Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Which of the following events is likely to cause both an decrease in real GDP
and an increase in the price level? (Hint: Sketch a graph of the Aggregate Supply - Aggregate Demand
model.)
a. | A business tax cut improves businesses' profitability and increases the supply
of goods they are willing to produce at the existing price level.. | b. | An unexpected war
interupts the supply of imported oil and raises it's price significantly, raising the costs of
doing business and lowering profitability. | c. | A decision by the Fed to lower interest rates
causes businesses to increase their investment spending, increasing Aggregate
Demand | d. | The value of the dollar in terms of other countries' currencies goes up, causing
a fall in exports, reducing Aggregate Demand. |
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Exhibit 8-1
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2.
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Refer to Exhibit 8-1. The economy is currently producing Q1. At this
level of Real GDP, the economy is in a(n)
a. | recessionary gap. | b. | inflationary gap. | c. | unemployment
gap. | d. | high Real GDP gap. | e. | none of the
above |
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3.
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Refer to Exhibit 8-1. The economy is currently producing Q1.
According to the Classical theory, the economy will move adjust by itself and move to QN,
because
a. | AD curve will shift rightward and intersect the SRAS curve at point
B. | b. | LRAS curve will shift leftward until it intersects the SRAS and AD curves at
Q1. | c. | SRAS curve will shift rightward and intersect the AD curve at point
A. | d. | economy will likely stay "stuck" in short-run
equilibrium. |
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4.
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According to Classical theory, inflationary and recessionary gaps produce shifts
of the
a. | SRAS curve that move the economy to a long-run full employment equilibrium
point. | b. | AD curve that move the economy to a long-run equilibrium point. | c. | SRAS curve that
maintain the short-run equilibrium point. | d. | AD curve that maintain the short-run
equilibrium point. |
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5.
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Which is not a feature of the Classical theory?
a. | If the economy is in a recession, government intervention is necessary to return to
full employment. | b. | The economy cannot have substantial unemployment over the long
run. | c. | If the economy is in a recession, it will automatically return to full
employment. | d. | Prices and wages are flexible. |
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6.
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According to the classical economists, which of the following statements is
false?
a. | Interest rate flexibility will ensure that planned saving is equal to planned
investment. | b. | There is a direct relationship between the amount individuals plan to save and the
interest rate. | c. | As the interest rate rises, the quantity supplied of loanable funds
rises. | d. | There is only a weak relationship between the amount business firms plan to invest
and the interest rate. Changes in interest rates do not really change Investment
spending. |
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7.
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The long-run aggregate supply (LRAS) curve is
a. | horizontal and shows the potential of the economy to produce long-run, given
it’s resources and technology. | b. | positively sloped and shows how firms change
output in response to price level changes | c. | vertical and shows the potential of the economy
to produce long-run, given it’s resources and technology. | d. | negatively sloped
and shows how firms change output in response to price level changes. |
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Exhibit 8-6
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8.
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Refer to Exhibit 8-6. Assume the economy is self-regulating and behaves
according to Classical theory. If it is currently at point 1, it follows that
a. | the SRAS curve will shift to the right and pass through point 3. | b. | the AD curve will
shift to the right and pass through point 4. | c. | the SRAS curve will shift to the left and pass
through point 2. | d. | the economy is currently operating below its physical PPF and above its institutional
PPF. |
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9.
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Refer to Exhibit 8-6. If the economy is self-regulating and currently at point
1, it follows that
a. | the actual unemployment rate is below the natural unemployment
rate. | b. | the labor market is in equilibrium. | c. | the economy is currently producing to the
capacity of it’s resources. | d. | there is a surplus of labor in the labor
market. | e. | the economy is currently in an inflationary gap. |
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10.
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Refer to Exhibit 8-6. If the economy is self-regulating and behaves according to
Classical theory, and if it is currently at point 1, what is going to happen?
a. | Wages fall, the SRAS curve shifts to the right until it passes through point 3; in
long-run equilibrium the price level is lower and Real GDP is higher than at point
1. | b. | Wages rise, the SRAS curve shifts to the right until it passes through point 3; in
long-run equilibrium the price level is lower and Real GDP is higher than at point
1. | c. | Prices rise, the AD curve shifts to the right until it passes through point 4; in
long-run equilibrium the price level and Real GDP are higher than at point 1. | d. | Wages rise, the AD
curve shifts to the right until it passes through point 4; in long-run equilibrium the price level
and Real GDP are higher than at point 1. | e. | Wages fall, the SRAS curve shifts to the left
until it passes through point 2; in long-run equilibrium the price level is higher and Real GDP is
lower that at point 1. |
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Exhibit 8-3
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11.
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Refer to Exhibit 8-3. The economy is in a long-run equilibrium at point
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12.
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In a "self-regulating" market economy of Classical theory,
inflationary and recessionary gaps
a. | are eliminated by timely actions of economic policymakers. | b. | never
occur. | c. | are the desirable results of microeconomic price adjustments. | d. | are eliminated by
forces internal to the economy, without government intervention. |
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