E1221Ch. 9 Practice Questions

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Chapter 9 - Practice Questions 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 constant. B) Factor prices are exogenous, and technology and factor supplies are changing. C) Factor prices are exogenous, technology and factor prices are endogenous. D) Factor prices adjust to output gaps, and technology and factor supplies are constant. E) Factor prices adjust to output gaps, and technology and factor prices are changing. 2) In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of A) the national accounts model. B) the short run. C) the long run. D) the adjustment process. E) the business cycle model. 3) If wages rise faster than increases in labour productivity, then unit labour costs will ____ and the AS curve will shift ______. 4) If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by A) a point to the right of the aggregate supply curve at potential GDP. B) the aggregate expenditure curve shifting upward. C) the aggregate demand curve shifting to the left. D) the intersection of the AD and AS curves at potential output. E) the aggregate supply curve shifting to the left. FIGURE 1 5) Refer to Figure 1. If the economy is currently producing output of Y0, the economy's automatic adjustment process will have the A) economy remaining where it is. B) AS curve shifting to the right until point A is reached. C) vertical line at Y* shifting to the left until it gets to Y0. D) level of potential output falling. E) AD curve shifting to the right until point B is reached. 6) Refer to Figure 1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the A) economy will quickly move to point A. B) level of output will decrease below Y0. C) AD curve will eventually shift to the right and return the economy to its full-employment level of output. D) economy will eventually move to point B. E) economy will only move gradually toward point A as wages slowly adjust.

7) 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 before all factor prices B) supplied by firms after all factor prices C) supplied by firms before all factor prices D) demanded by households after all factor prices E) supplied by firms after all output prices TABLE 1 shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion. 8) Refer to Table 1. Which of the following statements best describes the situation facing Economy B? A) There is a recessionary gap of $20 billion and wages are falling slowly. B) There is no output gap and wages are stable. C) There is an output gap of $20 billion and wages are rapidly adjusting. D) There is an inflationary gap of $40 billion and wages are rising. E) There is a recessionary gap of $40 billion and wages are falling slowly. 9) Refer to Table 1. How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E? A) The output gap is much larger in Economy E, so wages are changing at a faster rate. B) The size of the output gap is the same in Economies A and E, but wages are rising in A and falling in E. C) The output gap is larger in Economy A, yet wages are changing more slowly. 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. 10) 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) large increase; a small decrease B) small increase; a large increase C) large increase; a small increase D) small increase; a large decrease E) large increase; no change 11) 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 rise; real GDP returns to its original level with a higher 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 rises and the price level falls; real GDP returns to its original level with a lower price level D) real GDP and the price level both fall; real GDP is below its original level with a lower price level E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level 12) 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; an even larger B) a positive; a smaller C) a positive; no D) a negative; a positive E) a negative; no

13) Assume Canada's economy is in a long-run equilibrium with real GDP equal to potential output. 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 rises and the price level falls; real GDP and the price level return to their original levels B) 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 is above its original level with a higher price level D) real GDP and the price level both fall; real GDP is below its original level with a lower price level E) real GDP and the price level both rise; real GDP returns to its original level with a higher price level FIGURE 2 shows an AD/AS model for an economy. The economy begins in long-run equilibrium at point A. 14) Refer to Figure 2. A negative shock to the economy shifts the AD curve from AD 1 to AD 2 . The initial effect is A) an inflationary output gap of 200. B) a recessionary output gap of 550. C) a recessionary output gap of 100. D) a recessionary output gap of 300. E) an inflationary output gap of 100. 15) Refer to Figure 2. A negative shock to the economy shifts the AD curve from AD 1 to AD 2 . At the new short run equilibrium, the price level is ________ and real GDP is ________. A) 60; 700 B) 90; 900 C) 110; 800 D) 90; 1250 E) 60; 1000 16) Refer to Figure 2. Which of the following events could have shifted the AD curve from AD 1 to AD 2 ? A) an increase in desired investment B) an increase in government purchases C) an increase in autonomous consumption D) an increase in net exports E) an increase in autonomous household saving 17) Refer to Figure 2. After the negative aggregate demand shock shown in the diagram (from AD 1 to AD 2 ), which of the following describes the adjustment process that would return the economy to its long-run equilibrium? A) Wages would increase, causing the AS curve to shift to the right, reaching a new equilibrium at point E. B) Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a new equilibrium at point E. C) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D. D) Wages would increase, causing the AD curve to shift to the right, returning to the original equilibrium at point A. E) Wages would eventually fall, causing the AD curve to shift to the right, returning to the original equilibrium at point A. 18) Refer to Figure 2. Following the negative AD shock (from AD 1 to AD 2 ), the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 110; 800 B) 60; 1000 C) 90; 900 D) 90; 1250 E) 110; 1000

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19) Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP A) is determined by potential output and the price level by aggregate demand. B) is determined by aggregate demand and the price level by potential output. C) is determined by AD and the price level is determined by the AS curve. D) and the price level are determined by aggregate demand. E) and the price level are determined by "long-run aggregate supply." FIGURE 3 shows an AD/AS model for a hypothetical economy which is initially in a short run equilibrium at point A. 20) Refer to Figure 3. In the initial short-run equilibrium, there is ______ output gap of ______ but this gap could could be closed by a ________. A) a recessionary; 200; fiscal expansion B) an inflationary; 200; fiscal expansion C) a recessionary; 100; fiscal contraction D) an inflationary; 100; fiscal contraction E) a recessionary; 200; fiscal contraction 21) Refer to Figure 3. If the government takes no action to change the short-run macro equilibrium, then A) the AS curve can either shift to the right or left depending on the fiscal policy. B) the AS curve will shift to the left until it intersects with the AD curve at point D. C) the AS curve will shift to the right until it intersects with the AD curve at point B. D) the AD curve will shift downward until it intersects with the AS curve at point E. E) the AD curve will shift upward until it intersects with the AS curve at point C. 22) Refer to Figure 3. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing government transfer payments. C) decreasing the net tax rate. D) implementing a contractionary fiscal policy. E) decreasing government purchases. 23) Consider a simple macro model with demand-determined output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks? A) MPC = 0.7, t = 0.3, m = 0.2 B) MPC = 0.8, t = 0.1, m = 0.2 C) MPC = 0.9, t = 0.2, m = 0.4 D) MPC = 0.8, t = 0.2, m = 0.3 E) MPC = 0.7, t = 0.1, m = 0.4 24) 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 ________.

25) 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 (Y*) to increase? A) If the increase in G crowds out private investment. B) If the increase in G is offset by an equal decrease in C, I, and NX. C) 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. 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 spent on public infrastructure that increases the productivity of private-sector production. Answers 1) A 2) C 3) rise, left 4) D 5) B 6) E 7) B 8) A 9) D 10) C 11) A 12) A 13) A 14) C 15) B 16) E 17) B 18) B 19) A 20) A 21) C 22) C 23) B 24) decreasing, decrease 25) E

E1221Ch. 9 Practice Questions

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