ECON Chapters 9, 10, 11

By how much would government purchases have to change if the government wanted to increase income by $1,000 and the MPC were 0.9?

$100

In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 11-1, what would be the short-run equilibrium level of real GDP and the price level?

$300 and 40

Which of the following is likely to occur if the actual output produced in an economy is less than the economy's potential output?

A recessionary gap and an unemployment rate that is higher than the natural rate of unemployment

If fiscal policy is used to close an expansionary gap, the

AD curve shifts leftward and the price level decreases

Which of the following did classical economists believe caused depressions and high unemployment?

All of the answers are correct

Which of the following occurs as macroeconomic output expands in the short run?

All of the answers are correct

Which of the following is true about real and nominal wages?

Changes in the nominal wage will be the same as changes in the real wage only if the price level is constant

Which of the following is true in the long run if an economy experiences an expansionary gap?

Cost of production rises, and the short-run aggregate supply curve shifts leftward.

Discretionary fiscal policy works by shifting the short-run aggregate supply curve.

False

If the inflation rate is 4 percent a year and everyone expected 2 percent a year, then the potential level of real GDP will increase.

False

The graph in Exhibit 10-4, when aggregate supply is AS, the equilibrium output and price level will be Y2 and P2.

False

The natural rate of unemployment includes frictional, cyclical, and structural unemployment.

False

Unemployment insurance is an example of governmental discretionary fiscal policy.

False

Which of the following is true in the short run?

Firms benefit from a higher than expected price level.

Which of the following is likely to be true if the actual price level in an economy exceeds the expected price level?

Firms will utilize their unused production capacity and increase production beyond the potential level in the short run

If the economy were at its potential output level, which of the following would not be true?

Frictional unemployment would be zero.

Which of the following is true of an expansionary gap?

In the long run, this gap will close when resource suppliers negotiate higher resource payments.

Which of the following is true in the long run?

The actual price level and the expected price level are equal

Which of the following is true if the aggregate demand is greater than expected, for any given aggregate supply curve?

The actual price level is higher than the expected level in the short run, and output exceeds the potential level

Which of the following is true when an economy is in long-run equilibrium?

The economy's actual output equals its potential output

Which of the following is true in the long run?

The equilibrium output equals the potential output and the equilibrium price level depends on the aggregate demand curve

Which of the following is true in the long run?

The long-run aggregate supply curve is vertical.

When the economy is at its potential output level, which of the following is not true?

The nominal wage is a very poor measure of the expected real wage

When the economy is at its potential output level, which of the following is not true?

The unemployment rate is about 2 percent.

Which of the following is not true about classical economists?

They sought government intervention in markets to promote fairness.

An increase in short-run aggregate supply could decrease nominal GDP.

True

Government transfer payments are a good example of an automatic stabilizer.

True

Real wages are nominal wages adjusted for price changes.

True

_____ if nominal wages are sticky in the downward direction.

Unemployment may persist for long periods of time

Fiscal policy focuses on manipulating

aggregate demand to smooth out business fluctuations

A technological breakthrough with widespread practical applications that occurs in the microcomputer industry is likely to shift the:

aggregate supply curve rightward

The long run is the period of time during which:

agreements can be renegotiated based on the actual price level

During a recession, output is

below potential and unemployment is above the natural rate

If the price level turns out to be higher than expected,

businesses increase production

The natural rate of unemployment prevails in an economy when _____.

cyclical unemployment is zero

A(n) _____ will shift the long-run aggregate supply curve of an economy leftward.

decline in the fertility of land

To close a contractionary gap using fiscal policy, the government can

decrease taxes by less than the size of the gap

An adverse supply shock is likely to:

decrease the equilibrium output and increase the equilibrium price level, resulting in stagflation.

The figure below shows the aggregate demand and supply curves for an economy. If the economy moves from point e to e', then the:

economy experiences deflation

Exhibit 10-4 shows that the

economy will experience deflation

If the actual price level in Exhibit 10-2 exceeds the expected price level, then

equilibrium output might be Y3 in the short run

The _____ when an economy produces its potential output.

expected price level equals the actual price level

If the price level rises by 5 percent and the nominal wage rises 3 percent, the real wage

falls by 2 percent

A federal budget surplus occurs when

federal government net taxes exceed purchases

The expected price level is significant because

firms and resource owners make long-term agreements based on the expected price level

If the expected price level exceeds the actual price level,

firms decrease production in the short run

If the actual price level is below the expected price level in an economy, _____.

firms reduce the quantity supplied, and the actual unemployment rate exceeds the natural rate

Potential output is the amount produced when

firms' and workers' expectations about the price level are realized

The slope of the aggregate supply curve depends on:

how quickly the marginal cost of production rises as output expands

In the long run, an increase in aggregate demand will:

increase the price level but not change output

The goal of fiscal policy after the Great Depression was to

influence aggregate demand

The result of an adverse supply shock is a:

leftward shift of both the short-run and the long-run aggregate supply curves

An expansionary gap is closed in the long run by a(n)

leftward shift of the short-run aggregate supply curve

An adverse supply shock would shift the

long-run and short-run aggregate supply curves inward

A beneficial supply shock would shift the

long-run and short-run aggregate supply curves outward

The effect of automatic stabilizers on the business cycle is to

make both upswings and downswings smaller

A nominal wage is

measured in current dollars rather than in constant dollars

Which of the following is not a tool of fiscal policy?

money supply

John Maynard Keynes influenced the use of fiscal policy in the U.S. by arguing effectively that

natural economic forces were not necessarily adequate to move the economy toward its potential output level

It is generally observed that an economy's______ during a recession.

output is below the potential level, and its unemployment rate is above the natural rate

It is generally observed that when a recessionary gap is closed in the long run, there is _____.

price deflation and greater output

The aggregate supply curve reflects the relationship between the

price level and the quantity of all goods supplied in the economy

Among the reasons firms find it profitable to expand output in the short run when the price level is rising faster than expected is that

prices for firms' output are rising with the price level

If the expected price level falls below the actual price level,

production becomes more attractive to firms

The real wage represents the

quantity of goods and services a worker can purchase in exchange for work time

As actual output rises above the potential level, which of the following must be true?

real GDP rises

If the rate of inflation increases from 2 percent to 3 percent, it is likely that the:

real wage of a worker will fall

To close a recessionary gap:

real wages should decrease

If the actual output level exceeds the potential output in an economy in the short run, there will be a(n)______.

reduction in output and cost-push inflation in the long run

The significance of the expected price level is that:

resource owners make long-term agreements based on the expected price level

If the price level rises by 4 percent and the nominal wage rises 6 percent, the real wage

rises by 2 percent

A beneficial supply shock will shift the:

short-run and long-run aggregate supply curves rightward and increase the equilibrium output and decrease the price level.

In the short run, but not in the long run,

some resource prices are fixed

Supply-side economics emphasized government policies to

stimulate real GDP by improving incentives to work

Fiscal policy under the Reagan administration was intended to

stimulate the economy by decreasing taxes in order to increase aggregate supply

In the short run, there is a positive relationship between

the actual price level and aggregate quantity supplied

In the short run, a positive relationship exists between _____, other things remaining constant.

the actual price level and real gross domestic product supplied

If an economy is simultaneously in long-run and short-run equilibrium:

the actual price level equals the expected price level

A recessionary gap can be closed in the long run if:

the aggregate supply curve shifts rightward

If capital depreciation exceeds gross investment in an economy, it is likely that:

the capital stock of the economy will decrease, and the aggregate supply curve will shift leftward

An economy's potential gross domestic product changes when there are changes in _____.

the composition of the labor force

In constructing the short-run aggregate supply curve, we define the short run as the period in which

the costs of some resources are fixed

According to Keynes,

the economy could be stuck at equilibrium below the potential output for a prolonged period

In the long run, the aggregate demand curve determines ______, given the aggregate supply curve.

the equilibrium price level but not the equilibrium output level

The long-run aggregate supply curve in an economy depends on the:

the level of technology

The aggregate supply curve shows the relationship between _____, all other things remaining the same.

the price level in an economy and the aggregate output produced by firms

The short run is a period of time during which:

the price of some resources cannot be changed

Real wage is measured in terms of:

the quantity of goods and services that can be bought

The natural rate of unemployment is

the unemployment rate at which the economy is producing its potential GDP

The long-run aggregate supply curve is a(n):

vertical line

Compensation is usually negotiated in terms of a nominal wage because

wage agreements are based on expected price levels

Workers usually negotiate compensation in terms of nominal wages because:

wage agreements are based on expected price levels

In the long run, the economy will produce the potential output if:

wages and prices are sufficiently flexible

Lags in the approval and implementation of fiscal policy

weaken fiscal policy as a tool of economic stabilization

Potential output will decrease if

workers choose shorter work schedules in order to enjoy more leisure time

If the economy is experiencing an expansionary gap, which of the following will occur in the long run?

Workers will negotiate nominal wage increases that will shift the SRAS curve to the left.

Which of the following supply shocks would shift the aggregate supply curve inward?

a decrease in agricultural output

The long-run aggregate supply curve is represented by

a vertical line

An expansionary gap is the amount by which:

actual output in the short run exceeds an economy's potential output