EC140

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

A) 66%.

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.

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.

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.

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.

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.

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.

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

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

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.

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

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

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

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

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.

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

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

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.

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

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

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

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

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

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.

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

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

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.

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.

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.

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

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.

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

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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

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.

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.

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

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.

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.

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

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

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.

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.

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

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.

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)

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

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.

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.

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

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.

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.

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.

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

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.

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.

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

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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.

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.

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.

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.

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.

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.

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

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.

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

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

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*.

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

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.

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

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.

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.

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.

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)

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.

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.

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.

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 .

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.

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.

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.

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

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.

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.

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.

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

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

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.

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.

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

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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 .

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.

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

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

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

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.

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.

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

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.

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

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

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.

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.

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.

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

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

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.

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.

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*

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

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.

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.

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.

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.

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

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.

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

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

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.

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

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

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.

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.

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

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.

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.

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.

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.

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.

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

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

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

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

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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) 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 .

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

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

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

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

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.