Question 1

Figure 7-4  
-Refer to Figure 7-4. Which of the following statements is true?

Accepted Answer

A)  The economy depicted in the figure experiences a recessionary gap = Yp*Y1. 
B)  The economy depicted in the figure experiences a recessionary gap = Yp*Y2. 
C)  The economy depicted in the figure experiences a recessionary gap = Y2*Y1. 
D)  The economy depicted in the figure is in long-run equilibrium but not in short-run equilibrium. 
A)  The economy depicted in the figure experiences a recessionary gap = Yp*Y1. 
B)  The economy depicted in the figure experiences a recessionary gap = Yp*Y2. 
C)  The economy depicted in the figure experiences a recessionary gap = Y2*Y1. 
D)  The economy depicted in the figure is in long-run equilibrium but not in short-run equilibrium.

Question 2

Table 7-1
   Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion.
-Refer to Table 7-1. What kind of gap, if any, exists and what is the size of the gap?

Accepted Answer

A)  No gap exists because the economy is in equilibrium. 
B)  There is a recessionary gap of $0.8 trillion. 
C)  There is a recessionary gap of $0.2 trillion. 
D)  There is an inflationary gap of $1 trillion. 
A)  No gap exists because the economy is in equilibrium. 
B)  There is a recessionary gap of $0.8 trillion. 
C)  There is a recessionary gap of $0.2 trillion. 
D)  There is an inflationary gap of $1 trillion.

Question 3

Inflationary and recessionary gaps are always eliminated automatically through changes in aggregate demand.

Accepted Answer

A) True 
 B)False

Question 4

What is the meaning of "sticky" wages? Provide and explain three reasons why wages may be sticky.

Accepted Answer

"Sticky" wages refer to the phenomenon w

Question 5

The long-run aggregate supply curve is vertical at the level of real output that corresponds to the natural rate of employment.

Accepted Answer

A) True 
 B)False

Question 6

The long run in macroeconomics is a period in which wages and prices are flexible and there is full market adjustment.

Accepted Answer

A) True 
 B)False

Question 7

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.

Accepted Answer

A)  The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease. 
B)  The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase. 
C)  The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases. 
D)  The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases. 
A)  The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease. 
B)  The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase. 
C)  The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases. 
D)  The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.

Question 8

The economy's potential output corresponds to the level of

Accepted Answer

A)  natural employment. 
B)  frictional unemployment. 
C)  structural unemployment. 
D)  cyclical unemployment. 
A)  natural employment. 
B)  frictional unemployment. 
C)  structural unemployment. 
D)  cyclical unemployment.

Question 9

In the long run, the price level is determined by

Accepted Answer

A)  aggregate demand. 
B)  aggregate supply. 
C)  the government. 
D)  consumers and firms. 
A)  aggregate demand. 
B)  aggregate supply. 
C)  the government. 
D)  consumers and firms.

Question 10

All else constant, a lower price level

Accepted Answer

A)  increases imports and decreases exports, resulting in a downward movement along the economy's aggregate demand curve. 
B)  decreases imports and increases exports, resulting in an upward movement along the economy's aggregate demand curve. 
C)  increases imports and decreases exports, resulting in an upward movement along the economy's aggregate demand curve. 
D)  decreases imports and increases exports, resulting in a downward movement along the economy's aggregate demand curve. 
A)  increases imports and decreases exports, resulting in a downward movement along the economy's aggregate demand curve. 
B)  decreases imports and increases exports, resulting in an upward movement along the economy's aggregate demand curve. 
C)  increases imports and decreases exports, resulting in an upward movement along the economy's aggregate demand curve. 
D)  decreases imports and increases exports, resulting in a downward movement along the economy's aggregate demand curve.

Question 11

Suppose an economy's exports increase and its imports decrease. All other things unchanged, this results in

Accepted Answer

A)  a decrease in net exports which will shift the aggregate demand curve to the right. 
B)  an increase in net exports which will shift the aggregate demand curve to the right. 
C)  a decrease in net exports which will shift the aggregate supply curve to the left. 
D)  an increase in net exports which will shift the aggregate supply curve to the right. 
A)  a decrease in net exports which will shift the aggregate demand curve to the right. 
B)  an increase in net exports which will shift the aggregate demand curve to the right. 
C)  a decrease in net exports which will shift the aggregate supply curve to the left. 
D)  an increase in net exports which will shift the aggregate supply curve to the right.

Question 12

Figure 7-7  
-Refer to Figure 7-7. At output level YK,

Accepted Answer

A)  the economy is not in equilibrium because it operates with an output gap. 
B)  the economy is in short-run equilibrium and it operates with an inflationary gap. 
C)  the economy is in short-run equilibrium and it operates with a recessionary gap. 
D)  the economy is not in equilibrium because the unemployment rate is below the natural rate of unemployment. 
A)  the economy is not in equilibrium because it operates with an output gap. 
B)  the economy is in short-run equilibrium and it operates with an inflationary gap. 
C)  the economy is in short-run equilibrium and it operates with a recessionary gap. 
D)  the economy is not in equilibrium because the unemployment rate is below the natural rate of unemployment.

Question 13

Which of the following occurs if an economy experiences an inflationary gap? 
I. Actual real GDP is less than potential output.
II. Actual real GDP is greater than potential output.
III. Unemployment is less than the natural rate.
IV. Unemployment is greater than the natural rate.

Accepted Answer

A)  I and III 
B)  I and IV 
C)  II and III 
D)  II and IV 
A)  I and III 
B)  I and IV 
C)  II and III 
D)  II and IV

Question 14

The short-run aggregate supply shows the amount of real GDP that will be

Accepted Answer

A)  made available at various price levels. 
B)  purchased at various price levels. 
C)  purchased at various national income levels. 
D)  made available at various national income levels. 
A)  made available at various price levels. 
B)  purchased at various price levels. 
C)  purchased at various national income levels. 
D)  made available at various national income levels.

Question 15

Figure 7-1  
-Refer to Figure 7-1. What could have caused the aggregate demand curve to shift to the right from AD1 to AD2?

Accepted Answer

A)  An increase in exports 
B)  An increase in imports 
C)  A decrease in defense spending 
D)  An increase in the domestic price level 
A)  An increase in exports 
B)  An increase in imports 
C)  A decrease in defense spending 
D)  An increase in the domestic price level

Question 16

Table 7-1
   Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion.
-Refer to Table 7-1. What is the initial real GDP and price level?

Accepted Answer

A)  Real GDP = 7.6 trillion; price level = 1.2 
B)  Real GDP = 7.6 trillion; price level = 2.8 
C)  Real GDP = 6.8 trillion; price level = 2.0 
D)  Real GDP = 7.8 trillion; price level = 1.0 
A)  Real GDP = 7.6 trillion; price level = 1.2 
B)  Real GDP = 7.6 trillion; price level = 2.8 
C)  Real GDP = 6.8 trillion; price level = 2.0 
D)  Real GDP = 7.8 trillion; price level = 1.0

Question 17

What is the difference between the short run and the long run in macroeconomics? Why is
Jthis distinction critical in the analysis of aggregate demand and supply?

Accepted Answer

In macroeconomics, the short run and the

Question 18

Suppose the economy is initially in long-run equilibrium. Which of the following events leads to a decrease in the price level and real GDP in the short run?

Accepted Answer

A)  A decrease in health insurance premiums paid by firms raises the cost of employing labor 
B)  An increase in government transfer payments 
C)  An increase in the cost of a key input such as oil 
D)  A sharp fall in stock market prices 
A)  A decrease in health insurance premiums paid by firms raises the cost of employing labor 
B)  An increase in government transfer payments 
C)  An increase in the cost of a key input such as oil 
D)  A sharp fall in stock market prices

Question 19

Figure 7-6  
-Refer to Figure 7-6. Suppose the economy is initially at A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. Which of the following is false about the economy after it adjusts to its new long-run equilibrium?

Accepted Answer

A)  Nominal wages increase. 
B)  The price level rises to Pd. 
C)  Firms employ more workers than in the short-run equilibrium. 
D)  There is some frictional and structural unemployment. 
A)  Nominal wages increase. 
B)  The price level rises to Pd. 
C)  Firms employ more workers than in the short-run equilibrium. 
D)  There is some frictional and structural unemployment.

Question 20

Figure 7-7  
-Refer to Figure 7-7. A shift from SRAS1 to SRAS2 could have been caused by all of the following except

Accepted Answer

A)  an increase in the consumer confidence index. 
B)  an increase in payroll tax. 
C)  a rise in health care costs which raises the cost of employing labor. 
D)  terrorist attacks that destroys an economy's infrastructure. 
A)  an increase in the consumer confidence index. 
B)  an increase in payroll tax. 
C)  a rise in health care costs which raises the cost of employing labor. 
D)  terrorist attacks that destroys an economy's infrastructure.

Figure 7-4 -Refer to Figure 7-4. Which of the following statements is true?

Table 7-1 Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion. -Refer to Table 7-1. What kind of gap, if any, exists and what is the size of the gap?

Inflationary and recessionary gaps are always eliminated automatically through changes in aggregate demand.

What is the meaning of "sticky" wages? Provide and explain three reasons why wages may be sticky.

The long-run aggregate supply curve is vertical at the level of real output that corresponds to the natural rate of employment.

The long run in macroeconomics is a period in which wages and prices are flexible and there is full market adjustment.

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.

The economy's potential output corresponds to the level of

In the long run, the price level is determined by

All else constant, a lower price level

Suppose an economy's exports increase and its imports decrease. All other things unchanged, this results in

Figure 7-7 -Refer to Figure 7-7. At output level Y_K,

Which of the following occurs if an economy experiences an inflationary gap? I. Actual real GDP is less than potential output. II. Actual real GDP is greater than potential output. III. Unemployment is less than the natural rate. IV. Unemployment is greater than the natural rate.

The short-run aggregate supply shows the amount of real GDP that will be

Figure 7-1 -Refer to Figure 7-1. What could have caused the aggregate demand curve to shift to the right from AD₁ to AD₂?

Table 7-1 Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion. -Refer to Table 7-1. What is the initial real GDP and price level?

What is the difference between the short run and the long run in macroeconomics? Why is Jthis distinction critical in the analysis of aggregate demand and supply?

Suppose the economy is initially in long-run equilibrium. Which of the following events leads to a decrease in the price level and real GDP in the short run?

Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD₂. Which of the following is false about the economy after it adjusts to its new long-run equilibrium?

Figure 7-7 -Refer to Figure 7-7. A shift from SRAS₁ to SRAS₂ could have been caused by all of the following except

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters

Exam 7: Aggregate Demand and Aggregate Supply

Figure 7-4 -Refer to Figure 7-4. Which of the following statements is true?

Table 7-1 Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion. -Refer to Table 7-1. What kind of gap, if any, exists and what is the size of the gap?

Inflationary and recessionary gaps are always eliminated automatically through changes in aggregate demand.

What is the meaning of "sticky" wages? Provide and explain three reasons why wages may be sticky.

The long-run aggregate supply curve is vertical at the level of real output that corresponds to the natural rate of employment.

The long run in macroeconomics is a period in which wages and prices are flexible and there is full market adjustment.

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.

The economy's potential output corresponds to the level of

In the long run, the price level is determined by

All else constant, a lower price level

Suppose an economy's exports increase and its imports decrease. All other things unchanged, this results in

Figure 7-7 -Refer to Figure 7-7. At output level YK,

Which of the following occurs if an economy experiences an inflationary gap? I. Actual real GDP is less than potential output. II. Actual real GDP is greater than potential output. III. Unemployment is less than the natural rate. IV. Unemployment is greater than the natural rate.

The short-run aggregate supply shows the amount of real GDP that will be

Figure 7-1 -Refer to Figure 7-1. What could have caused the aggregate demand curve to shift to the right from AD1 to AD2?

Table 7-1 Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion. -Refer to Table 7-1. What is the initial real GDP and price level?

What is the difference between the short run and the long run in macroeconomics? Why is Jthis distinction critical in the analysis of aggregate demand and supply?

Suppose the economy is initially in long-run equilibrium. Which of the following events leads to a decrease in the price level and real GDP in the short run?

Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. Which of the following is false about the economy after it adjusts to its new long-run equilibrium?

Figure 7-7 -Refer to Figure 7-7. A shift from SRAS1 to SRAS2 could have been caused by all of the following except

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters

Figure 7-7 -Refer to Figure 7-7. At output level Y_K,

Figure 7-1 -Refer to Figure 7-1. What could have caused the aggregate demand curve to shift to the right from AD₁ to AD₂?

Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD₂. Which of the following is false about the economy after it adjusts to its new long-run equilibrium?

Figure 7-7 -Refer to Figure 7-7. A shift from SRAS₁ to SRAS₂ could have been caused by all of the following except