Macroeconomics 24

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)

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 24-4. 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)

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)

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)

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

B

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)

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)

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 24-3. 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)

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 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.

C

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)

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)

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)

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 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)

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.

D

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)

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)

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)

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)

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)

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)

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)

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)

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.

E

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.

E

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)

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)

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)

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)

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)

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)

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)

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)

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)

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.

A

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)

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)

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)

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)

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)

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)

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)

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)

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.

B

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)

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)

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.

C

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)

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 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)

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)

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)

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)

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)

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)

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)

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)

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)

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.

D

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)

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)

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)

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)

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)

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)

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

E

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)

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)

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)

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)

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)