a change in autonomous expenditure. B) downward movement along the AD curve in response to a change in autonomous expenditure. C) size of the rightward shift of the AD curve in response to a change in autonomous expenditure. D) upward movement along the AD curve in response to a change in autonomous expenditure. E) size of the leftward shift of the AD curve in response to a rise in autonomous expenditure.

C) size of the rightward shift of the AD curve in response to a change in autonomous expenditure.

108) Refer to Figure 24-7. If the government takes no action to close the existing output gap, then A) the AD curve will shift down until it intersects with the AS curve at point D. B) the AD curve will shift up until it intersects with the AS curve at point B. C) the AS curve will shift to the left until it intersects with the AD curve at point C. D) the AS curve will shift to the right until it intersects with the AD curve at point E. E) the AS curve can either shift to the right or left depending on the fiscal policy.

C) the AS curve will shift to the left until it intersects with the AD curve at point C.

52) An adjustment "asymmetry" in aggregate supply is A) the concave shape of the AS curve. B) the convex shape of the AS curve. C) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps). D) the difference in speed of increases in factor prices versus wage rates. E) the difference in speed of decreases in output levels.

C) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps).

10) An inflationary output gap implies that A) the demand for all factor services will be relatively low. B) the intersection of AD and AS occurs at real GDP below potential output. C) the economy's resources are being used beyond their normal capacity. D) there is a pressure for wages to decrease. E) there is excess supply of most factors of production.

C) the economy's resources are being used beyond their normal capacity.

57) The aggregate supply (AS) curve is drawn with which variables on the axes of the graph? A) the price level on the vertical axis and MPC on the horizontal axis B) national income on the vertical axis and total desired consumption on the horizontal axis C) the price level on the vertical axis and real national income on the horizontal axis D) national income on the vertical axis and marginal cost on the horizontal axis E) the price level on the vertical axis and real disposable income on the horizontal axis

C) the price level on the vertical axis and real national income on the horizontal axis

88) Refer to Figure 24-5. If the economy is currently in equilibrium at E3, the concept of asymmetrical adjustment of the AS curve suggests that A) the economy will attain potential output faster if there is no intervention by the government. B) a decrease in the price level will induce a rightward shift of AS. C) the return of the economy to potential output may be very slow without government intervention. D) the economy will never return to potential output. E) the price level is constant regardless of the level of equilibrium income.

C) the return of the economy to potential output may be very slow without government intervention.

75) According to the Neoclassical growth model, which of the following scenarios explains improvements in long- run material living standards? A) an equal increase in both population and the stock of capital B) an equal increase in both population and output C) a decrease in unemployment rates D) an increase in the stock of physical capital E) an increase in population

29) The Phillips curve describes the relationship between A) aggregate expenditure and aggregate demand. B) the money supply and interest rates. C) unemployment and the rate of change of wages. D) inflation and interest rates. E) the output gap and potential GDP.

C) unemployment and the rate of change of wages.

75) Consider the economy's aggregate supply curve. Other things being equal, unit costs will tend to fall if A) there is a fall in the price of oil. B) the government increases payroll taxes. C) wage increases are less than productivity increases. D) wages fall. E) wage and price controls are in effect.

C) wage increases are less than productivity increases.

74) Consider the economy's aggregate supply curve. Other things being equal, unit costs will tend to increase if A) there is a rise in the price of oil. B) the government reduces payroll taxes. C) wage increases exceed productivity increases. D) wages rise. E) wage and price controls are in effect.

C) wage increases exceed productivity increases.

54) Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, will be eliminated if A) wages rise quickly. B) the AS curve shifts upward. C) wages and other factor prices fall sufficiently. D) real national income decreases. E) prices rise quickly.

C) wages and other factor prices fall sufficiently.

The federal government has a large public debt that it finances through borrowing. As a result, real interest rates are higher than otherwise and the volume of private investment spending is lower. This illustrates the:

Crowding-out effect.

Economists refer to a budget deficit that exists when the economy is achieving full employment as a:

Cyclically adjusted deficit.

9) If real income grows at approximately 2 percent per year, the number of years it will take for real income to double is approximately A) 5. B) 12. C) 24. D) 36. E) 72.

) Suppose the following conditions are present in the economy: - firms are increasing output to meet strong demand for their goods - workers are able to demand higher wages as firms try to bid workers away from other firms Which of the following statements describes the adjustment that will happen in the AD/AS macro model? A) There is an inflationary output gap; aggregate demand will continue to increase, causing the AD curve to shift to the right. The price level will rise until equilibrium is restored at . B) The economy is in equilibrium at , but wages are rising. The AS curve will shift to the left until a new equilibrium is reached at a higher price level. C) There is a recessionary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at . D) There is an inflationary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at . E) There is a recessionary output gap; aggregate demand will rise, causing the AD curve to shift to the right until equilibrium is restored at .

1) Over a long period of time, perhaps many years, changes in real GDP come primarily from A) leftward shifts of the AD curve. B) upward shifts of the AE curve. C) upward shifts of the AS curve. D) continuous increases in potential GDP. E) rightward shifts of the AD curve.

57) Consider the Neoclassical growth model. The effect of an increase in population (or the labour force) in an economy, with everything else held constant, is A) a decrease in per capita output. an inward shift of the production possibilities boundary. an increase in per capita national income. an increasingly aging population. a decrease in the capital- output ratio. A 58) One important assumption of the Neoclassical growth model is that, with a given state of technology, A) the return from successive units of a single factor increases over time. B) increases in the use of a single factor result in constant returns. C) increases in the use of a single factor bring increasing returns. D) increases in the use of single factor bring diminishing returns. E) increases in GDP are possible only if all factors are increased at an equal rate.

67) According to the Neoclassical growth model, it is most likely that GDP would increase, but that average material living standards would fall, as a result of A) a better educated labour force. B) a growing capacity to develop and incorporate new innovations. C) an increase in the availability of natural resources. D) an increase in the working population. E) a fast- growing capital stock.

68) In Neoclassical growth theory, an increase in the labour force ________ total output and ________ total output per person. A) increases; increases B) increases; leaves constant C) leaves constant; reduces D) increases; reduces E) leaves constant; leaves constant

99) New theories of growth based on the idea that growth is endogenous A) assume that the rate of growth of the economy is equal to the rate of population growth. B) ignore the role of technology. C) incorporate factors such as central- bank behaviour. D) stress the role of knowledge and learning in the economy's rate of growth. E) assume that the growth rate of technology is exogenous.

A monetary policy change that causes a decrease in interest rates will result in A. the aggregate demand curve shifting to the left. B. an upward movement along the aggregate demand curve. C. a downward movement along the aggregate demand curve. D. the aggregate demand curve shifting to the right.

An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________. A. contractionary; rise; fall B. expansionary; rise; fall C. expansionary; rise; rise D. contractionary; fall; fall

An important automatic fiscal stabilizer in Canada is A) the exchange rate. B) the marginal propensity to consume. C) the marginal propensity to import. D) the income-tax system. E) government purchases of goods and services

An increase in the government budget surplus, everything else constant, will cause a(n) : C) equal increase in private consumption. D) increase in national saving. E) decrease in national saving.

An inflationary output gap is characterized by A) falling prices. B) constant prices. C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. E) real GDP falling below potential output.

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 A) shift the AD curve to the left by decreasing tax rates. B) increase potential GDP. C) shift the AS curve to the right through large increases in government spending. D) shift the AD curve to the right through large increases in government spending. E) shift the AS curve to the left by increasing wage rates

Assume that an economy is initially in long-run equilibrium. Explain the short-run effect of monetary policy that causes an increase in interest rates. The new equilibrium will be A. where the new aggregate demand curve intersects the original aggregate demand curve. B. where the new aggregate demand curve intersects the original long-run aggregate supply curve. C. where the original aggregate demand curve intersects the original short-run aggregate supply curve. D. where the new aggregate demand curve intersects the original short-run aggregate supply curve.

Assume that the economy is in long-run equilibrium. Now, assume that there is an unexpected increase in the price of oil. Which of the following best explains how and why the economy will adjust back to long-run equilibrium? A. Aggregate demand will increase, restoring the original equilibrium price and quantity. B. Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new, higher price level. C. Aggregate demand will decrease, restoring the original equilibrium price and quantity. D. Short-run aggregate supply will increase (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices.

Briefly explain whether an expansionary fiscal policy will cause each of the following variables to increase or decrease: (i) Real GDP A. Not affect real GDP because potential GDP won't change. B. Decrease real GDP by decreasing long-run aggregate supply. C. Increase real GDP by increasing short-run aggregate supply. D. Increase real GDP by increasing aggregate demand.

Consider Figure 24-7. At the initial short-run equilibrium, there is ________ output gap of ________. This gap could be closed by a ________. A) a recessionary; 100; fiscal contraction B) a recessionary; 200; fiscal expansion C) an inflationary; 100; fiscal contraction D) an inflationary; 200; fiscal contraction E) an inflationary; 350; fiscal expansion

Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will A) leave real output unaffected and increase the price level. B) decrease real output and decrease the price level. C) decrease real output and leave the price level unchanged. D) decrease real output and increase the price level. E) increase real output and decrease the price level.

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) decrease real GDP and the price level. C) affect only the level of real GDP. D) increase real GDP and lower the price level. E) decrease real GDP and raise the price level.

Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP A) and the price level are determined by aggregate demand. B) and the price level are determined by "long-run aggregate supply." C) is determined by aggregate demand and the price level by potential output. D) is determined by potential output and the price level by aggregate demand. E) is determined by AD and the price level is determined by the AS curve.

If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by A) the aggregate demand curve shifting to the left. B) the aggregate expenditure curve shifting upward. C) a point to the right of the aggregate supply curve at potential GDP. D) the intersection of the AD and AS curves at potential output. E) the aggregate supply curve shifting to the left.

If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by A) the aggregate supply curve shifting to the left. B) the aggregate demand curve shifting to the left. C) the aggregate expenditure curve shifting upward. D) the intersection of the AD and AS curves at potential output. E) a point to the right of the aggregate supply curve at potential GDP.

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) increasing; increase B) increasing; decrease C) decreasing; equal one D) decreasing; decrease E) decreasing; increase

On the graph of the consumption function, the horizontal axis measures _______, while the vertical axis measures _______. A. real GDP; real aggregate expenditure B. real consumption spending; real national income C. real disposable income; real national income D. real national income or real GDP; real consumption spending

One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that A) the economy will overshoot potential GDP and a boom will be underway. B) inflation will not be as stimulated. C) price level will rise higher than otherwise. D) the recovery may be more rapid. E) the recovery will be slower, thereby causing less disruption

Refer to Figure 24-1. Suppose the economy is currently in a short-run equilibrium with output of Y0. An appropriate fiscal policy response, to attain potential output (Y*), is A) an increase in personal income taxes. B) a reduction in government purchases of goods and services. C) an increase in corporate income taxes. D) an increase in government purchases. E) an increase in interest rates to encourage increased saving.

Refer to Figure 24-4. The positive aggregate supply shock results in a new short-run equilibrium where the price level is ________ and real GDP is ________. A) 60; 1000 B) 60; 1300 C) 90; 750 D) 90; 1200 E) 110; 1300

Refer to Figure 24-6. If the government takes no action to change the short-run macro equilibrium, then A) the AD curve will shift downward until it intersects with the AS curve at point E. B) the AD curve will shift upward until it intersects with the AS curve at point C. C) the AS curve will shift to the left until it intersects with the AD curve at point D. D) the AS curve will shift to the right until it intersects with the AD curve at point B. E) the AS curve can either shift to the right or left depending on the fiscal policy

Refer to Table 24-1. How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E? A) The size of the output gap is the same in Economies A and E, but wages are rising in A and falling in E. B) The output gap is larger in Economy A, yet wages are changing more slowly. C) The output gap is much larger in Economy E, so wages are changing at a faster rate. D) The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E. E) There is insufficient data with which to observe the adjustment asymmetry.

An inflationary output gap implies all of the following EXCEPT A) the demand for all factor services will be relatively high. B) there is a pressure for wages to increase. C) the intersection of AD and AS occurs at real GDP above potential output. D) the economy's resources are being used at less than their normal capacity. E) none of the above.

D 10)

Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, ________. In the long run, ________. 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 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 and the price level return to their original levels E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, ________. In the long run, ________. 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 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 and the price level return to their original levels E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level

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. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary

Suppose the economy enters a recession. If government policymakersdash-Congress, the president, and members of the Federal Reservedash-do not take any policy actions in response to the recession, what is the likely result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long run? i. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP and remain lower than potential GDP in the long run. ii. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iii. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iv. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run and remain lower than potential GDP in the long run. A. Statement i is correct. B. Statement iv is correct. C. Statement iii is correct. D. Statement ii is correct.

Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of A) an execution lag. B) fine tuning. C) gross tuning. D) a decision lag. E) automatic fiscal stabilizers

The Phillips curve provides a theoretical link between A) the liquidity preference and investment demand schedules. B) labour markets and foreign-exchange markets. C) the goods market and productivity. D) the goods market and the labour market. E) inflation and the demand for money.

The aggregate demand curve slopes downward for all of the following reasons except A) A higher price level decreases the real wealth of households, thereby decreasing household consumption. B) A higher price level makes U.S. exports relatively more expensive, thereby decreasing net exports. C) A higher price level increases the rate of interest, which decreases household consumption. D) A higher price level makes imports from other countries relatively more expensive, and U.S. citizens buy more imports.

The paradox of thrift does not exist in the long run because A) not everyone increases saving in the long run. B) aggregate supply has an impact on real GDP only in the short run. C) everyone increases consumption in the long run. D) changes in aggregate demand have no impact on real GDP in the long run. E) potential output is determined by changes in the price level

There has been a decrease in investment. As a result, real GDP will ____________ in the short run, and _______________ in the long run. A) increase; increase further. B) increase; decrease to its initial level. C) decrease; decrease further. D) decrease; increase to its initial level.

What would be the effect of an increase in investor optimism an increase in investor optimism on a graph showing aggregate demand and short and long-run aggregate supply that is initially in long-run equilibrium? The new short-run equilibrium will be where A. the original aggregate demand curve intersects the original short-run aggregate supply curve. B. the new aggregate demand curve intersects the original long-run aggregate supply curve. C. the new aggregate demand curve intersects the original aggregate demand curve. D. the new aggregate demand curve intersects the original short-run aggregate supply curve.

What would be the effect of an unexpected increase in the price of oil an unexpected increase in the price of oil on a graph showing aggregate demand and short-run aggregate supply that is initially in equilibrium? The new equilibrium will be where A. the original short-run aggregate supply curve interects the original aggregate demand curve. B. the new short-run aggregate supply curve interects the original short-run aggregate supply curve. C. the new short-run aggregate supply curve interects a new aggregate demand curve. D. the new short-run aggregate supply curve interects the original aggregate demand curve.

Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap? A) falling prices B) increasing investment C) declining government purchases D) rising wages E) increasing tax rates

Which of the following statements about fiscal policy is an example of "gross tuning"? A) The government uses automatic stabilizers to reduce any output gaps. B) The government increases its spending to reduce an inflationary gap. C) The government increases tax rates to decrease an inflationary gap. D) The government cuts taxes to remove a large and persistent recessionary gap. E) The government consistently uses its spending powers to hold real GDP at potential.

D 102)

The paradox of thrift does not exist in the long run because A) not everyone increases saving in the long run. B) potential output is determined by changes in the price level. C) aggregate supply has an impact on real GDP only in the short run. D) changes in aggregate demand have no impact on real GDP in the long run. E) everyone increases consumption in the long run.

D 113)

Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of A) automatic fiscal stabilizers. B) gross tuning. C) fine tuning. D) a decision lag. E) an execution lag.

D 116)

Refer to Figure 24-3. Following a positive demand shock that takes the economy from E0 to E1, the movement of the economy from E1 to E2 indicates that A) an increase in the price level causes the AD curve to shift to the left. B) an increase in the price level causes the AS curve to shift to the left. C) a demand shock can keep real GDP above potential output permanently. D) the effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted. E) the economy cannot return to potential output without government intervention.

D 76)

The study of cyclical fluctuations usually assumes, for simplicity, that there are no changes in A) the AS curve. B) either the AD or AS curves. C) either the AS curve or potential GDP. D) potential GDP. E) the intersection of the AD and AS curves.

D 78)

In the long run in the AD/AS macro model we can say that A) real GDP and the price level are determined by Y*. B) real GDP and the price level are determined by aggregate demand. C) real GDP is determined by aggregate demand and the price level by Y*. D) long-run real GDP is determined by Y* and the long-run price level by the AD curve. E) none of the above.

D 79)

Consider Figure 24-6. The government could close the existing output gap by A) decreasing the net tax rate. B) implementing an expansionary fiscal policy. C) decreasing government transfer payments. D) increasing the net tax rate. E) increasing government purchases.

D 99)

33) If all the commercial banks in the banking system collectively have $300 million in cash reserves and are satisfying their target reserve ratio of 20%, what is the amount of deposits they have? A) $0 B) $2000 million C) $600 million D) $1500 million E) $60 million

D) $1500 million

57) Suppose there are 7000 people in the labour force of an economy and the unemployment rate is 6%. If GDP per worker in this economy is $15, then GDP is equal to A) $6300. B) $12 800. C) $35 000. D) $98 700. E) $105 000.

D) $98 700.

39) Consider the equation GDP = F × (FE/F) × (GDP/FE). Which component describes the amount of output produced per unit of input employed? A) F B) FE C) (FE/F) D) (GDP/FE) E) GDP

D) (GDP/FE)

54) An economy's current GDP is $100 billion, the labour force is composed of 2.2 million people, and 2 million people are employed. What is this economy's labour utilization rate? A) 0.2 B) 0.22 C) 0.45 D) 0.91 E) 4.4

D) 0.91

81) The aggregate supply curve will shift as a result of a change in 1) the wage rate; 2) the price level; 3) technology. A) 1 only B) 2 only C) 3 only D) 1 and 3 E) 2 and 3

D) 1 and 3

46) The average rate of labour productivity growth in Canada over the past few decades has been about A) 15% per year. B) 25% per year. C) 0.2% per year. D) 1.3% per year. E) 5% per year.

D) 1.3% per year.

74) Refer to Figure 24-4. The positive aggregate supply shock results in a new short-run equilibrium where the price level is ________ and real GDP is ________. A) 60; 1000 B) 60; 1300 C) 90; 750 D) 90; 1200 E) 110; 1300

D) 90; 1200

Refer to the in the definition. If AD1 represents the current level of expenditures and Q2 is the full-employment level of GDP, the government should undertake: A) An expansionary fiscal policy that reduces aggregate demand to AD2 B) An expansionary fiscal policy that reduces aggregate demand to AD3 C) A contractionary fiscal policy that reduces aggregate demand to AD2 D) A contractionary fiscal policy that reduces aggregate demand to AD3

D) A contractionary fiscal policy that reduces aggregate demand to AD3 Feedback: If aggregate demand is given by AD1 and Q2 is the full-employment level of GDP, then the current equilibrium real GDP level of Q1 is beyond the economy's capacity to produce and will result in demand-pull inflation. The appropriate fiscal stance is contractionary. Note however, that AD should not be shifted all the way to AD2, as that would push output to Q3 with the price level stuck at P1¬. Rather, AD3 will result in full employment at Q2 with price level P1.

27) What is a bank run? A) The collapse of a non-commercial bank as a result of non-payment of loans. B) A situation where a commercial bank is holding zero reserves. C) The collapse of a commercial banks as a result of the devaluation of their assets. D) A panic situation where many depositors rush simultaneously to withdraw their deposit money in the form of cash. E) A situation where all commercial banks in the system are simultaneously short of reserves.

D) A panic situation where many depositors rush simultaneously to withdraw their deposit money in the form of cash.

The investment demand curve will shift to the left if: A) the interest rate decreases B) the interest rate increases C) expected returns on investment increase D) business taxes increase

D) Business taxes increase Feedback: By reducing the amount firms may expect to receive from investment projects, an increase in business taxes will reduce the number of investment projects whose expected real rates of return exceed any particular real rate of interest. This will shift the investment demand curve to the left—less investment spending at each real rate of interest.

2) Which of the following are the defining assumptions of the long run in macroeconomics? A) Factor prices are exogenous, and technology and factor supplies are changing. B) Factor prices adjust to output gaps, and technology and factor supplies are constant. C) Factor prices are exogenous, and technology and factor supplies are constant. D) Factor prices adjust to output gaps, and technology and factor supplies are changing. E) Factor prices are exogenous, technology and factor prices are exogenous.

D) Factor prices adjust to output gaps, and technology and factor supplies are changing.

99) Refer to Figure 23-3. Which of the following statements best describes the supply side of Economy B? A) Unit costs are rising rapidly, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level. B) Firms are producing well below their capacity and are willing to produce more only if prices rise. C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase. D) Firms are producing well below their capacity and are willing to produce more output with no increase in price. E) Firms are not able to produce more output because there is no excess capacity in the economy.

D) Firms are producing well below their capacity and are willing to produce more output with no increase in price.

17) The largest component of the assets of the Bank of Canada is A) notes and coins in circulation. B) loans to private individuals. C) Government of Canada deposits. D) Government of Canada securities. E) loans to commercial banks.

D) Government of Canada securities.

26) Consider the equation GDP = F ∙ ∙ . What is the significance of this equation? A) It allows for a more accurate accounting of actual GDP in any given year. B) The three components on the right-hand side provide a better understanding of all of the short-run changes in GDP. C) The three components on the right-hand side provide a better understanding of the long-run changes in GDP. D) It shows us how any change in real GDP can be decomposed into changes in factor supply, the utilization of factors, and productivity. E) It allows us a better understanding of how changes in factor supply, the utilization of factors, and productivity affect changes in the output gap.

D) It shows us how any change in real GDP can be decomposed into changes in factor supply, the utilization of factors, and productivity.

If consumption and disposable income are equal at a particular level of income: A) the MPC must be one at this point B) the MPS must be zero at this point C) the APC must be less than one at this point D) saving must be zero at this point

D) Saving must be zero at this point Feedback: Consumption and saving add to disposable income. If consumption and disposable income are equal, saving must be zero.

77) Suppose there is a drop in the price of an important factor input. What will be the effect on the aggregate supply curve? A) There will be movement to the left, along the AS curve. B) The AS curve will shift to the left. C) There will be movement to the right, along the AS curve. D) The AS curve will shift to the right. E) There will be no change in the AS curve.

D) The AS curve will shift to the right.

41) Refer to Table 24-1. How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E? A) The size of the output gap is the same in Economies A and E, but wages are rising in A and falling in E. B) The output gap is larger in Economy A, yet wages are changing more slowly. C) The output gap is much larger in Economy E, so wages are changing at a faster rate. D) The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E. E) There is insufficient data with which to observe the adjustment asymmetry.

D) The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E.

50) Consider the equation GDP = F × (FE/F) × (GDP/FE). If the economy enters a recessionary gap because of a negative aggregate demand shock, the equation changes in which of the following ways? A) The value of F falls as the rate of unemployment rises. B) The value of FE/F rises as the rate of unemployment rises. C) The value of GDP/FE rises as workers are laid off and equipment is used less intensively. D) The value of FE/F falls as workers are laid off and equipment is used less intensively. E) There are no short-run changes in this case.

D) The value of FE/F falls as workers are laid off and equipment is used less intensively.

45) Suppose the following conditions are present in the economy: - firms are increasing output to meet strong demand for their goods - workers are able to demand higher wages as firms try to bid workers away from other firms Which of the following statements describes the adjustment that will happen in the AD/AS macro model? A) There is an inflationary output gap; aggregate demand will continue to increase, causing the AD curve to shift to the right. The price level will rise until equilibrium is restored at . B) The economy is in equilibrium at , but wages are rising. The AS curve will shift to the left until a new equilibrium is reached at a higher price level. C) There is a recessionary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at . D) There is an inflationary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at . E) There is a recessionary output gap; aggregate demand will rise, causing the AD curve to shift to the right until equilibrium is restored at .

D) There is an inflationary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at .

Spending on the war in Iraq is essentially categorized as government purchases. How do increases in spending on the war in Iraq affect the aggregate demand curve? A) They will shift the aggregate demand curve to the left. B) They will move the economy up along a stationary aggregate demand curve. C) They will move the economy down along a stationary aggregate demand curve. D) They will shift the aggregate demand curve to the right.

D) They will shift the aggregate demand curve to the right

129) Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of A) an execution lag. B) fine tuning. C) gross tuning. D) a decision lag. E) automatic fiscal stabilizers.

D) a decision lag.

32) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is . Now, suppose the AE curve shifts to and we move to a new equilibrium level of GDP at and point F on . A possible cause of this change in equilibrium is A) an exogenous rise in the price level. B) an exogenous fall in the price level. C) an increase in autonomous consumption. D) a decrease in desired net exports. E) an increase in government purchases.

D) a decrease in desired net exports.

27) Refer to Figure 24-2. If the economy is currently in a short-run equilibrium at , the economy is experiencing A) potential output growth. B) a long-run equilibrium. C) an excess supply of labour. D) an inflationary output gap. E) a recessionary output gap.

D) an inflationary output gap.

The shift from AD1 to AD2 (Where AD2 is below AD2...see graphic in the definition) may have been caused by: A) a reduction in the price level B) a reduction in aggregate supply C) a decline in personal taxes D) a decrease in government spending

D) a decrease in government spending Feedback: A reduction in aggregate demand may be caused by any reduction in spending, whether consumption, net exports, planned investment, or government spending.

71) In the basic AD/AS macro model, which of the following events would cause stagflation? A) a large decrease in wages B) a large increase in business confidence C) a large increase in the net tax rate D) a large increase in the price of raw materials E) a large increase in labour productivity

D) a large increase in the price of raw materials

Refer to the table in the definition. The changes in the budget conditions between 2008 and 2009 best reflect: A) demand-pull inflation B) a cut in government spending C) a tax increase D) an expansionary fiscal policy

D) an expansionary fiscal policy Feedback: Both the actual and cyclically-adjusted budget deficits increased, suggesting that either government spending increased, taxes were cut, or both in an attempt to stimulate the economy.

66) Refer to Figure 24-3. Which of the following events could have shifted the AD curve from to ? A) an increase in net exports B) an increase in government purchases C) an increase in desired investment D) an increase in autonomous household saving E) an increase in autonomous consumption

D) an increase in autonomous household saving

96) Refer to Figure 24-1. Suppose the economy is currently in a short-run equilibrium with output of Y0. An appropriate fiscal policy response, to attain potential output (Y*), is A) an increase in personal income taxes. B) a reduction in government purchases of goods and services. C) an increase in corporate income taxes. D) an increase in government purchases. E) an increase in interest rates to encourage increased saving.

D) an increase in government purchases.

117) Consider the AD/AS macro model. Suppose there is an increase in aggregate demand and, simultaneously, a decrease in aggregate supply. The result will be a A) rise in real GDP but price level changes will be indeterminate. B) rise in real GDP and a rise in the price level. C) rise in real GDP and a fall in the price level. D) an indeterminate change in real GDP and a rise in the price level. E) an indeterminate change in real GDP and a fall in the price level.

D) an indeterminate change in real GDP and a rise in the price level.

40) Which of the following examples constitutes a new deposit to the Canadian commercial banking system? A) an individual transfers money from ShipShape Credit Union to Scotiabank B) the Bank of Canada buys foreign currency from abroad C) the Bank of Canada sells government securities to an individual or a firm D) an individual immigrates to Canada and deposits money from abroad E) an individual puts cash in a safety-deposit box

D) an individual immigrates to Canada and deposits money from abroad

107) Consider Figure 24-7. At the initial short-run equilibrium, there is ________ output gap of ________. This gap could be closed by a ________. A) a recessionary; 100; fiscal contraction B) a recessionary; 200; fiscal expansion C) an inflationary; 100; fiscal contraction D) an inflationary; 200; fiscal contraction E) an inflationary; 350; fiscal expansion

D) an inflationary; 200; fiscal contraction

14) The largest element of the Canadian money supply today is A) gold. B) coins. C) paper money. D) bank deposits. E) the debt of the federal government.

D) bank deposits.

The aggregate demand curve slopes downward to the right: A) Because a lower domestic price level reduces net exports B) Because of the income and substitution effects of lower prices C) At low prices, but not at high prices D) Because a lower price level reduces the demand for money, which lowers the interest rate and increases desired investment

D) because a lower price level reduces the demand for money, which lowers the interest rate and increases desired investment Feedback: This is known as the "interest rate effect." At a lower price level, fewer dollars are needed to carry out transactions. With a fixed money supply, the reduced demand for money puts downward pressure on the interest rate, ultimately increasing investment expenditures.

125) The paradox of thrift does not exist in the long run because A) not everyone increases saving in the long run. B) aggregate supply has an impact on real GDP only in the short run. C) everyone increases consumption in the long run. D) changes in aggregate demand have no impact on real GDP in the long run. E) potential output is determined by changes in the price level.

D) changes in aggregate demand have no impact on real GDP in the long run.

92) Consider the AD/AS macro model. The main source of increases in material living standards over the long term is the A) maintenance of a continuous inflationary gap. B) continual avoidance of recessionary gaps. C) continuous outward shift of aggregate demand. D) continual increase in potential national income. E) positive slope of the aggregate supply curve.

D) continual increase in potential national income.

A leftward shift of the short-run aggregate supply curve would illustrate: A) demand-pull inflation B) an inflationary gap C) a positive GDP gap D) cost-push inflation

D) cost-push inflation Feedback: Cost-push inflation is caused by an increase in production costs, such as that caused by an increase in energy prices. The higher production costs result in a lower output supplied at any given price level. This leftward shift of the aggregate supply curve results in lower equilibrium output and a higher equilibrium price level. The resulting inflation is known as cost-push inflation.

3) Other things being equal, an exogenous rise in the domestic price level will A) have no effect on the level of desired real expenditure. B) increase the level of desired real expenditure. C) decrease desired real expenditure only if it is accompanied by a change in the current income of households. D) decrease desired real expenditure because it will affect the real value of wealth. E) cause net exports to rise.

D) decrease desired real expenditure because it will affect the real value of wealth. E) cause net exports to rise.

84) Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will A) leave real output unaffected and increase the price level. B) decrease real output and decrease the price level. C) decrease real output and leave the price level unchanged. D) decrease real output and increase the price level. E) increase real output and decrease the price level.

D) decrease real output and increase the price level.

117) 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) increasing; increase B) increasing; decrease C) decreasing; equal one D) decreasing; decrease E) decreasing; increase

D) decreasing; decrease

4) Which of the following is a defining assumption of the AD/AS macro model in the short run? A) factor supplies are assumed to be flexible B) technology used in production is endogenous and variable C) the level of potential output fluctuates with the price level D) factor prices are assumed to be exogenous E) firms cannot operate near their normal capacity

D) factor prices are assumed to be exogenous

5) 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) factor supplies are assumed to be varying B) technology used in production is endogenous C) the level of potential output fluctuates with the price level D) factor prices are assumed to respond to output gaps E) firms cannot operate near their normal capacity

D) factor prices are assumed to respond to output gaps

84) Consider the basic AD/AS model. If firms' unit costs remained constant as firms increased their output levels, this would lead to a A) vertical AD curve. B) horizontal AD curve. C) vertical AS curve. D) horizontal AS curve. E) horizontal AE curve.

D) horizontal AS curve.

94) Consider the basic AD/AS model. Real GDP is demand determined along the A) upward-sloping portion of the AS curve. B) downward-sloping portion of the AS curve. C) vertical portion of the AS curve. D) horizontal portion of the AS curve. E) None of the above - real GDP cannot be demand determined.

D) horizontal portion of the AS curve.

112) Which of the following represents a positive aggregate supply shock? A) an outbreak of war among oil-exporting countries B) a general labour strike across the country C) bad weather which cripples telecommunications for one month D) improved computer literacy for the typical worker E) an increase in exports

D) improved computer literacy for the typical worker

82) Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP A) and the price level are determined by aggregate demand. B) and the price level are determined by "long-run aggregate supply." C) is determined by aggregate demand and the price level by potential output. D) is determined by potential output and the price level by aggregate demand. E) is determined by AD and the price level is determined by the AS curve.

D) is determined by potential output and the price level by aggregate demand.

10) Fiat money has value because it A) has intrinsic value equal to its face value. B) is only fractionally backed by gold. C) can be manufactured at will by the issuing government. D) is generally accepted. E) is fully backed by gold at a fixed ratio.

D) is generally accepted.

55) The economy's aggregate supply (AS) curve shows the relationship between the A) equilibrium real GDP and marginal cost. B) equilibrium real GDP and desired consumption. C) price level and the marginal propensity to consume (MPC). D) price level and the total output that firms wish to produce and sell, with technology and input prices held constant. E) price level and the total output that firms wish to produce and sell, as technology and input prices vary.

D) price level and the total output that firms wish to produce and sell, with technology and input prices held constant.

13) An inflationary output gap is characterized by A) falling prices. B) constant prices. C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. E) real GDP falling below potential output.

D) real GDP exceeding potential output.

63) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, ________. In the long run, ________. 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 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 and the price level return to their original levels E) real GDP falls

D) real GDP rises and the price level falls; real GDP and the price level return to their original levels

An increase in the price level will: A) increase net exports B) reduce the value of household debt and increase investment C) increase production costs and reduce short-run aggregate supply D) reduce the purchasing power of household wealth and reduce consumption

D) reduce the purchasing power of household wealth and reduce consumption Feedback: A given amount of dollar-denominated assets, such as savings accounts, will purchase fewer goods and services if the price level rises. This drop in household wealth causes consumers to cut back on their spending in order to replenish their real savings.

9) Consider a simple macro-model with demand-determined output. An exogenous increase in the domestic price level will ________ the real value of the private sector's wealth, which leads to ________ in autonomous consumption and thus ________ shift in the AE function. A) increase; a decrease; a downward B) increase; an increase; a downward C) increase; an increase; an upward D) reduce; a decrease; a downward E) reduce; an increase; an upward

D) reduce; a decrease; a downward

15) Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap? A) falling prices B) increasing investment C) declining government purchases D) rising wages E) increasing tax rates

D) rising wages

35) Consider a simple macro model with a given price level and demand-determined output. An exogenous change in the price level causes a A) shift in both the AE and AD curves. B) movement along the AE curve and a shift in the AD curve. C) movement along both the AE and AD curves. D) shift in the AE curve and a movement along the AD curve. E) movement along AE but does not affect the AD curve.

D) shift in the AE curve and a movement along the AD curve.

111) 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 A) shift the AD curve to the left by decreasing tax rates. B) increase potential GDP. C) shift the AS curve to the right through large increases in government spending. D) shift the AD curve to the right through large increases in government spending. E) shift the AS curve to the left by increasing wage rates.

D) shift the AD curve to the right through large increases in government spending.

65) Consider the basic AD/AS model. If there is a decrease in the cost of non-labour inputs to production, the result will be to A) shift the AD curve to the left. B) shift the AD curve to the right. C) shift the AS curve to the left. D) shift the AS curve to the right. E) cause a movement to the left along the AS curve.

D) shift the AS curve to the right.

28) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0. Other things being equal, exogenous changes in the price level will cause A) movement along the aggregate expenditure curve and shifts of the AD curve. B) movement along the aggregate expenditure curve and movement along the aggregate demand curve . C) shifts of the AE curve and shifts of the AD curve. D) shifts of the AE curve and movement along the aggregate demand curve . E) no change in either the AE curve or the AD curve.

D) shifts of the AE curve and movement along the aggregate demand curve AD0

If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift:

Leftward by $40 billion at each price level.

31) GDP can be represented by the equation: GDP = F × (Fe/F) × (GDP/Fe). This equation tells us that real aggregate output can be expressed as factor A) price times the utilization rate times GDP per capita. B) supply times the equilibrium factor price times GDP per capita. C) supply times equilibrium factor price times factor productivity. D) supply times the factor-utilization rate times factor productivity. E) utilization times equilibrium factor price times factor productivity.

D) supply times the factor-utilization rate times factor productivity.

49) Consider the AD/AS model. Suppose there is an increase in autonomous desired consumption at a given price level. The result is A) the AE curve shifts downward and the AD curve shifts to the left. B) the AE curve shifts downward and the AD curve shifts to the right. C) the AE curve shifts upward and the AD curve shifts to the left. D) the AE curve shifts upward and the AD curve shifts to the right. E) no change in either the AE or the AD curve.

D) the AE curve shifts upward and the AD curve shifts to the right.

121) Consider the following news headline: "Information technology costs for Canadian firms continue to drop." Choose the statement below that best describes the likely macroeconomic effect. A) the AD curve shifts to the right; the price level rises and real GDP rises B) the AD curve shifts to the left; the price level falls and real GDP falls C) the AS curve shifts to the left; the price level rises and real GDP falls D) the AS curve shifts to the right; the price level falls and real GDP rises E) the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises

D) the AS curve shifts to the right; the price level falls and real GDP rises

114) An important automatic fiscal stabilizer in Canada is A) the exchange rate. B) the marginal propensity to consume. C) the marginal propensity to import. D) the income-tax system. E) government purchases of goods and services.

D) the income-tax system.

3) In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of A) the short run. B) the adjustment process. C) the national accounts model. D) the long run.

D) the long run.

100) One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that A) the economy will overshoot potential GDP and a boom will be underway. B) inflation will not be as stimulated. C) price level will rise higher than otherwise. D) the recovery may be more rapid. E) the recovery will be slower, thereby causing less disruption.

D) the recovery may be more rapid.

8) Which of the following statements describes a possible self-fulfilling prophesy in the short run involving households' behaviour? A belief of an impending recession leads households A) to decrease their desired saving. B) to increase their registration in post-secondary institutions to reduce their risk of being unemployed. C) to increase their desired consumption. D) to increase their desired saving. E) to increase the autonomous portion of their desired consumption.

D) to increase their desired saving.

18) Other things being equal, as the price level falls exogenously, the aggregate expenditure (AE) function shifts A) down and the economy will move upward along the AD curve. B) down and the economy will move downward along the AD curve. C) upward and the economy moves upward along the AD curve. D) upward and the economy moves downward along the AD curve. E) to the left, as does the AD curve.

D) upward and the economy moves downward along the AD curve.

128) If the economy's AS curve is vertical, the multiplier in the AD/AS model is A) infinitely large. B) equal to the simple multiplier. C) smaller than the simple multiplier. D) zero. E) negative.

D) zero.

The aggregate demand curve is:

Downsloping because of the interest-rate, real-balances, and foreign purchases effects.

) Refer to Figure 24-4. Following the positive AS shock shown in the diagram, the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 60; 1000 B) 60; 1300 C) 90; 750 D) 90; 1200 E) 110; 1000

103) Compared to Neoclassical growth theory, newer "endogenous growth" theories are more ________ regarding the prospect of continuous increases in the standard of living, due in part to its emphasis on the ________. A) pessimistic; endogeneity of technological change B) pessimistic; increasing birth rates as a result of higher real income per capita C) pessimistic; accelerating depletion of natural resources D) optimistic; accelerating depletion of natural resources E) optimistic; endogeneity of technological change

14) The theory of economic growth concentrates on the ________ over the long run, not on ________. A) factor utilization rates; growth of real GDP B) factor utilization rates; growth of the supplies of factors C) growth of real GDP; growth of potential GDP D) growth of investment in capital goods; short- run fluctuations of investment E) growth of potential output; fluctuations of output around potential

21) One of the benefits of long- run economic growth is A) growth in nominal GDP greater than real GDP. B) decreased productive capacity. C) decreased current saving and increased current consumption. D) increased future interest rates. E) a greater ability to reduce inequality.

22) One of the costs of long- run economic growth is A) declining future living standards. B) that current consumption must be sacrificed to increase investment in capital goods. C) current increases in investment may only generate greater consumption in the distant future. D) lower interest rates. E) both B and C are correct.

29) An important social cost of economic growth is A) the sacrifice of current consumption required for a higher level of future consumption. B) the associated inflation. C) the associated frictional unemployment. D) the increasing inequality of income. E) the destruction of jobs due to labour skills of certain workers becoming obsolete.

30) If government policies are to be successful in enhancing a country's long- run growth rate, they likely work through generating A) lower levels of current consumption. B) greater private investment in physical capital. C) an upward shift in the AS curve. D) an increase in current consumption and a reduction in saving. E) both A and B are correct.

32) For a given level of national income, an increase in private consumption or government purchases will cause national saving to A) increase. B) grow at a constant rate. C) exceed investment. D) remain unchanged from its initial level. E) decrease.

33) An increase in the government budget surplus, everything else constant, will cause a(n) A) equal decrease in private investment. B) decrease in national saving. C) decrease in the growth rate. D) equal increase in private consumption. E) increase in national saving.

42) Consider the market for loanable funds in the long run. The national saving curve is upward sloping because an increase in the real interest rate A) leads households to increase their current consumption. B) decreases the supply of public saving. C) leads to an increase in investment demand. D) decreases the supply of private saving. E) leads households to reduce their current consumption.

43) Consider the market for loanable funds in the long run. The investment demand curve is downward sloping because A) an increase in the real interest rate reflects a lower opportunity cost to firms of using loanable funds. B) an increase in the real interest rate leads to an increase in investment demand. C) all components of desired investment are positively related to the real interest rate. D) a decrease in the real interest rate reflects a higher opportunity cost to firms of using loanable funds. E) all components of desired investment are negatively related to the real interest rate.

6) A common measure of a country's level of productivity is A) the average efficiency of capital. B) per capita GDP. C) the capital- output ratio. D) output per capita. E) output per unit of labour input.

62) In the Neoclassical growth model, decreases in the population, other things being equal, would eventually result in A) decreasing GDP and falling living standards. B) increasing GDP and falling living standards. C) increasing savings and increasing living standards. D) increasing GDP and increasing living standards. E) decreasing GDP and increasing living standards.

71) The Neoclassical theory of economic growth led economics to be referred to as the "dismal science" because of its emphasis on A) growing inequality of income. B) increasing damage to the environment. C) the immoral behaviour of firms. D) increasing government intervention in the economy. E) diminishing returns in production.

73) In the Neoclassical growth model, the law of diminishing marginal returns implies that capital accumulation leads to ever A) larger increases in GDP but smaller decreases in living standards. B) larger levels of unemployment but small increases in the standard of living. C) larger levels of unemployment but larger increases in the standard of living. D) larger decreases in GDP and large decreases in living standards. E) smaller increases in GDP and living standards.

74) A person who returns to school to improve her computer skills is an example of an increase in A) the labour force. B) technological capital. C) financial capital. D) physical capital. E) human capital.

79) Balanced growth of labour and capital in the Neoclassical growth model A) cannot explain rising material living standards. B) will not increase the level of per capita GDP. C) will result in a constant level of GDP. D) is a natural outcome of long- run equilibrium. E) both A and B are correct.

91) An aggregate production function exhibits increasing returns to capital when A) each additional unit of capital increases the number of jobs by more than one percent. B) a one percent increase in capital produces no change in output. C) no change in capital produces a one percent increase in output. D) a one percent decrease in capital produces an increase in the marginal product of capital. E) each additional unit of capital has a higher marginal product than the previous unit.

According to the Neoclassical growth model, which of the following scenarios explains improvements in long-run material living standards? C) an increase in population D) an equal increase in both population and the stock of capital E) an increase in the stock of physical capital

According to the Neoclassical growth theory, sustained rising material living standards can only be explained by C) growth in human capital. D) balanced growth of labour and capital. E) exogenous technological change.

An example of ʺembodied technical changeʺ is B) the strengthening of social infrastructure, such as delivery of basic health-care services. C) the development of better intellectual property law. D) better methods of inventory control. E) the replacement of old computer chips with new ones designed for faster processing.

An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________. A) rises to an unsustainable level; real GDP is reduced B) is crowded out; corporate tax revenue is reduced C) increases; aggregate demand increases D) increases; net exports increases E) is crowded out; potential output is reduced

An important asymmetry in the behaviour of aggregate supply is the A) changing slope of the aggregate demand curve. B) difference between actual and potential output. C) different relative sizes of inflationary versus recessionary gaps. D) economy's path of potential output as a result of labour force growth. E) different speeds at which factor prices adjust to positive and negative output gaps.

Automatic fiscal stabilizers are most helpful in A) making discretionary fiscal policy effective. B) removing persistent output gaps. C) promoting economic growth. D) eliminating price fluctuations in the economy. E) reducing the intensity of business cycles.

Consider Figure 24-5. The government could close the existing output gap by A) decreasing government purchases. B) implementing a contractionary fiscal policy. C) increasing the net tax rate. D) decreasing government transfer payments. E) decreasing the net tax rate.

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 = 0.3, m = 0.2 C) MPC = 0.7, t = 0.1, m = 0.4 D) MPC = 0.9, t = 0.2, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2

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 ________. A) increase slightly; significantly increase B) increase slightly; significantly decrease C) increase sharply; increase slightly D) fall sharply; will not change. E) fall sharply; decrease slightly.

Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output will ________. A) decrease; decrease; decrease further; decrease further B) decrease; decrease; decrease further; be restored to potential output C) increase; decrease; increase further; increase further D) increase; decrease; increase further; be restored to potential output E) increase; increase; increase further; be restored to potential output

Consider the simplest macro model with demand-determined output. Other things being equal, the ________ the value of the simple multiplier, the ________ stable is real GDP in response to shocks to autonomous spending. A) larger; more B) larger; less C) smaller; more D) smaller; less E) both B and C are correct

For a given level of national income, a decrease in government tax revenues will cause: C) an increase in national saving. D) an increase in the growth rate. E) a decrease in national saving.

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 ________. A) a higher price level; unemployment B) increased potential output; a higher price level C) a higher price level; lower real GDP D) increased real GDP; higher economic growth E) increased economic activity; lower economic growth

Real GDP is not a good measure of average material living standards because C) it excludes the role of imported goods. D) it is biased by the changes in the inflation rate. E) it does not take into account the size of the population.

Refer to Figure 24-1. If the economy is currently producing output of Y0 and the government initiates an expansionary fiscal policy adequate to close the output gap, the result will likely be A) the vertical line at Y* will shift to the left, intersecting the AS and AD curves at Y0. B) no change in either price level or output, since expansionary fiscal policy is ineffective. C) that the AS curve will shift to the right until point A is reached. D) that the AS curve and the AD curve will shift left simultaneously. E) that the AD curve will shift to the right until point B is reached

Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. A contractionary fiscal policy would restore the economy to potential output (Y*) by shifting the A) AS curve to the left to intersect AD at C. B) AS curve to the right. C) potential GDP and the AS curve to the left. D) AD curve to the right. E) AD to the left to intersect AS at point A.

Refer to Figure 24-4. After the positive aggregate supply shock shown in the diagram, which of the following would shift the AS curve leftward during the economy's adjustment process? A) an increase in factor supplies B) an increase in the unemployment rate C) a decrease in wages and other factor prices D) an increase in labour productivity E) an increase in wages and other 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 the Canadian-dollar price of all imported raw materials. In the short run, ________. In the long run, ________. 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 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 falls and the price level rises; real GDP and the price level return to their original levels

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 A) this economy is already at its long-run equilibrium. B) this economy is suffering from the paradox of thrift. C) the impact of the policy is dampened by the automatic fiscal stabilizers. D) the government has little credibility. E) the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their "lifetime" income.

Suppose the economy has a high level of unemployment and a low level of aggregate output. Which of the following policies could the government implement to alleviate these conditions? A) an expansionary fiscal policy that increases tax rates B) a contractionary fiscal policy that increases government purchases C) automatic fiscal stabilizers D) a contractionary fiscal policy that increases tax rates E) an expansionary fiscal policy that increases government purchases

38) Refer to Table 24-1. Which of the economies are experiencing an inflationary gap? A) Economies A and B B) Economies B and C C) Economies C and D D) Economies D and E E) none of the economies

E) none of the economies

Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of A) a decision lag. B) fine tuning. C) gross tuning. D) automatic fiscal stabilizers. E) an execution lag.

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) the effect of economic shocks on government revenues becomes more volatile, while the economy becomes more stable. B) further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer. C) private investment is crowded out, which may reduce the future growth rate of potential output. D) the effect of the automatic stabilizer is reduced and the economy will be more unstable. E) —both C and D are correct.

The ________ associated with fiscal policy make(s)________ tuning difficult to implement successfully. A) execution lag; gross B) execution lag; fine C) decision lag; gross D) decision lag; fine E) execution and decision lags; fine

The curve that is sometimes called the "long-run aggregate supply curve" (vertical Y*) relates the aggregate price level to real GDP A) in the short run. B) when wages are in adjustment but prices are unstable. C) when national income is at less than potential income. D) when technology is allowed to change. E) after factor prices have fully adjusted to eliminate output gaps.

The wage-adjustment process is asymmetrical because A) factor prices fluctuate more frequently than goods prices. B) goods prices rise more quickly than factor prices. C) employers delay wage increases in a boom but lay off workers quickly during a slump. D) taxes rise quickly in a boom but do not fall during a slump. E) wages rise quickly in a boom but fall slowly during a slump.

Which of the following statements about output gaps is true? A) When actual GDP is below potential GDP, there is upward pressure on wages. B) When actual GDP is below potential GDP, there is upward pressure on output prices. C) When actual GDP is above potential GDP, there is downward pressure on wages. D) When actual GDP is above potential GDP, there is downward pressure on output prices. E) When actual GDP is above potential GDP, there is upward pressure on wages

Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of A) automatic fiscal stabilizers. B) a decision lag. C) fine tuning. D) gross tuning. E) an execution lag.

E 117)

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 A) the government has little credibility. B) the impact of the policy is dampened by the automatic fiscal stabilizers. C) this economy is suffering from the paradox of thrift. D) this economy is already at its long-run equilibrium. E) the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their "lifetime" income.

E 121)

12) Which of the following is the best example of the acquisition of human capital? A) A worker communicates more quickly and accurately with suppliers because of upgrades to communications software. B) A government- sponsored program increases the amount of investment available per worker. C) A worker receives new machinery enabling him/her to do the amount of work that was formerly done by two workers. D) A computer chip manufacturer introduces a faster processor for micro- computing. E) A worker takes a training course that increases his/her productivity.

E 13) The four fundamental determinants of economic growth include all of the following EXCEPT: A) growth in financial capital B) technological improvement C) growth in human capital D) growth in the labour force E) growth in physical capital Answer: A

The Phillips curve describes the relationship between A) aggregate expenditure and aggregate demand. B) the money supply and interest rates. C) unemployment and the rate of change of wages. D) the output gap and the rate of change of wages. E) both C and D are correct.

E 28)

63) In the Neoclassical growth model, increases in the stock of physical capital, other things being equal, will lead to A) increasing GDP and falling living standards. B) decreasing GDP and falling living standards. C) increasing GDP and decreased national wealth. D) decreasing GDP and increasing living standards. E) increasing GDP and increasing living standards.

E 64) In the Neoclassical growth model, if capital and labour grow at the same rate, we will observe A) rising GDP but falling living standards. B) increasing living standards but only for workers using labour- intensive production. C) increasing living standards but only for workers using capital- intensive production. D) rising GDP but no change in living standards. E) rising GDP and increasing living standards. Answer: D

One reason many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy is that A) households may save the extra income from a tax cut rather than spend it. B) private investment is crowded out by government's borrowing. C) there are long and uncertain time lags in implementing fiscal policy. D) all of the above E) both A and C are correct

E 90)

Consider Figure 24-5. If the government takes no action to change the short-run macro equilibrium, then A) the AD curve will shift downward until it intersects with the AS curve at point E. B) the AS curve can either shift to the right or left depending on the fiscal policy. C) the AD curve will shift upward until it intersects with the AS curve at point C. D) the AS curve will shift to the left until it intersects with the AD curve at point D. E) the AS curve will shift to the right until it intersects with the AD curve at point B.

E 95)

127) 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) government deficits tend to reduce the value of the multiplier; 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

E) 1 and 3

18) At any given time, the level of potential GDP depends on 1) the available supply of factors of production; 2) normal rates of utilization for labour and capital; 3) the productivity of factors of production. A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1, 2, and 3

E) 1, 2, and 3

65) Fiscal and monetary policies typically affect the short-run level of GDP because they cause shifts in the ________ but they will not generally have any long-run effects on real GDP unless they affect ________. A) AS curve; factor-utilization rates B) AS curve; factor supplies or factor productivity C) AD curve; factor-utilization rates D) AD curve; the unemployment rate E) AD curve; the level of potential output

E) AD curve; the level of potential output

99) Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. A contractionary fiscal policy would restore the economy to potential output (Y*) by shifting the A) AS curve to the left to intersect AD at C. B) AS curve to the right. C) potential GDP and the AS curve to the left. D) AD curve to the right. E) AD to the left to intersect AS at point A.

E) AD to the left to intersect AS at point A.

18) The largest component of the liabilities of the Bank of Canada is A) deposits of commercial banks and other financial institutions. B) loans to private individuals. C) Government of Canada securities. D) Government of Canada deposits. E) Canadian dollars in circulation.

E) Canadian dollars in circulation.

134) Refer to Figure 23-3. Which of the two economies, A or B, will experience more volatile fluctuations in national income in response to aggregate demand shocks? A) Economies A and B will experience similar volatility because the slopes of the AD curves are the same. B) Economy A because the large fluctuations in the price level lead to large fluctuations in national income. C) Economy A because the multiplier is much larger than in Economy B. D) Economy B because the multiplier is much smaller than in Economy A. E) Economy B because output is purely demand determined, and there is no offsetting effect from a price level increase.

E) Economy B because output is purely demand determined, and there is no offsetting effect

123) Consider the following two headlines appearing in the same day: "Federal government announces major new infrastructure investments" and "New technology drives down transport costs." Choose the statement below that best describes the likely macroeconomic effects. A) The AS curve shifts to the left; the price level rises and real GDP falls. B) The AS curve shifts to the right; the price level falls and real GDP rises. C) The AD curve shifts to the left; the price level falls and real GDP falls. D) The AD curve shifts to the right; the price level rises and real GDP rises. E) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises.

E) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises.

30) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is . Now, suppose there is an increase in desired investment and no change in the price level. Which of the following statements describes the likely macroeconomic effects? A) The AE curve shifts up to , the AD curve shifts to , and a new equilibrium is established at point C, with real GDP at . B) The AE curve shifts down to , the AD curve shifts to , and a new equilibrium is established at point F, with real GDP at . C) The AE curve shifts to , the AD curve shifts to , and a new equilibrium is established at point E, with real GDP at . D) The AE curve shifts to , the AD curve shifts to , and a new equilibrium is established at point F, with real GDP at . E) The AE curve shifts to , the AD curve shifts to , and a new equilibrium is established at point E, with real GDP at .

E) The AE curve shifts to , the AD curve shifts to , and a new equilibrium is established at point E, with real GDP at .

28) Why is the possibility of a bank run extremely small in Canada today? A) The Office of the Superintendent of Financial Institutions provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic. B) Industry Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. C) The Department of Finance guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. D) The Bank of Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. E) The Canadian Deposit Insurance Corporation provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic.

E) The Canadian Deposit Insurance Corporation provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic.

12) Consider a simple macro model with demand-determined output. An exogenous change in the price level shifts the AE curve because the change affects desired ________ and desired ________. A) consumption; investment B) consumption; imports C) investment; consumption D) government purchases; net exports E) consumption; net exports

E) consumption; net exports

13) Which of the following statements about deposit money is true? A) Deposit money can legally be created solely by the Bank of Canada. B) Deposit money is the paper money or coinage that is decreed by the government to be accepted as legal tender. C) The quantity of fiat money in the Canadian economy far exceeds the quantity of deposit money. D) Deposit money is recorded as an asset on the balance sheet of a commercial bank. E) The quantity of deposit money in the Canadian economy far exceeds the quantity of fiat money in circulation.

E) The quantity of deposit money in the Canadian economy far exceeds the quantity of fiat money in circulation.

33) Which of the following statements about output gaps is true? A) When actual GDP is below potential GDP, there is upward pressure on wages. B) When actual GDP is below potential GDP, there is upward pressure on output prices. C) When actual GDP is above potential GDP, there is downward pressure on wages. D) When actual GDP is above potential GDP, there is downward pressure on output prices. E) When actual GDP is above potential GDP, there is upward pressure on wages.

E) When actual GDP is above potential GDP, there is upward pressure on wages.

96) If the economy's AS curve is upward sloping, a negative shock to aggregate demand will result in A) an increase in prices and no change in real GDP. B) a decrease in prices but no change in real GDP. C) an increase in real GDP and no change in prices. D) an increase in both real GDP and prices. E) a decrease in both real GDP and prices.

E) a decrease in both real GDP and prices.

16) Which of the following events would cause the AE function to shift upwards in a parallel way? A) an increase in the MPC B) a decrease in the net tax rate C) a decrease in the business confidence of firms D) a decrease in foreign income E) a decrease in the aggregate price level

E) a decrease in the aggregate price level

125) Consider Figure 23-4. Initially the economy is in equilibrium at point A. An unexpected shock then shifts both the AD and the AS curves as shown and results in a new equilibrium represented by point B. Which of the following events could cause such a shock? A) an increase in the net tax rate B) a decrease in firms' desired investment expenditures C) an increase in factor prices D) a decrease in labour productivity E) a decrease in the world price of oil

E) a decrease in the world price of oil

87) Refer to Figure 23-2. Which of the following events could cause the upward shift of the AS curve? A) improvements in communications technology B) a decrease in business confidence that reduces desired investment C) a recession in the U.S. that reduces our net exports D) a major discovery of new oil reserves that will increase the world supply E) a massive drought that reduces agricultural output

E) a massive drought that reduces agricultural output

6) Which of the following is a defining assumption of the AD/AS macro model in the long run? A) factor supplies are assumed to be fixed B) technology used in production is constant C) the level of potential output is constant D) factor prices are assumed to be fixed

E) changes in real GDP are determined by the changes in potential output

78) The curve that is sometimes called the "long-run aggregate supply curve" (vertical Y*) relates the aggregate price level to real GDP A) in the short run. B) when wages are in adjustment but prices are unstable. C) when national income is at less than potential income. D) when technology is allowed to change. E) after factor prices have fully adjusted to eliminate output gaps.

E) after factor prices have fully adjusted to eliminate output gaps.

132) Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of A) a decision lag. B) fine tuning. C) gross tuning. D) automatic fiscal stabilizers. E) an execution lag.

E) an execution lag.

103) Suppose the economy has a high level of unemployment and a low level of aggregate output. Which of the following policies could the government implement to alleviate these conditions? A) an expansionary fiscal policy that increases tax rates B) a contractionary fiscal policy that increases government purchases C) automatic fiscal stabilizers D) a contractionary fiscal policy that increases tax rates E) an expansionary fiscal policy that increases government purchases

E) an expansionary fiscal policy that increases government purchases

68) The economy's AS curve will shift upward in the short run if there is A) an improvement in technology. B) a decrease in the cost of capital. C) an increase in the price level. D) a decrease in nominal wages. E) an increase in nominal wages.

E) an increase in nominal wages.

97) Which of the following will cause a negative aggregate demand shock? A) an increase in the price of raw materials B) a decrease in the domestic price level C) an increase in the domestic price level D) an increase in government expenditures E) an increase in tax rates

E) an increase in tax rates

25) Which of the following would likely cause a downward shift in the AE curve and a movement upward along the AD curve? A) a decrease in the business confidence of firms B) a reduction in government purchases C) a decrease in the MPC D) a decrease in the price level E) an increase in the price level

E) an increase in the price level

45) Consider an economy in long-run equilibrium where factor supply is 2.5 million units, the factor utilization rate is 0.85 and a simple measure of productivity (GDP per factor employed) is $200. Now suppose that, other things being equal, the productivity measure rises to $210. The effect of this change will be A) an inflationary gap caused by simultaneous rightward shifts of the aggregate demand and aggregate supply curves. B) a rightward shift of the aggregate supply curve, and an adjustment back to Y*. C) a rightward shift of the aggregate demand curve due to the increased wealth of the private sector. D) an increase in this economy's potential output, and an adjustment back to its original level after factor prices have adjusted. E) an increase in this economy's potential output in the long run.

E) an increase in this economy's potential output in the long run.

75) Refer to Figure 24-4. After the positive aggregate supply shock shown in the diagram, which of the following would shift the AS curve leftward during the economy's adjustment process? A) an increase in factor supplies B) an increase in the unemployment rate C) a decrease in wages and other factor prices D) an increase in labour productivity E) an increase in wages and other factor prices

E) an increase in wages and other factor prices

118) Consider the AD/AS model. Suppose there is a decrease in aggregate demand and, simultaneously, an increase in aggregate supply. The result will be a A) rise in real GDP but price level changes will be indeterminate. B) rise in real GDP and a rise in the price level. C) rise in real GDP and a fall in the price level. D) an indeterminate change in real GDP and a rise in the price level. E) an indeterminate change in real GDP and a fall in the price level.

E) an indeterminate change in real GDP and a fall in the price level.

31) ʺExcess reservesʺ for a commercial bank refer to A) reserves (cash or deposits with the Bank of Canada) that the Bank of Canada requires the bank to hold. B) any surplus in the bankʹs supply of gold. C) excess demand for money from that bank. D) any surplus of chequable deposits. E) any reserves (cash or deposits with the Bank of Canada) that the bank holds over and above its requred reserves.

E) any reserves (cash or deposits with the Bank of Canada) that the bank holds over and above its requred reserves.

39) A leftward shift in the aggregate demand (AD) curve could result from a rise in A) autonomous exports. B) autonomous government purchases. C) government transfer payments to households. D) desired investment. E) autonomous desired savings.

E) autonomous desired savings.

33) Consider the equation: GDP = L × [E/L] × [GDP/E] where L is the supply of labour and E is the level of employment. In this equation, the term [E/L] represents the A) productivity of labour. B) the ratio of the population unemployed. C) labour employment rate. D) number of people employed. E) capital-utilization rate.

E) capital-utilization rate.

62) When discussing the banking system, a cash drain of 5% means that A) depositors wish to hold 95% of the value of their deposits in cash. B) 5% of an initial new deposit to the banking system is paid in banking fees and is therefore not available for the creation of new deposit money. C) 95% of an initial new deposit is maintained as cash reserves by the commercial bank. D) 5% of an initial new deposit to the banking system is payable as a financial services tax. E) depositors wish to hold 5% of the value of their deposits in cash.

E) depositors wish to hold 5% of the value of their deposits in cash.

50) An important asymmetry in the behaviour of aggregate supply is the A) changing slope of the aggregate demand curve. B) difference between actual and potential output. C) different relative sizes of inflationary versus recessionary gaps. D) economy's path of potential output as a result of labour force growth. E) different speeds at which factor prices adjust to positive and negative output gaps.

E) different speeds at which factor prices adjust to positive and negative output gaps.

36) A low factor-utilization rate describes ________ in factor markets, which causes factor prices to ________ and shifts the aggregate supply curve to the ________. A) excess supply; fall; left B) excess demand; rise; right C) excess supply; rise; right D) excess demand; fall; right E) excess supply; fall; right

E) excess supply; fall; right

32) GDP can be represented by the equation: GDP = F × (Fe/F) × (GDP/Fe). This equation tells us that any change in real GDP can be decomposed into changes in A) factor price, productivity and the investment rate by businesses. B) factor price, productivity and factor-utilization rates. C) factor supply, productivity and per capita consumption by households. D) factor supply, productivity and the investment rate by businesses. E) factor supply, productivity and factor-utilization rates.

E) factor supply, productivity and factor-utilization rates.

56) 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 ________. A) increase slightly; significantly increase B) increase slightly; significantly decrease C) increase sharply; increase slightly D) fall sharply; will not change. E) fall sharply; decrease slightly.

E) fall sharply; decrease slightly.

30) A commercial bankʹs actual reserve ratio is the A) fraction of its deposit liabilities that it actually holds as gold, other precious metal or cash in its own vaults. B) ratio of chequable deposits to term deposits that it holds on its books. C) ratio of Canadian dollars to foreign currencies that it holds on its books. D) fraction of its deposit liabilities that are backed by gold. E) fraction of its deposit liabilities that it actually holds as reserves, either as cash or as deposits with the Bank of Canada.

E) fraction of its deposit liabilities that it actually holds as reserves, either as cash or as deposits with the Bank of Canada

5) Long-run increases in real national income can generally be traced to A) excess of demand in the labour market that increases employment. B) growing demand that lead to increases in output and prices. C) growing demand which causes continuous growth in consumer spending. D) growing supply because higher wages will increase the participation rate. E) growing availability of factors and/or growing factor productivity.

E) growing availability of factors and/or growing factor productivity.

25) GDP can be represented by the equation: GDP = F × (Fe/F) × (GDP/Fe), where F represents the total factor supply and Fe represents the number of employed factors. The term (GDP/Fe) represents A) factor supply per level of output. B) output per capita. C) factor utilization. D) average factor productivity. E) income per person.

E) income per person.

59) Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output will ________. A) decrease; decrease; decrease further; decrease further B) decrease; decrease; decrease further; be restored to potential output C) increase; decrease; increase further; increase further D) increase; decrease; increase further; be restored to potential output E) increase; increase; increase further; be restored to potential output

E) increase; increase; increase further; be restored to potential output

135) 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 ________. A) a higher price level; unemployment B) increased potential output; a higher price level C) a higher price level; lower real GDP D) increased real GDP; higher economic growth E) increased economic activity; lower economic growth

E) increased economic activity; lower economic growth

13) Long-run increases in potential GDP would most likely be caused by a (an) A) decrease in factor-utilization rates. B) decrease in factor productivity. C) decrease in saving in the short run. D) increased availability of key factors of production. E) increases in the prices of factors of production such as wages or interest rates.

E) increases in the prices of factors of production such as wages or interest rates.

133) An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________. A) rises to an unsustainable level; real GDP is reduced B) is crowded out; corporate tax revenue is reduced C) increases; aggregate demand increases D) increases; net exports increases E) is crowded out; potential output is reduced

E) is crowded out; potential output is reduced

115) Consider the basic AD/AS macro model. A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level A) and real GDP are higher than in the initial equilibrium. B) and real GDP are lower than in the initial equilibrium. C) is lower and real GDP higher than in the initial equilibrium. D) is higher and real GDP remained the same as in the initial equilibrium. E) is higher and real GDP lower than in the initial equilibrium.

E) is higher and real GDP lower than in the initial equilibrium.

19) In the event of a sudden loss in confidence in the ability of the commercial banks to redeem deposits, the Bank of Canada would probably A) take over the operation of any banks in severe difficulties. B) suspend operation of the banking system until the panic subsided. C) offer to sell government bonds to the chartered banks. D) impose severe financial penalties on the commercial banks by charging them interest at higher than the Bank rate. E) lend reserves to the commercial banks.

E) lend reserves to the commercial banks.

110) If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand decreases, we expect the AE function to shift to a A) higher level and stay there. B) higher level, but then shift part of the way down to its original position as the price level falls. C) higher level but then return to its original position as the price level falls. D) lower level and stay there. E) lower level, but then return to its original position as the price level falls.

E) lower level, but then return to its original position as the price level falls.

80) Consider the basic AD/AS model. If their unit costs rise as output increases, price-taking firms will be prepared to produce ________ only if ________. A) more; prices decrease B) more; the economy is in equilibrium C) their current output; prices increase D) less; prices increase E) more; prices increase

E) more; prices increase

11) Consider a simple macro model with demand-determined output. Other things being equal, the price level and desired aggregate expenditure are related to each other A) positively. B) proportionally. C) progressively. D) exponentially. E) negatively.

E) negatively.

16) The study of the short run in macroeconomics focuses A) equally on potential GDP and actual GDP. B) primarily on changes to potential GDP. C) primarily on changes to potential GDP with less emphasis on changes in actual GDP. D) primarily on changes to actual GDP with no interest in the output gap. E) primarily on changes to the output gap with less emphasis on changes to potential GDP.

E) primarily on changes to the output gap with less emphasis on changes to potential GDP.

60) In building a macro model with an AS curve, it is assumed that producers will A) increase prices without changing their output. B) decrease their prices without changing output. C) decrease their prices when they expand output. D) produce as much as possible at the existing price level. E) produce more output only if prices rise.

E) produce more output only if prices rise.

14) A recessionary output gap is characterized by A) rising prices. B) constant prices. C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. E) real GDP falling below potential output.

E) real GDP falling below potential output.

62) 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, ________. 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 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 falls and the price level rises; real GDP and the price level return to their original levels

E) real GDP falls and the price level rises; real GDP and the price level return to their original levels

115) Automatic fiscal stabilizers are most helpful in A) making discretionary fiscal policy effective. B) removing persistent output gaps. C) promoting economic growth. D) eliminating price fluctuations in the economy. E) reducing the intensity of business cycles.

E) reducing the intensity of business cycles.

107) In the basic AD/AS model, the effect of an aggregate demand shock is divided between a change in output and a change in the price level. How the effect is divided depends on the A) amount of inflation in the economy. B) position of the AE curve. C) size of the simple multiplier. D) slope of the AD curve. E) slope of the AS curve.

E) slope of the AS curve.

95) Refer to Figure 24-1. If the economy is currently producing output of Y0 and the government initiates an expansionary fiscal policy adequate to close the output gap, the result will likely be A) the vertical line at Y* will shift to the left, intersecting the AS and AD curves at Y0. B) no change in either price level or output, since expansionary fiscal policy is ineffective. C) that the AS curve will shift to the right until point A is reached. D) that the AS curve and the AD curve will shift left simultaneously. E) that the AD curve will shift to the right until point B is reached.

E) that the AD curve will shift to the right until point B is reached.

119) Consider the following news headline: "World commodity prices rise sharply." Choose the statement below that best describes the likely macroeconomic effects in Canada. (Remember that Canada is both a producer and a consumer of commodities.) A) there is no change in either the AD or the AS curves B) the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate C) the AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP decreases D) the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP increases E) the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate

E) the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate

105) Refer to Figure 24-6. If the government takes no action to change the short-run macro equilibrium, then A) the AD curve will shift downward until it intersects with the AS curve at point E. B) the AD curve will shift upward until it intersects with the AS curve at point C. C) the AS curve will shift to the left until it intersects with the AD curve at point D. D) the AS curve will shift to the right until it intersects with the AD curve at point B. E) the AS curve can either shift to the right or left depending on the fiscal policy.

E) the AS curve can either shift to the right or left depending on the fiscal policy.

61) Suppose that the cash drain in the banking system increases during holiday periods. As a result, A) the money supply will automatically increase. B) the capacity of the banking system to create deposit money is increased during holiday periods. C) commercial banks decrease their target reserve ratios. D) changes in reserves will result in no change in deposits during holiday periods. E) the capacity of the banking system to create deposit money is dampened during holiday periods.

E) the capacity of the banking system to create deposit money is dampened during holiday periods.

136) 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 A) this economy is already at its long-run equilibrium. B) this economy is suffering from the paradox of thrift. C) the impact of the policy is dampened by the automatic fiscal stabilizers. D) the government has little credibility. E) the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their "lifetime" income.

E) the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their "lifetime" income.

36) Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). This fraction is known as A) the excess reserve ratio. B) the required reserve. C) the fractional reserve. D) the target reserve. E) the reserve ratio.

E) the reserve ratio.

54) Aggregate supply refers to the A) decisions of firms to decrease inputs in order to produce outputs. B) effects of increases in input prices on output. C) economy's potential output at each possible labour force. D) supply of labour inputs in the economy. E) total output firms wish to produce at each price level.

E) total output firms wish to produce at each price level.

22) In a macro model with a constant price level, an increase in government purchases will cause the AE curve to shift A) downward and the AD curve to shift to the right. B) downward and the AD curve to shift to the left. C) downward and a movement to the right along the AD curve. D) upward and the AD curve to shift to the left. E) upward and the AD curve to shift to the right.

E) upward and the AD curve to shift to the right.

49) The wage-adjustment process is asymmetrical because A) factor prices fluctuate more frequently than goods prices. B) goods prices rise more quickly than factor prices. C) employers delay wage increases in a boom but lay off workers quickly during a slump. D) taxes rise quickly in a boom but do not fall during a slump. E) wages rise quickly in a boom but fall slowly during a slump.

E) wages rise quickly in a boom but fall slowly during a slump.

122) 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) the effect of economic shocks on government revenues becomes more volatile, while the economy becomes more stable. B) further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer. C) private investment is crowded out, which may reduce the future growth rate of potential output. D) the effect of the automatic stabilizer is reduced and the economy will be more unstable. E) —both C and D are correct.

E) —both C and D are correct.

Other things equal, a decrease in the real interest rate will:

Expand investment and shift the AD curve to the right.

Adding the Public Sector

G expenditure rises by $20B m = 4, ∆G = $20B ∆GDP = 4 * $20B = $80B move the analysis from a private (no government) open economy to an economy with a public sector (mixed economy), means adding govt purchases and taxes to the model. Model: C + Ig + Xn + G

The aggregate production function can be expressed as

GDP = FT(L,K,H) L = labour K = physical capital H = labour's human capital GDP = nation's total level of output FT = the function relating L,K, and H to GDP depends on the state of technology.

If inventories are declining unexpectedly at the current level of GDP:

GDP exceeds the level of current expenditures If inventories are falling unexpectedly, it is because planned expenditures exceed the current level of production. This is a signal for firms to expand production and GDP will rise.

The largest component of the assets of the Bank of Canada is

Government of Canada securities

Shift the aggregate supply curve to the left

Higher prices of imported resources will:

Decrease consumption and increase saving

Higher real interest rates are likely to

More spending results in ___ GDP, less spending results in ___ GDP.

Higher, lower

economic growth in the Neoclassical model - balanced growth with constant technology

If capital and labour grow at the same rate, GDP will increase. But in the Neoclassical growth model with constant returns to scale, such balanced growth will not lead in increases in per capita output and therefor will not generate improvements in living standards.

Saving must be zero at this point

If consumption and disposable income are equal at a particular level of income:

Not change, but the average propensity to consume will change

If consumption increases by $5 billion at each level of disposable income, then the marginal propensity to consume will

0.6

If consumption spending increases from $358 to $367 billion when disposable income increases from $412 to $427 billion, it can be concluded that the marginal propensity to consume is

Saving is $75 billion

If disposable income is $375 billion when the average propensity to consume is 0.8, it can be concluded that

3.33 and 0.70

Changes in Equilibrium GDP and the Multiplier

If interest rate (i) rises, investment spending (I) will decline, by say $5B MPS = 0.25 m = 1/MPS = 1/0.25 = 4 Change in GDP due to the rise in investment spending of $5B = m * ∆I = 4 * $5B = $20B

GDP is below its equilibrium level

If inventories are declining unexpectedly at the current level of GDP:

$1,000

If net exports are increased by $4 billion at each level of GDP, the equilibrium real GDP would be

Decrease and aggregate supply would increase

If productivity increased such that 60 units are now produced with the quantity of inputs still equal to 10, then per-unit production costs would

Will tend to increase

If real GDP is $275 billion, consumption is $250 billion, and investment is $30 billion, real GDP

Real GDP will be greater than planned investment plus consumption

If saving is greater than planned investment

$310

If taxes were $5, government purchases of goods and services $10, planned investment $6, and net exports zero, equilibrium real GDP would be

$330

If taxes were zero, government purchases of goods and services $10, planned investment $6, and net exports zero, equilibrium real GDP would be

1 / .37

If the MPC is .63, the multiplier is:

$40 billion below full-employment GDP

If the MPC is .75 and the economy has a recessionary expenditure gap of $10 billion, then equilibrium GDP is:

$500 billion

If the real rate of interest is 4%, then the equilibrium level of GDP will be

Saving is zero at the $60 billion level of disposable income

If the relevant saving schedule were constructed, one would find that

The MPC is .8

If the slope of the consumption line is .8:

$40

If there was a change in investment spending of $10 and the marginal propensity to save was 0.25, then real GDP would increase by

$240

If this were a private open economy without a government sector, the level of GDP would be

contractionary AD shocks - sticky wages

If wages are downwardly sticky, the economy's adjustment process is sluggish and thus recessionary gaps may not be eliminated quickly.

increase in investment demand

In the long run, an increase in the demand for investment pushes up the real interest rate and encourages more savings by households. The higher rate of saving (and investment) leads to a higher future growth rate of potential output.

Other things equal, a reduction in personal and business taxes can be expected to:

Increase both aggregate demand and aggregate supply.

In the diagram, a shift from AS2 to AS3 might be caused by a(n):

Increase in business taxes and costly government regulation.remain unchanged.

In the diagram, a shift from AS1 to AS3 might be caused by a(n):

Increase in the prices of imported resources.

An effective expansionary fiscal policy will:

Increase the cyclically adjusted deficit but reduce the actual deficit.

Refer to the graph. Suppose the full-employment level of GDP is Q1, but a significant decline in investment demand has pushed the economy into recession as shown by the decline in aggregate demand to AD2. Currently, output is at Q3 and there is a negative GDP gap (Q3 -Q1) of $100 billion. If the multiplier is 5, which of the following would most likely move the economy back to its full potential?

Increased government spending of $20 billion If the multiplier is 5, a $20 billion increase in government spending will shift aggregate demand from AD2 back to AD1 and restore GDP to its full-employment level. A tax cut of more than $20 would be required to accomplish the goal, as part of a tax cut would be saved rather than added as new spending.

The crowding-out effect of expansionary fiscal policy suggests that:

Increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

Contractionary fiscal policy is so named because it:

Is aimed at reducing aggregate demand and thus achieving price stability.

Expansionary fiscal policy is so named because it:

Is designed to expand real GDP.

MPC Slope

Is the numerical value of the slope of the consumption schedule

Balanced growth with constant technology

Labour and capital grow at the same rate

Change in GDP Equation

Multiplier X Initial Change in Spending

National saving is therefore equal to

NS = Y* - T - C + (T-G) = NS = Y* - C - G

An increase in the level of national income among the trading partners for this economy

Other things remaining constant, which would increase an economy's real GDP and employment?

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports caused by a change in incomes abroad is depicted by:

Panel (A) only.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Cost-push inflation is depicted by:

Panel (B) only.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in productivity is depicted by:

Panel (B) only.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Growth, full-employment, and price stability are depicted by:

Panel (C) only.

Which of the following best describes the built-in stabilizers as they function in the United States?

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

With real GDP equal to Y* in the long run, desired private saving is equal to

Private saving = Y* - T - C

Recessions have contributed to the public debt by:

Reducing national income and therefore tax revenues.

Reducing or limiting personal deductions and credits when figuring personal income taxes This economy has a large positive GDP gap and is likely experiencing demand-pull inflation. A contractionary fiscal policy would be appropriate, and would entail either higher taxes or reduced government spending. Reducing the size of personal deductions and credits would increase the amount households pay in taxes.

fiscal policy - reductions in taxes

Reductions in tax rates generate a short-run demand stimulus and may also generate a longer-run increase in the level and growth rate of potential output.

Graphically, demand-pull inflation is shown as a:

Rightward shift of the AD curve along an upsloping AS curve.

The aggregate demand curve:

Shows the amount of real output that will be purchased at each possible price level.

What are the six explicit functions of the Fed

Six explicit functions of the Fed are: 1) conducting monetary policy; 2) supervising financial institutions; 3) serving as a lender of last resort; 4) providing banking services to the U.S. government; 5) issuing coin and currency; and 6) providing financial services to commercial banks.

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. Answer the following question on the basis of this information. Refer to the information. Given an increase in input price from $4 to $6, we would expect the aggregate:

Supply curve to shift to the left.

Answer the question on the basis of the following information. An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. Refer to the information. If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the aggregate:

Supply curve would shift to the left.

An economist who favors smaller government would recommend:

Tax cuts during recession and reductions in government spending during inflation.

Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. In this economy:

Tax revenues vary directly with GDP, but government spending is independent of GDP.

Embodied technical change

Technical change that is intrinsic to the particular capital goods in use.

FED

The Fed's direct control is on short-term interest rates; its effect on long-term interest rates is indirect. When the Fed buys bonds, the price of bonds rises and interest rates fall. When the Fed sells bonds, the price of bonds falls and interest rates rise. (

A decrease in the marginal propensity to spend out of national income will cause

a decrease in the slope of the AE curve, which rotates it downward

A depreciation in the value of the U.S. dollar

The aggregate demand curve will be increased by

Refer to the diagram. Suppose that aggregate demand increased from AD1 to AD2. For the price level to stay constant:

The aggregate supply curve would have to shift rightward.

Recessionary Expenditure Gap

The amount by which the aggregate expenditures schedule must shift upward to increase real GDP to its full-employment, noninflationary level.

The public debt is the amount of money that:

The federal government owes to holders of U.S. securities.

Average Propensity to Consume (APC)

The fraction, or percentage, of total income that is consumed

The Real Interest Rate

The higher the real interest rate, the higher the opportunity cost of investment, and therefore the lower the amount of desired investment. opportunity cost for; investment in inventories, investment in residential construction, investment in new plants and equipment

Law of dimishing marginal returns

The hypothesis that if increasing quantities of a variable factor are applied to a quantity of fixed factors, the marginal product of the variable factor will eventually decrease

the MPC is .63 the multiplier is

The multiplier is the inverse of the fraction of income that is not re-spent—that is, it is the inverse of the marginal propensity to save. In this example, the MPS is 1 - .63 = .37. 1/.37

MPS Slope

The numerical value of the slope of the saving schedule

paradox of thrift

The paradox of thrift - the idea that an increase in saving reduces the level of real GDP - is only true in the short run. In the long run, the path of real GDP is determined by the path of potential output. The increase in savings has the long-run effect of increasing investment and therefore increasing potential output.

Directly on the level of total expenditures

The premise of the model in this chapter is that the amount of goods and services produced, and therefore the level of employment, depends

If aggregate demand decreases, and as a result, real output and employment decline but the price level remains unchanged, it is most likely that:

The price level is inflexible downward and a recession has occurred.

(Consider This) The ratchet effect is the tendency of:

The price level to increase but not to decrease.

The Multiplier

The ratio of a change in equilibrium GDP of a change in investment or in any other component of aggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in the equilibrium GDP

Multiplier

The ratio of a change in equilibrium GDP to the change in investment or in any other component of aggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in equilibrium GDP.

Paradox of Thrift

The seemingly self-contradictory but possibly true statement that increased saving may be both good and bad for the economy. It is always good in the long run when matched with increased investment spending, but may be bad in the short run if there is a recession because it reduces spending on goods and services. If the increased savings are not translated into increased investment, then the fall in consumption spending will not be made up for by an increase in investment. The overall result will be a decrease in output and employment. If the decline in GDP is severe enough, the attempt to save more will actually lead to less overall savings because the higher rate of saving will be applied to a smaller national income. Attempts by households to save more during a recession may simply worsen the recession and result in less saving.

Nominal wages do not respond to changes in the price level

The short-run aggregate supply curve assumes that

Shows the amount of real output supplied at various price levels

The short-run aggregate supply curve:

Marginal propensity to consume

The slope of the consumption schedule or line for a given economy is the

Growth in physical capital

The stock of capital (factories, machines etc.) increases only through the process of investment. We include here improvements in the quality of the physical capital

For three reasons, there may be important costs associated with the initial development of the market;

These costs result in increasing marginal returns to investment

In short-run model, economy is in equilibrium when desired saving equals desired investment. We modify these settings in only two ways

We added government We are holding real GDP constant at Y* and letting the equilibrium condition that desired saving equal desired investment determine the real interest rate in the market for loanable funds.

The cyclically adjusted budget tells us:

What the size of the federal budget deficit or surplus would be if the economy was at full employment.

Neoclassical growth theory

When discussing long-run economic growth, we focus on the changes in potential output. We therefore interpret GDP in the aggregate production function as potential output.

There is unplanned investment in the economy

When the economy's real GDP exceeds its equilibrium real GDP,

An increase in planned inventories

Which would increase investment demand?

The economy's output gap is defined as the A) difference between actual GDP and potential GDP. B) level of total output that would be produced if capacity utilization is at its normal rate. C) difference between actual national income and desired aggregate expenditure. D) result of economic growth. E) difference between nominal GDP and real GDP.

Multiplier effect

a change in a component of total spending leads to a larger change in GDP. The Multiplier determines how much large that change will be; it is the ratio of a change in GDP to the initial change in spending (investment)

A sharp decline in the real value of stock prices, which is independent of a change in the price level, would best be an example of

a change in the real value of consumer wealth

protected class

a class of persons defined by one or more of these criteria (basis of race,color, religion, national origin, gender, age, disability,)

employment at will

a common law doctrine under which either party may terminate an employment relationship at any time for any reason unless a contract specifies otherwise (or if the act violates a federal or state statute); if employer made employee aware of a written policy limiting its right of discharge and the employee detrimentally relied on this

Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of

a decision lag

Which combination of fiscal policies would be the most contractionary?

a decrease in government spending and an increase in taxes

Over the horizontal range of the economy's AS curve (if such a range exists), a leftward shift of the AD curve will result in

a decrease in real GDP but no change in prices

the aggregate demand curve will be increased by

a depreciation in the value of the US dollar

Other things equal

a direct (positive) relationship exists between income and consumption and income and saving. The C and S schedules show the various amounts that households intend to consume and save at the various income and output levels, assuming a fixed price level.

I-9 verification

a form from that Department of Homeland Security, U.S. Citizenship and Immigration Services, used for employment eligibility verification; a form that documents that each new employee is authorized to work in the United States

Money is commonly defined as

a generally accepted medium of exchange

In the long run, an increase in the demand for investment pushes up the real interst rate and encourages more saving by households. The higher rate of savings (and investment) leads to

a higher future growth rate of potential output.

The Multiplier

a measure of the size of the change in equilibrium Y that results from a change in autonomous expenditure

International Trade The Next Export Schedule

a net export schedule lists the amount of net exports that will occur at each level of GDP

vesting

a pension plan becomes when an employee has a legal right to the benefits purchased with the employer's contributions, even if the employee is no longer working for this employer

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.

a positive; an even larger

Increase in invesment demand creates an excess demand for loanable funds and therefore leads to

a rise in the real interest rate

Aggregate Demand Curve

a schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level. These buyers include the nation's households, businesses, and government along with consumers located abroad. relationship between the price level and the amount of real GDP is inverse or negative

tangible employment action

a significant change in employment status, such as change brought about by firing or failing to promote an employee

Which of the following factors does not cause the aggregate demand curve to shift? a. a change in the price level b. a change in government policies c. a change in the expectations of households and firms d. a change in foreign variables

a. a change in the price level

Which of the following will not shift the aggregate demand curve to the right? a. a fall in the price level b. a decrease in taxes c. households expecting higher future income d. exports rising

a. a fall in the price level

The wealth effect refers to the fact that a. when the price level falls, the real value of household wealth rises, and so will consumption. b. when income rises, consumption rises. c. when the price level falls, the nominal value of assets rises, while the real value of assets remains the same. d. all of the above

a. when the price level falls, the real value of household wealth rises, and so will consumption.

An inflationary output gap occurs when

actual GDP exceeds potential GDP

With respect to consumption, investment, government purchases and net exports, the national-income and product accounts measure

actual expenditures in each of the categories

MPL or MPN

additional output from an extra worker deltaFt / deltaL

unemployment insurance

aka federal jobless benefits, is a government program that reduces the hardship of joblessness by guaranteeing that unemployed workers receive a percentage of their former income while unemployed

If both the marginal product and average product of labour are falling

although economic growth continues in the sense that output is growing, material living standards are actually falling because average GDP per person is falling (real GDP is growing more slowly than the population). If we are interested in growth in living standards, we are concerned with increasing real GDP per person

business necessity

an employer may defend against a claim of disparate-impact of unintentional discrimination by asserting that a practice has a discriminatory effect is a _________

wrongful discharge

an employer's termination of an employee's employment in violation of an employment contract or law that protect employees

Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of

an execution lag

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with:

an expansionary fiscal policy.

Which combination of policies would be the most expansionary?

an increase in government spending and a decrease in taxes

which would increase investment demand?

an increase in planned inventories

Which of the following will cause a negative aggregate demand shock

an increase in tax rates

National saving curve is upward sloping because

an increase in the interest rate is assumed to lead household to reduce their current consumptions, especially on big-ticket items and durable goods, such as cars, furniture, and appliances, that are often purchased on credit.

investment, net exports, and government expenditures

are independent of GDP

In the diagram, it is assumed that investment, net exports, and government purchases:

are independent of the level of GDP.

Assume that steel is the only good produced in the economy. Which of the following would explain why the short-run aggregate supply curve for steel would be upward sloping? a. Steel demand and steel prices begin to rise rapidly, and the wages of steel workers rise as the demand for workers increases. b. Steel demand and steel prices begin to rise rapidly, but the price of coal—an input into the production of steel—remains fixed by contract. c. Steel demand and steel prices begin to rise rapidly, but foreign producers increase production faster than domestic producers increase production. d. all of the above

b. Steel demand and steel prices begin to rise rapidly, but the price of coal—an input into the production of steel—remains fixed by contract.

The international-trade effect refers to the fact that an increase in the price level will result in a. an increase in exports and a decrease in imports. b. a decrease in exports and an increase in imports. c. an increase in exports and an increase in imports. d. a decrease in exports and a decrease in imports.

b. a decrease in exports and an increase in imports

The interest rate effect refers to the fact that a higher price level results in a. higher interest rates and higher investment. b. higher interest rates and lower investment. c. lower interest rates and lower investment. d. lower interest rates and higher investment.

b. higher interest rates and lower investment.

If real GDP in the United States increases faster than real GDP in other countries, U.S. imports will __________ faster than U.S. exports, and net exports will ___________. a. increase; rise b. increase; fall c. decrease; rise d. decrease; fall

b. increase; fall

Which of the following government policies affects the economy through intended changes in the money supply and interest rates? a. fiscal policy b. monetary policy c. both fiscal and monetary policies d. neither fiscal nor monetary policies

b. monetary policy

A supply shock will a. increase the real GDP in the short-run. b. not change real GDP in the long-run. c. shift the long-run aggregate supply curve to the right. d. decrease both the price level and real GDP in the short-run

b. not change real GDP in the long-run.

If the exchange rate between the dollar and foreign currencies rises (the dollar rises in value versus foreign currencies), the price in foreign currency of U.S. products will _________ and the U.S. aggregate demand curve will shift to the _________. a. rise; right b. rise; left c. fall; right d. fall; left

b. rise; left

The long-run aggregate supply curve a. is positively sloped. b. shifts to the right as technological change occurs. c. is negatively sloped. d. shifts to the left as the capital stock of the country grows.

b. shifts to the right as technological change occurs.

An example of ʺinterbank activitiesʺ in the Canadian banking system is

banks lending money to each other in order to meet daily cash requirements

The aggregate demand curve slopes downward to the right:

because a lower price level reduces the demand for money, which lowers the interest rate and increases desired investment Feedback: This is known as the "interest rate effect." At a lower price level, fewer dollars are needed to carry out transactions. With a fixed money supply, the reduced demand for money puts downward pressure on the interest rate, ultimately increasing investment expenditures.

Consider a simple macro model with the price level assumed to be constant. If national income is less than its equilibrium level, it is likely that firms' inventories are ________, and so national income tends to ________.

being depleted; rise

As disposable income decrease, ceteris paribus,

both consumption and saving decrease

the public debt is the sum of all previous

budget deficits minus any budget surpluses of the federal government

16. The public debt is the sum of all previous (a) expenditures of the federal government (b) budget deficits of the federal government (c) budget deficits minus any budget surpluses of the federal government (d) budget surpluses less the current budget deficit of the federal government

c) budget deficits minus any budget surpluses of the federal government

Which of the following statements is correct? a. If households become more optimistic about their future incomes, the aggregate demand curve will shift to the right. b. If firms become more optimistic about the future profitability of investment spending, the aggregate demand curve will shift to the right. c. Both a. and b. d. Neither a. nor b. Optimism or pessimism do not have anything to do with shifts in the aggregate demand curve

c. Both a. and b.

Which of the following statements is true? a. In the long run, increases in the price level result in an increase in real GDP. b. In the long run, increases in the price level result in a decrease in real GDP. c. In the long run, changes in the price level do not affect the level of real GDP. d. In the long run, changes in the price level may either increase or decrease real GDP.

c. In the long run, changes in the price level do not affect the level of real GDP

What is the impact of an increase in the price level on the short-run aggregate supply curve? a. a shift of the curve to the right b. a shift of the curve to the left c. a movement up and to the right along a stationary curve d. a combination of a movement along the curve and a shift of the curve

c. a movement up and to the right along a stationary curve

If oil prices rise unexpectedly, a. there will be a movement up and to the right along a stationary aggregate supply curve. b. there will be a movement down and to the left along a stationary aggregate supply curve. c. the short-run aggregate supply curve will shift to the left. d. the short-run aggregate supply curve will shift to the right

c. the short-run aggregate supply curve will shift to the left.

For given values of L, K, and H, changes in T will lead to

changes in GDP

Shift in Aggregate Supply -determinants of aggregate supply

changes in input prices: make up the price level, a major ingredient of per unit production costs and therefore a key determinant of AE. Can be either domestic or imported productivity: a measure of the relationship between a nation's level of real output and the amount of resources used to produce that output total output/total inputs legal institutional environment: changes in legal institutional setting in which businesses operate are the final determinant of aggregate supply. Such changes may alter the per unit costs of output through changes in taxes and subsidies and changes in the extent of regulation

As a measure of the Canadian money supply, M2+ is defined as currency in circulation plus

chequable and non-chequable deposits at all financial institutions

Until recently, and for many years, the common definition of the money supply used by the Bank of Canada was M1, which included currency in circulation plus

chequable deposits at the chartered banks

Economic growth provides higher incomes that often lead to a demand for a

cleaner environment, thus leading to higher average living standards not directly captured by measures of per capita GDP.

Dissaving

consuming in excess after tax income will occur at relatively low DIs. Shown as the vertical line or as the vertical distance of the saving schedule.

Economy's investment demand curve is found by:

cumulating investment projects, arraying them in descending order according to their expected rates of return, graphing the result, and applying the rule that investment should be undertaken up to the point at which the real interest rate, i equals the expected rate of return, r.

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) factor supplies are assumed to be varying B) technology used in production is endogenous C) the level of potential output fluctuates with the price level D) factor prices are assumed to respond to output gaps E) firms cannot operate near their normal capacity

Which of the following are the defining assumptions of the long run in macroeconomics? A) Factor prices are exogenous, and technology and factor supplies are changing. B) Factor prices adjust to output gaps, and technology and factor supplies are constant. C) Factor prices are exogenous, and technology and factor supplies are constant. D) Factor prices adjust to output gaps, and technology and factor supplies are changing. E) Factor prices are exogenous, technology and factor prices are exogenous.

Which of the following factors will cause the long-run aggregate supply curve to shift to the right? a. an increase in the number of workers in the economy b. the accumulation of more machinery and equipment c. technological change d. all of the above

d. all of the above

Why does the failure of workers and firms to accurately predict the price level result in an upwardsloping aggregate supply curve? a. because contracts make some wages and prices "sticky" b. because firms are often slow to adjust wages c. because menu costs make some prices "sticky" d. all of the above

d. all of the above

if the prices of imported resources increase, then this event would most likely

decrease aggregate supply

Ideas are also not necessarily subject to

diminishing marginal returns As our knowledge increases, each increment of new knowledge does not inevitably add less to our productive ability than each previous increment.

Suppose that real domestic output in an economy is 50 units, the quantity of inputs is 10, and the price of each input is $2. Answer this Question on the basis of this information. If productivity increased such that 60 units are now produced with the quantity of inputs still equal to 10, then per-unit production costs would

decrease and aggregate supply would increase

Other things being equal, an exogenous rise in the domestic price level will

decrease desired real expenditure because it will affect the real value of wealth

bona fide occupational qualification (BFQQ)

defense that applies when discrimination against a protected class is essential to a job, this is a ___________

45 line

desired consumption is equal to disposable income

The money supply in Canada is measured using M1, M2, M2+, and M3. The reason there are so many measures of the money supply is that

different kinds of bank accounts represent different functions of money, and so the various measures are used to reflect these different functions

The ʺasymmetryʺ in the behaviour of aggregate supply refers to the

different speeds at which the economy adjusts to positive and negative output gaps

The premise of the model in this chapter is that the amount of goods and services produced, and therefore the level of employment, depends

directly on the level of total expenditures

If the economy is private, closed to international trade, and government neither taxes nor spends, then real GDP equals

disposable income

Savings equals

disposable income minus consumption

autonomous expenditures

do not change systematically with level of national income

an increase in taxes shifts the consumption schedule

downward and the saving schedule downward

The biggest disadvantage of a barter system compared to one that uses money is that

each trade requires a double coincidence of wants

Returns to later investment are greater than returns in initial investment because

economic environment becomes more fully developed over time

Aggregate demand decreases and real output falls, but the price level remains the same. Which factor most likely contributes to downward price inflexibility?

efficiency wages

For a given state of technology (T), changes in

either L,K, or H will lead to changes in GDP.

When you pay for your $74 purchase at the grocery store with a debit card, you are

electronically transferring $74 of deposit money from your bank account to the grocery storeʹs bank account

Suppose Bank ABC has a target reserve ratio of 2 percent. If Bank ABC receives a new deposit of $50 million it will immediately find itself with

excess cash reserves of $49 million

Suppose Bank ABC has a target reserve ratio of 10 percent. If Bank ABC receives a new deposit of $100 000 it will immediately find itself with

excess cash reserves of $90 000

Suppose aggregate demand falls from AD1 to AD2. In the short run, this will cause output to:

fall to Q3 but the price level to remain at P1 In the short run, product prices tend to be inflexible downward, so that any reduction in aggregate demand has its full impact on real GDP rather than the price level.

At levels of GDP below equilibrium, aggregate expenditures are less than GDP, which causes inventories to rise and production to fall.

false

countercyclical fiscal policy

fiscal policy that seeks to counteract business cycle fluctuations

At very low levels of output, the short-run aggregate supply curve is relatively:

flat, because firms can expand output with relatively little increase in per-unit production costs When there are large numbers of unemployed workers and idle machines, firms can put these resources back to work with little upward pressure on per-unit costs. Further, expanded output will not likely result in cost-increasing bottlenecks or input shortages.

A commercial bankʹs actual reserve ratio is the

fraction of its deposit liabilities that it actually holds as reserves, either as cash or as deposits with the Bank of Canada

The Canadian banking system is a

fractional-reserve system

potential output/potential GDP

full employment output

In order to be considered ʺmoneyʺ, paper currency must be

generally acceptable as a medium of exchange

Fiscal policy refers to the

governmentʹs use of spending and taxing policies to influence equilibrium real GDP

4 fundamental sources of growth

growth in labour force, human capital, physical capital and technological improvement.

inflation

growth in the overall level of prices in an economy

exogenous growth

growth that is independent of any factors in the economy

convergence

idea that per capita GDP across nations will equalize as nations approach the steady state allowing poorer nations to catch up

rule of 70

if annual growth rate of a variable is x%, the size of that variable doubles approximately every 70/x years

If the marginal propensity to consume is 0.67 and initial spending increases by $25, real GDP will

increase by $75

An increase in the real GDP of an economy will, other things remaining constant,

increase its imports and the real GDPs in other economies

Compared with a private closed economy, aggregate expenditures and GDP will

increase when net exports are positive

increase; increase; increase further; will be restored to potential output

The effectiveness of an expansionary fiscal policy will be reduced if:

increased government borrowing increases interest rates, causing a reduction in private investment This so-called "crowding-out effect" will lead to a lower than expected increase in aggregate demand, as decreases in private investment partially offset increases in other expenditures. However, the likelihood of this effect may be small when GDP is substantially below its potential.

new classical critique

increases in government spending and decreases in taxes today are offset by increases in savings since people know that they'll have to pay higher taxes eventually

The benefits of economic growth includes

increases in income

Increases in labour and capital together cannot explain

increases in per capita income

The increase in desired investment might be caused by technological improvement that

increases the productivty of investment goods or by a government tax incentive aimed at encouraging investment.

Transfer Payments

indirectly affect desired expenditure, through households' disposable income.

which relationship is an inverse one?

investment spending and the rate of interest

Investment demand curve

investment spending determined by the real interest rate investment on x, expected rate of return on y

supply side fiscal policy

involves the use of government spending and taxes to affect the supply or production side of the economy

An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________.

is crowded out; potential output is reduced

Which of the following exemplifies the crowding-out effect? An increase in government spending:

is financed by borrowing, raising interest rates and causing private investment to fall The crowding-out effect refers to the decrease in private investment spending which may accompany an expansionary fiscal policy financed by government borrowing from the public. An expansionary fiscal policy may generate increased spending by government and consumers but reduced spending by investors.

Suppose you come into possession of two ʺsilverʺ dollars, one minted in the 1950s which contains a lot of silver, the other minted in the 1990s which contains no silver at all. The legal exchange rate between the coins is fixed at one for one. According to Greshamʹs law, the 1950s silver dollar:

is less likely to be used as a medium of exchange

Commercial banks in Canada are prohibited by law from

issuing paper currency

how does technology change GDP

it increases overall

Which is an important consequence of the public debt of the United States?

it transfers a portion of the US output to foreign nations

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.

large increase; a small increase

leftward; the aggregate supply curve

In the event of a sudden loss in confidence in the ability of the commercial banks to redeem deposits, the Bank of Canada would probably

lend reserves to the commercial banks

To place the public debt in perspective based on the wealth and productive capacity of the economy, it is more meaningful to

measure it relative to the GDP

chained CPI

measure of the CPI in which the typical consumer's basket of goods and services is updated monthly

The M2 and M2+ definitions of the money supply concentrate on the ________ function of money.

medium-of-exchange

When metal coins, such as gold and silver, were used as money, a technique which helped to prevent the reduction of their value through clipping was

milling

inflation is always and everywhere a

monetary phenomenon

what is not an effective tool by the Fed:

money market multiplier change by changing the required ratio

If the slope of line T were steeper, there would be

more built-in stability for the economy

Change in GDP

multiplier x initial change in spending

Consider a simple macro model with demand-determined output. Other things being equal, the price level and desired aggregate expenditure are related to each other

negatively

Budget balance

net tax revenue - government purchases

Investment in early stages of development may create

new skills and attitudes in workforce that are then available to subsequent firms, costs are therefore now lower.

When government tax revenues change automatically and in a countercyclical direction over the course of the business cycle, this is an example of

non-discretionary fiscal policry

If consumption increases by $5 billion at each level of disposable income, then the marginal propensity to consume will

not change, but the average propensity to consume will change

In the long run, aggregate demand is ________ for determining real GDP, and the paradox of thrift ________.

not important; does not apply

National saving is the sum

of private saving and public (government saving

The length of time involved for the fiscal action taken by Congress to affect output, employment, or the price level is referred to as the

operational lag

full employment output

output level produced in economy when unemployment rate is equal to natural rate

Gross National Product

output produced by workers and resources owned by residents of the nation

common concern of CPI:

overstates true inflation

Each new firm may find environment more favourable to its investment because of

physical infrastructure that has been created by those who came before it

All else equal, if the interest rate rises:

planned investment spending will decrease

In the neoclassical growth model with diminishing marginal returns, increases in

population (with a fixed stock of capital) leads to increases in GDP but an eventual decline in material living standards

public saving

public saving = T - G

Open Market Operations

purchase or sale of bonds by a central bank

imports

purchases of foreign-produced goods and services by Americans

A central bank can ʺcreateʺ money by

purchasing government securities on the open market

increases in aggregate demand lead to increases in:

real GDP

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, ________. In the long run, ________.

real GDP and the price level both fall; real GDP is at its original level with a lower price level

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in world demand for Canadaʹs goods. In the short run, ________. In the long run, ________.

real GDP and the price level both rise; real GDP returns to its original level with a higher price level

An inflationary output gap is characterized by

real GDP exceeding potential output

A recessionary output gap is characterized by

real GDP falling below potential output

Following any AD or AS shock, economists typically assume that the adjustment process continues until

real GDP returns to Y*

if saving is greater than planned investment

real GDP will be greater than planned investment plus consumption

The increase in the supply of national saving leads to an excess supply of loanable funds and thus to a decline in the

real interest rate

The amount by which an economy's aggregate expenditures must shift upward to achieve full-employment GDP is

recessionary expenditure gap

An increase in household consumption or government purchases implies a

reduction in national saving

Consumption schedule (consumption function)

reflects the direct consumption disposable income relationship suggested by household budget studies.

All points on an economy's AD curve

relate a particular price level to the total demand for output at that price level.

Aggregate Expenditure Function

relates desired aggregate expenditure to actual national income

At the new equilibrium, more of the economy's resources are devoted to investment than before, and thus the country's capital stock is

rising at a faster rate.

If disposable income is $375 billion when the average propensity to consume is 0.8, it can be concluded that

saving is $75 billion

Assume the level of investment is independent of the level of GDP. If the interest rate rises, the investment schedule will:

shift downward A higher interest rate will reduce planned investment (a movement downward along the investment demand curve) and cause the investment schedule (the relationship between investment and GDP) to shift downward.

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

shift the AD curve to the right through large increases in government spending

Higher prices of imported resources will:

shift the aggregate supply curve to the left Higher input costs reduce the amount of real domestic output supplied at any given price level. The resulting leftward shift of the supply curve will move the economy upward and to the left along its aggregate demand curve (reduced output at a higher price level.)

Describe the aggregate demand curve.

shows the relationship between the price level and the level of planned aggregate expenditure by households, firms, and the government

Describe aggregate demand.

shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government

Production Possibility Boundary

shows which alternative combinations of commodities can be attained if all available resources are used efficiently

institution

significant practice, relationship, or organization in society

The process of economic growth renders some machines obsolete and also leaves the

skills of some workers partly obsolete.

When the economy's AS curve is positively sloped, the multiplier in the AD/AS model is

smaller than the simple multiplier

Consider the following news headline: "Information technology costs for U.S. firms continue to drop." Choose the statement below that best describes the likely macroeconomic effect.

the AS curve shifts to the right; the price level falls and real GDP rises

if the slope of the consumption line is .8

the MPC is .8

Along a particular saving schedule, each change in disposable income of $15 billion generates an additional $3 billion in saving. Therefore:

the MPS is .2 The MPS is the ratio of the change in saving to the change in disposable income that brought it about. In this example, the MPS is $3 / $15 = .2.

Recessionary Expenditure gap

the amount by which aggregate expenditures at the full employment GDP fall short of those required to achieve the full employment GDP. Insufficient total spending contracts or depresses the economy. -will cause cyclical unemployment pg 255 graph

The Solow Residual

the amount of growth in GDP that cannot be accounted for by growth in the labour force or by growth in the capital stock. Since Solow was thinking about changes in GDP as having only three possible sources, changs in capital, labour and technology - the "residual" was naturally interpreted as a measure of technical change.

The aggregate supply curve will shift as a result of a change in any of the following

the cost of capital, labor productivity, Incorrect Response, the wage rate, and technology.

A recessionary output gap implies that

the demand for all factor services will be relatively low

when the price level rises

the demand for money and interest rate rises

An inflationary output gap implies that

the economyʹs resources are being used beyond their normal capacity

Break-even Income

the income level at which households plan to consume their entire incomes (C=DI) Consumption schedule cuts the 45 degree line and the saving schedule cuts the horizontal axis at the break-even income level

An important automatic fiscal stabilizer in Canada is

the income-tax system

In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of

the long run

minimum wage

the lowest wage, either by government regulation or union contract, that an employer may pay an hourly worker ($7.25); if tips and wages do not equal federal minimum wage, employer must make up the difference; if paid at least federal minimum wage, the FLSA allows employers to take tips and make other arrangements for distribution (pooling)

The financial crisis that occurred in 2007 and 2008 highlighted one of the crucial functions of commercial banks and other financial institutions in developed economies. A crucial function that ceased to work smoothly during this time, and contributed to the global recession that began in 2008, was

the provision of credit to firms and households

Suppose the rare event occurs that a major Canadian commercial bank is on the verge of insolvency and collapse due to volatile world credit markets. The likely initial response is

the provision of funds by the Bank of Canada as the ʺlender of last resortʺ

discouraged workers

those who are not working who have looked for a job in the past 12 months, willing to work, but have not sought employment in the past 4 weeks

An increase in the volume of a nation's exports, other things being equal, will expand the nation's real GDP.

true

At levels of GDP below equilibrium, the economy wants to spend at higher levels than the levels of GDP the economy is producing.

true

At the equilibrium price level, the real domestic output purchased is equal to the real domestic output produced.

true

Changes in aggregate demand involve a change in initial spending from one of the determinants and a multiplier effect on spending.

true

Equal changes in government spending and taxes do not have equivalent effects on real GDP.

true

Expansionary fiscal policy during a recession or depression will create a budget deficit or add to an existing budget deficit.

true

Historical data suggest that the level of consumption expenditures is directly related to the level of disposable income.

true

If government spending is for public investments that increase the capital stock, then this spending can increase the future production capacity of the economy.

true

If the MPS were 0.3 and taxes were levied by the government so that consumers paid $20 in taxes at each level of real GDP, consumption expenditures at each level of real GDP would be $14 less.

true

In the aggregate expenditures model of the economy, the price level is assumed to be fixed or stuck.

true

In the short run, an increase in aggregate demand will increase both the price level and the real domestic output.

true

Interest payments as a percentage of GDP reflect the level of taxation (average tax rate) required to service the public debt.

true

Per-unit production cost is determined by dividing total input cost by units of output.

true

Productivity is a measure of real output per unit of input.

true

The aggregate supply curve is vertical in the long run at the full-employment level of output.

true

The basic premise of the aggregate expenditures model is that the amount of goods and services produced and the level of employment depend directly on the level of total spending.

true

The equilibrium level of GDP is that GDP level corresponding to the intersection of the aggregate expenditures schedule with the 45-degree line.

true

The equilibrium level of GDP will change in response to changes in the investment schedule or the consumption schedule.

true

The immediate short-run aggregate supply curve is horizontal and the short-run aggregate supply curve is up-sloping.

true

The investment schedule is a schedule of planned investment rather than a schedule of actual investment.

true

The key to assessing discretionary fiscal policy is to observe the change in the cyclically adjusted budget.

true

The marginal propensity to consume is the change in consumption divided by the change in income.

true

The multiplier is based on the idea that any change in income will cause both consumption and saving to vary in the same direction as a change in income and by a fraction of that change in income.

true

The public debt is the total accumulation of the deficits, minus any surpluses, that the federal government has incurred over time.

true

The real interest rate is the nominal interest rate minus the rate of inflation.

true

If interest rate is below I*, the quantity of desired investment exceeds the quantity of desired saving, and this excess demand for loanable funds pushes

up the real interest rate.

Consider the basic AD/AS model. If major labor unions succeed in increasing wages across the economy, the AS curve will shift

upward (to the left), increasing the price level

In a macro model with a constant price level, an increase in government purchases will cause the AE curve to shift

upward and the AD curve to shift to the right

monetary policy

use of money supply to influence the economy

What is sometimes called the ʺlong-run aggregate supply curveʺ shows the relationship between the price level and aggregate supply over a time period long enough to permit

wages and other factor prices to adjust

What is sometimes called the "long-run aggregate supply curve" shows the relationship between the price level and aggregate supply over a time period long enough to permit

wages and other factor prices to adjust.

The wage-adjustment process is asymmetrical because

wages rise quickly in a boom but fall slowly during a slump

If the economy is experiencing an inflationary output gap, the adjustment process operates as follows:

wages rise, unit costs rise, and the AS curve shifts leftward

If the economy is experiencing an inflationary output gap, the adjustment process operates as follows

wages rise, unit costs rise, and the AS curve shifts leftward.

transfer payments

welfare payments, social security, unemployment insurance do not count as GDP

money illusion

when people interpret nominal changes in wages or prices as real changes

If capital and labour row at the same rate, GDP will increase, But in the neoclassical growth model with constant returns to scale, such balanced growth will not lead to increases in per capita output and therefore

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