Deck 8:The Classical Long run Model

Question 1

Which of the following is true for a market that clears?

A) An excess supply of anything traded will lead to a fall in its price.
B) An excess demand of anything traded will lead to a fall in its price.
C) An excess supply of anything traded will lead to a rise in its price.
D) An excess demand of anything traded will not lead to a price change.
E) A high price will lead to a high demand.

Answer 1

An excess supply of anything traded will lead to a fall in its price.

Question 2

Which economic phenomenon is the short-run macro model most useful in explaining?

A) The sources of employment in the long run
B) The trend of output in the long run
C) The sources of cyclical unemployment
D) The reasons why some workers become discouraged
E) The sources of long-run economic growth

Answer 2

The sources of cyclical unemployment

Question 3

The short-run macro model

A) is an attempt to explain why the economy tends to perform better in the short run than in the long run
B) was developed during the Great Depression to explain the economy's continuing poor performance
C) lost its popularity during the 1950s
D) was developed during the early 19th century
E) explains the forces that work to drive the economy to full employment

Answer 3

was developed during the Great Depression to explain the economy's continuing poor performance

Question 4

Which of the following real-world phenomena does the classical model ignore?

A) Frictional unemployment
B) Inflation
C) Real output growth
D) Cyclical unemployment
E) Structural unemployment

Question 5

According to Keynesian economists,

A) the economy will return quickly to full employment in most cases
B) if output is below its potential,the economy will soon return to full employment
C) production can be stuck below its full-employment level for extended periods of time
D) the Great Depression proved that classical economics does a good job of explaining how the economy operates
E) he economy will achieve full employment in the short run but,in the long run,GDP will fluctuate

Question 6

One reason why economists often appear to disagree when asked about the impact of some bad economic news is that

A) they do not understand the economy very well
B) economics is a very difficult science,and so there are many incorrect economic projections being made
C) economists rarely disagree;people just think they are disagreeing because they do not understand the language of economics
D) economists often appear to be disagreeing when one is talking about long-run impact while the other is referring to short-run impacts
E) economists are by nature competitive individuals and they often disagree

Question 7

Which of the following events triggered intense debate over the classical model of the economy?

A) The U.S.Civil War
B) World War I
C) the Baby Boom
D) The Great Depression
E) World War II

Question 8

A key assumption of the classical model is that

A) government intervention is important to get markets to clear
B) prices adjust until quantity supplied equals quantity demanded
C) markets never clear in the long run
D) demand adjusts in order to meet supply
E) prices remain constant and supply and demand adjust

Question 9

Which of the following is a definition of economic fluctuations?

A) Movements in prices around their long-run trend
B) Shifts in the long-run trend of output
C) Movements of the real wage over the long run
D) Shifts in the long-run trend of prices
E) Movements in output around its long-run trend

Question 10

John Maynard Keynes and his followers argued that

A) the classical model does a good job of explaining the economy's operation in both the short run and long run
B) the short run is unimportant so economists should focus their attention on the long run
C) the economy should be allowed to function with minimal government interference
D) the economy operates the same way in both the short run and long run
E) while the classical model might explain economic performance in the long run,the long run could take a long time to reach

Question 11

What key observation did the classical model attempt to explain?

A) the economy performs well in the short run,but not so well in the long run
B) business cycles are the most important economic problem
C) over the short run,the economy performs rather poorly
D) markets do not clear without government intervention
E) over the long run,the economy performs rather well

Question 12

The Classical model

A) is now discredited
B) was developed by John Maynard Keynes
C) has been completely displaced by the short-run macro model
D) helps us to understand the performance of the economy in the long run
E) is most useful in helping us to predict when an economic downturn will occur

Question 13

Classical economists believed that production could be stuck below its full employment level for a long period of time.

Question 14

What major historical event led to the most significant challenge to classical economic thinking?

A) The war on poverty
B) The American Revolution
C) World War II
D) The Great Depression
E) The oil shocks of the 1970s

Question 15

Which of the following statements about modern macroeconomic theory is most accurate?

A) Keynes' ideas help us understand movements in output around its long-run trend,while the Classical model is more useful in explaining the long-run trend itself.
B) The classical model helps us understand movements in output around its long-run trend,while the short-run macro model is more useful in explaining the long-run trend itself.
C) Both classical and short-run macro models help us understand movements in output around its long-run trend,but neither model is effective at explaining the long-run trend itself.
D) Neither the classical nor the short-run macro model helps us understand movements in output around its long-run trend,but both are useful in explaining the long-run trend itself.
E) Only the short-run macro model is useful in understanding movements in output around its long-run trend,and in explaining the long-run trend itself.

Question 16

A critical assumption in the classical model is that

A) markets are perfectly competitive in the short run
B) markets clear in the long run
C) markets clear in the short run
D) markets are perfectly competitive in the long run
E) all variables are expressed in nominal terms

Question 17

Which of the following is more of a short-run than a long-run goal?

A) Increasing the capital stock
B) Encouraging investment in human capital
C) Moderating economic fluctuations
D) Stimulating economic growth
E) Increasing private investment

Question 18

A critical assumption in the classical model is that markets are always clear.

Question 19

According to classical economics,

A) the economy moves to full employment in the long run
B) the economy is always at full employment in the short run
C) the economy is rarely at full employment
D) business cycles explain long-run fluctuations in the economy
E) the economy is at full employment in the short run,but in the long run,business cycle movements lead the economy away from full employment

Question 20

The classical model

A) is another name for the short-run macro model
B) was developed to explain the long period of poor economic performance during the Great Depression
C) is an attempt to explain why the economy tends to perform rather well over long periods of time
D) is believed by most economists to be a better explanatory model for short-term,rather than long-term,economic performance
E) was not really accepted as a legitimate economic theory until the 1950s

Question 21

The labor supply curve shows

A) how much output a firm will supply with a given amount of labor
B) how much labor a firm will want to hire at each wage rate
C) how much output people will want to buy if they supply a given amount of labor
D) how much labor a firm will need with a given amount of machinery and equipment
E) how many people will want jobs at each wage rate

Question 22

If the actual real wage exceeds the equilibrium wage,there will be an excess supply of labor.

Question 23

Markets clear

A) in the short run
B) when a depression occurs
C) when a recession occurs
D) roughly every ninety days
E) eventually

Question 24

The classical model

A) relies on the equivalency of the labor,capital,and land resource markets
B) includes a land market and a labor market
C) focuses primarily on capital markets
D) focuses primarily on labor markets
E) focuses on labor,capital,and land markets

Question 25

The desire for goods and services is

A) created by a market economy
B) the ultimate explanation for all production
C) why it is so difficult to explain how our economy works
D) the cause of inflation
E) what causes the market wage for labor to continually increase

Question 26

Refer to Figure 8-1.If the real hourly wage rate was $6,what would be the effect?

A) There would be a shortage of 40 million workers and the wage rate would rise.
B) There would be a shortage of 20 million workers and the wage rate would rise.
C) There would be a surplus of 40 million workers and the wage rate would fall.
D) There would be a surplus of 20 million workers and the wage rate would fall.
E) There would be unemployment.

Question 27

The market clearing assumption is

A) a central assumption of the short-run macro model
B) the idea that prices in every market will adjust until quantity supplied and quantity demanded are equal
C) the idea that excess supply always leads to an increase in demand
D) the idea that markets only work when they are in equilibrium
E) believed by most economists today to be an unreasonable assumption

Question 28

Which of the following groups would be considered suppliers in the labor market?

A) Government agencies
B) Firms
C) Households
D) Stockholders
E) Landlords

Question 29

The labor supply curve

A) slopes upward to illustrate that more people will want to work as the real wage increases
B) slopes upward to illustrate that changes in the real wage are directly proportional to changes in the nominal wage
C) may slope either upward or downward,depending upon the real wage
D) slopes downward to illustrate that a decrease in the real wage decreases the number of individuals willing to work
E) slopes downward to illustrate that the availability of workers is directly proportional to the real wage

Question 30

Because markets may not clear for several months or even several years,the classical model

A) is no longer considered valuable by mainstream economists
B) has no value when explaining a situation where excess supply exists
C) is irrelevant to any discussion of a market in which excess demand exists
D) does a better job of explaining short-term fluctuations than long-run growth
E) does a better job of explaining long-run growth than short-run fluctuations

Question 31

In the classical view,all markets clear,except the labor market.

Question 32

Refer to Figure 8-1.What would be the effect if the real wage was $2 above the equilibrium wage?

A) There would be a shortage of 40 million workers and the wage rate would rise.
B) There would be a shortage of 20 million workers and the wage rate would rise.
C) There would be a surplus of 40 million workers and the wage rate would fall.
D) There would be a surplus of 20 million workers and the wage rate would fall.
E) The government would set a minimum wage.

Question 33

In the classical long-run model,

A) we focus on labor resources,rather than capital or land
B) we study thousands of different resource markets
C) we concentrate our attention on three resource markets: land,labor,and capital
D) we focus on two markets: households and firms
E) the number of variables we include depends upon whether we are focusing on the short run or the long run

Question 34

The supply of labor

A) varies inversely with the price level
B) does not vary with the real wage rate
C) does not vary with the price level
D) varies directly with the price level
E) varies inversely with the nominal wage rate

Question 35

The labor demand curve slopes downward because

A) firms wish to hire fewer workers as the wage rate increases
B) households wish to hire fewer workers as the wage rate decreases
C) firms wish to hire more workers as the wage rate increases
D) firms wish to supply fewer workers as the wage rate increases
E) households wish to provide fewer hours of work as the wage rate decreases

Question 36

Refer to Figure 8-1.If the labor market is in equilibrium,there is no

A) unemployment
B) frictional unemployment
C) structural unemployment
D) seasonal unemployment
E) cyclical unemployment

Question 37

According to the classical model,there is no need for government intervention in the economy.if the economy is left alone,full employment output will eventually occur.

Question 38

The labor demand curve shows the

A) number of workers that firms will want to hire at any wage rate
B) number of people who will want jobs at any wage rate
C) amount of labor that a firm needs to produce a given amount of output
D) equilibrium wage rate and number of workers employed
E) amount of output workers will be able to buy for a given number of hours worked

Question 39

Refer to Figure 8-1.According to the graph,the equilibrium real hourly wage and quantity of labor employed,respectively,are

A) $10,110 million workers
B) $8,130 million workers
C) $8,150 million workers
D) $6,150 million workers
E) $6,130 million workers

Question 40

The labor demand curve slopes

A) upward to illustrate that the more productive the worker,the higher the real wage the employer is willing to pay that worker
B) upward to illustrate that the higher the wage rate,the fewer workers are demanded
C) upward or downward in direct proportion to the rate of inflation
D) downward to illustrate that the lower the real wage,the more workers employers are willing to hire
E) downward to illustrate that the availability of workers is directly proportional to the real wage

Question 41

What is the effect of diminishing returns to labor on the slope of the aggregate production function (where output is measured on the vertical axis and employment is measured on the horizontal axis)?

A) It implies that the slope of the curve increases as the number of workers employed increases.
B) It implies that the slope of the curve becomes negative as the number of workers employed increases.
C) It implies that the slope of the curve decreases (or becomes flatter)as the number of workers employed increases.
D) It keeps the slope the same throughout.
E) It has nothing to do with the slope of the aggregate production function.

Question 42

Which of the following best describes the aggregate production function if output is measured on the vertical axis and the number of workers employed is measured on the horizontal axis? The curve is

A) downward sloping and becomes flatter as the number of workers employed increases
B) downward sloping and becomes steeper as the number of workers employed increases
C) downward sloping with the same slope throughout
D) upward sloping and becomes steeper as the number of workers employed increases
E) upward sloping and becomes flatter as the number of workers employed increases

Question 43

A country's total output,or real GDP,is determined only by its aggregate production function.

Question 44

If the labor supply and demand curves cross at a wage of $20,

A) a wage rate of $10 per hour would lead to an excess demand for labor
B) a wage rate of $10 per hour would lead to an excess supply of labor
C) that wage causes a high rate of cyclical unemployment
D) employees are overpaid
E) a wage rate of $10 per hour would mean there is a significant amount of structural unemployment

Question 45

In a labor market diagram,the point at which the labor supply curve crosses the labor demand curve is

A) the point at which all workers are employed at the salary at which they would prefer to be employed
B) the point at which all jobs are filled at the wage employers prefer to pay
C) the point at which everyone who wants to work is able to find a job
D) a point at which we have excess labor supply,causing unemployment
E) the point at which excess demand for labor drives the wage rate upward

Question 46

Diminishing returns to labor occur for two primary reasons: 1)as we keep adding new workers,it becomes increasingly difficult to obtain productivity gains through additional specialization;and 2)each additional worker we add has less land and capital to work with.

Question 47

Which of the following is not an accurate description of the point at which the labor supply and labor demand curves meet?

A) The point at which the market for labor has cleared
B) The real wage at which the quantity of labor demanded is equal to the quantity of labor supplied
C) The point at which there is no frictional unemployment
D) The point at which there is no unemployment
E) The wage at which the number of workers firms want to hire is equal to the number of people who want jobs

Question 48

The aggregate production function is the

A) relationship between the amount of labor employed in the economy and the total amount of output produced
B) relationship between available labor and the total amount of output produced
C) the relationship between land and capital and labor employed in the economy
D) long-run equilibrium of the macroeconomy
E) amount of output any worker can produce given existing land and capital constraints

Question 49

According to the classical model,if there are too many elementary school teachers in the labor market,

A) the government should institute a retraining program to give the unemployed teachers new job skills
B) the wages for elementary teachers will fall,eventually causing the number of excess teachers to shrink
C) the wage for elementary teachers will increase for those who are employed,but unemployment of teachers will remain high
D) this situation provides an example of cyclical unemployment,which often occurs in the long run
E) people will quit training to become elementary school teachers and soon there will be a shortage in this labor market

Question 50

According to classical economists,

A) full employment means zero unemployment
B) as long as markets clear,no government action is needed to ensure full employment
C) even if all markets clear,government action is needed to correct labor market imperfections if the economy is to reach full employment
D) as long as markets clear and government provides jobs to those who need them,the economy will be at full employment
E) even if markets clear,cyclical unemployment will still persist in the long run

Question 51

The aggregate production function shows us that increasing the number of workers employed will increase output at a constant rate.

Question 52

Which of the following is a definition of the aggregate production function?

A) the relationship describing which inputs an economy can use with different quantities of labor
B) the relationship describing how much labor an economy can supply with different quantities of capital
C) the relationship describing how much output an economy can produce with different quantities of labor
D) the relationship describing what services an economy can produce with different quantities of capital
E) the relationship describing how much output a firm can produce with different quantities of capital

Question 53

It is possible for an economy to produce more than its potential level of output,at least for a short period of time.

Question 54

The classical model assumes that

A) the supply of labor is fixed
B) the stock of capital and technology are fixed
C) the stock of capital and technology grows at a constant rate
D) the supply of labor grows at a constant rate
E) the supply of labor grows at an increasing rate.

Question 55

The economy's level of output depends upon (1)the

A) amount of land and capital available for labor to use and (2)the state of technology and types of inputs available
B) cost of land and capital and (2)the cost of labor
C) availability of land and (2)the availability of capital
D) state of technology and (2)the cost of land
E) state of technology and (2)the types of inputs available

Question 56

An aggregate production function,when shown on a graph,

A) is linear and slopes upward
B) is linear and slopes downward
C) is horizontal
D) is vertical
E) slopes upward,and flattens out as more labor is used

Question 57

What is the full-employment output level?

A) The output level that results when the loanable funds market clears
B) The output level that results when the returns to labor are zero
C) The output level that results when factories are completely full
D) The output level that results when the labor market clears
E) The output level that would occur if the output level was positive.

Question 58

The aggregate production function shows how much output the economy can produce

A) with different quantities of labor,land,capital and states of technology
B) with different quantities of labor and capital,for given amounts of land and a given state of technology
C) with different quantities of labor,for given amounts of land and capital,and a given state of technology
D) with a given amount of money
E) with different amounts of money and given amounts of land,labor,capital,and a given state of technology

Question 59

Refer to Figure 8-2.The economy's potential level of output on the graph

A) cannot be determined with this information,only actual output can be found
B) is rising
C) exceeds $8 trillion
D) is less than $8 trillion
E) equals $8 trillion

Question 60

Refer to Figure 8-2.The economy is at full employment if

A) the quantity of labor supplied exceeds the quantity demanded
B) the quantity of labor demanded exceeds the quantity supplied
C) 130 million workers are employed
D) the real hourly wage is rising
E) we reach the maximum point on the production function

Question 61

Using the following information on a hypothetical economy in equilibrium,calculate total output for 2008.
$\begin{array}{|l|l}\text { Consumption Spending } & \$ 3.5 \text { trillion } \\\hline \text { Net Taxes } & \$ 2.7 \text { trillion } \\\hline \text { Household Saving } & \$ 2.5 \text { trillion } \\\hline \text { Investment Spending } & \$ 2.2 \text { trillion } \\\hline \text { Government Purchases } & \$ 3.0 \text { trillion } \\\hline \text { Exports } & \$ 1.1 \text { trillion } \\\hline \text { Imports } & \$ 1.1 \text { trillion }\end{array}$

Total output for 2008 is

A) $5.2 trillion
B) $5.7 trillion
C) $8.4 trillion
D) $8.7 trillion
E) $13.9 trillion

Question 62

Using the following information on a hypothetical economy in equilibrium,calculate total output for 2008.
$$\begin{array} { | l | l | } \hline \text { Consumption Spenting } & \$ 3.5 \text { trillion } \\\hline \text { Net Taxes } & \$ 2.7 \text { trillion } \\\hline \text { Household Seving } & \$ 2.5 \text { trilion } \\\hline \text { Investment Spenting } & \$ 2.2 \text { trilion } \\\hline \text { Government Purchases } & \$ 3.0 \text { trillion } \\\hline\end{array}$$
If exports are exactly equal to imports,total output for 2008 is

A) $5.2 trillion
B) $5.7 trillion
C) $8.4 trillion
D) $8.7 trillion
E) $13.9 trillion

Question 63

Say's Law states that by purchasing goods and services,buyers stimulate firms to produce goods and services equal to what has been purchased: Demand creates its own supply.

Question 64

Saving and taxes are considered leakages from the spending stream.

Question 65

The aggregate production function is the relationship between the

A) total cost of labor and the quantity of output in the economy
B) total cost of labor and the total real cost of inputs
C) quantity of labor employed in the economy and the total quantity of output produced
D) cost of labor and the supply of labor
E) quantity of labor and the quantity of capital

Question 66

What is the relationship between household saving and taxes?

A) taxes = income - consumption - household saving
B) household saving = income + taxes - consumption
C) taxes = income + consumption + household saving
D) household saving = consumption + income - taxes
E) taxes = household saving - income + consumption

Question 67

What is the relationship between total taxes and net taxes?

A) total taxes = net taxes / transfer payments
B) net taxes = total taxes + local taxes
C) net taxes = transfer payments / total taxes
D) total taxes = net taxes - transfer payments
E) total taxes = net taxes + transfer payments

Question 68

In a typical economy,the dollar value of the total output for a period will equal the sum of consumption spending,planned investment spending,government spending,and net tax revenue.

Question 69

According to Say's Law,supply creates its own demand.

Question 70

Say's Law is the idea that

A) in the long run,the economy reaches full employment automatically
B) the aggregate production function,along with the labor market,determines the economy's level of output
C) total output will always exceed total spending
D) whenever a good or service is produced,an equal amount of income is created
E) markets always clear

Question 71

Using the following information on a hypothetical economy in equilibrium,calculate total output for 2008.
$\begin{array}{l|r}\text { Consumption Spending } & \$ 3.5 \text { trillion } \\\hline \text { Net Taxes } & \$ 2.7 \text { trillion } \\\hline \text { Household Saving } & \$ 2.5 \text { trillion } \\\hline \text { Investment Spending } & \$ 2.2 \text { trillion } \\\hline \text { Government Purchases } & \$ 3.0 \text { trillion } \\\hline \text { Net Exports } & -\$ 0.3 \text { trillion }\end{array}$

If exports are exactly equal to imports,total output for 2008 is

A) $5.2 trillion
B) $5.7 trillion
C) $8.4 trillion
D) $8.7 trillion
E) $13.9 trillion

Question 72

Refer to Figure 8-3.This figure is known as

A) the classical aggregate production function
B) the Keynesian aggregate production function
C) the full-employment model
D) the circular flow diagram
E) Say's diagram

Question 73

After examining Figure 8-3,it is possible to conclude that

A) people do not save money nor pay taxes in this model
B) firms purchase resources from households and other firms in this model
C) households are the only ones who purchase and firms the only ones who sell in this model
D) completion of a sale represents a break in the flow of goods and services,and inputs in this model
E) all households and firms individually receive the same amount of money in this model

Question 74

Which of the following is a leakages from the circular flow?

A) Household saving and government spending
B) Business investment and household saving
C) Net taxes and household saving
D) Government spending and business investment
E) Net taxes and government spending

Question 75

The economist that gave us the proposition that "supply creates its own demand" was

A) Adam Smith
B) Jean Baptiste Say
C) Marc Lieberman
D) John Maynard Keynes
E) Robert Hall

Question 76

Factor payments are

A) amounts paid to resource owners for the use of their resource
B) amounts paid for goods
C) another term for revenues
D) the amount households put into savings
E) payments made to workers who are employed only part time

Question 77

Net taxes are

A) the total amount of taxes paid to the government
B) total tax revenues of the federal government
C) total tax revenues plus transfer payments
D) total tax revenues minus transfer payments
E) total tax revenues minus taxes paid by firms

Question 78

Say's Law

A) is valid only in a simple economy without financial markets
B) led economists during the 1920s to encourage the government to adopt flawed economic policies that led to the Great Depression
C) assures us that in the aggregate,firms are able to sell their output so that full employment can be sustained
D) tells us that in the long run,markets clear
E) tell us that firms must carefully monitor consumer spending and saving in order not to produce more than consumers are willing to purchase

Question 79

Transfer payments,such as unemployment insurance and welfare,are included in the circular flow as part of

A) government purchases
B) household saving
C) net taxes
D) planned investment spending
E) household consumption

Question 80

According to Say's Law,in the aggregate

A) demand creates its own supply
B) the production of output will generate exactly enough income to purchase what has been produced
C) the economy is incapable of producing output fast enough to ensure full employment
D) full employment cannot be sustained without government action
E) consumer saving prevents the economy from reaching full employment