Deck 16: Macro Policy Debate: Active or Passive?

Question 1

If the price level in an economy rises and its output level decreases as it gravitates toward its potential GDP, then _____

A) a policy to manipulate the aggregate supply is being used.
B) an active approach to correcting a recessionary gap is being used.
C) an active approach to correcting an expansionary gap is being used.
D) a passive approach to correcting a recessionary gap is being used.
E) a passive approach to correcting an expansionary gap is being used.

Answer 1

a passive approach to correcting an expansionary gap is being used.

Question 2

According to the active policy approach, the elimination of a recessionary gap _____

A) can only be achieved by decreasing wages.
B) requires a public policy of wage and price controls.
C) should be accomplished by stimulating aggregate demand.
D) will increase unemployment.
E) will cause a recession.

Answer 2

should be accomplished by stimulating aggregate demand.

Question 3

Self-correction works to close a recessionary gap because _____

A) a labor shortage causes wages to increase.
B) a labor surplus causes wages to increase.
C) a labor shortage causes wages to fall.
D) a labor surplus causes wages to fall.
E) a labor surplus causes price to fall.

Answer 3

a labor surplus causes wages to fall.

Question 4

Exhibit 16.1

Refer to Exhibit 16.1, which shows the relationship between an economy's potential output, price level, and real GDP. According to those who favor an active approach to policy, the economy will end up at _____ when it attains the potential output level.

A) point A
B) point B
C) point C
D) a point between point A and point B
E) a point between point A and point C

Question 5

Exhibit 16-2

Refer to Exhibit 16.2, which shows the price level, real GDP, and potential output for an economy. According to those who favor an active approach to policy, once the expansionary gap is eliminated, the economy can attain equilibrium at _____

A) point A.
B) point B.
C) point C.
D) a point above point A on the SRAS curve.
E) a point below point C on the SRAS curve.

Question 6

If an economy's actual GDP exceeds its potential GDP, _____
a.
wages and prices must fall.
b.
self-correcting forces will shift the SRAS curve to the left.
c.
self-correcting forces will shift the AD curve to the left.
d.
inflation will occur when AD shifts to the left.
e.
unemployment is likely to be unusually high.

Question 7

Exhibit 16-2

Refer to Exhibit 16.2, which shows the price level, real GDP, and potential output for an economy. According to those who favor a passive approach to policy, once the expansionary gap is eliminated, the economy will end up at _____

A) point A.
B) point B.
C) point C.
D) a point to the right of point A.
E) a point below point C.

Question 8

Which of the following is consistent with an active approach to policy?

A) the natural rate of unemployment being uncertain
B) wages and prices being relatively quick to adjust
C) the short-run aggregate supply curve being slow to shift in the presence of a recessionary gap
D) the size of the multiplier being irrelevant
E) the aggregate demand curve being slow to shift in the presence of a recessionary gap

Question 9

In the event of a recession, which of the following is the most likely policy stance of those who advocate a passive approach to economic policy?

A) cutting taxes
B) increasing government spending
C) reducing interest rates
D) increasing the money supply
E) doing nothing

Question 10

If a passive approach is followed in closing an expansionary gap, _____

A) restrictive fiscal policy would be used.
B) restrictive monetary policy would be used.
C) the short-run aggregate supply curve would shift to the right.
D) the price level would decrease in the long run.
E) an economy would experience inflationary pressure.

Question 11

Exhibit 16.1

Refer to Exhibit 16.1, which shows the relationship between an economy's potential output, price level, and real GDP. According to those who favor a passive approach to policy, the economy will attain equilibrium at potential output when _____

A) the short-run aggregate supply curve shifts to the left.
B) the short-run aggregate supply curve shifts to the right due to a fall in real wages.
C) government spending increases.
D) the money supply increases.
E) aggregate demand decreases.

Question 12

For those who favor an active approach, public policy changes are necessary to cure a recessionary gap because _____

A) the short-run aggregate supply curve will otherwise shift quickly to the right.
B) prices and wages are flexible downward but not upward.
C) the required decrease in output can be achieved only by shifting the aggregate demand curve.
D) real wages must fall in order to increase aggregate supply in the economy.
E) falling money wages will cause the AD curve to shift leftward unless policy counters this movement.

Question 13

An economy experiencing an expansionary gap _____

A) operates in an environment in which labor shortages drive up money wages, real wages, and prices.
B) has an excess supply of labor due to rising money wages and prices.
C) will self-correct as money wages decrease faster than rising prices.
D) will experience rising money wages and prices but falling real wages.
E) will have excessive involuntary unemployment.

Question 14

Exhibit 16-2

Refer to Exhibit 16.2, which shows the price level, real GDP, and potential output for an economy. According to those who favor an active approach to policy, the economy can attain equilibrium at potential output if _____

A) the SRAS curve shifts to the left.
B) the SRAS curve shifts to the right.
C) money supply remains constant.
D) government spending is decreased.
E) aggregate demand increases.

Question 15

Exhibit 16-2

Exhibit 16.2 shows the price level, real GDP, and potential output for an economy. According to those who favor a passive approach to policy, the economy will attain equilibrium at potential output when _____

A) the SRAS curve shifts to the left.
B) the SRAS curve shifts to the right.
C) government spending increases.
D) the money supply increases.
E) aggregate demand decreases.

Question 16

If we observe an economy adjusting to potential GDP as prices fall and real output increases, we can conclude that _____

A) the economy was experiencing an expansionary gap.
B) there is a labor surplus.
C) the economy was experiencing a recessionary gap.
D) self-correction is not the process that is occurring.
E) there are widespread labor shortages.

Question 17

If an active approach is followed in closing an expansionary gap, _____

A) the aggregate demand curve would shift rightward.
B) the aggregate demand curve would shift leftward.
C) the short-run aggregate supply curve would shift rightward.
D) the short-run aggregate supply curve would shift leftward.
E) there would be an upward movement along the short-run aggregate supply curve.

Question 18

Which of the following is not consistent with a self-correcting economy?

A) falling wages that correct a recessionary gap
B) falling prices that correct a recessionary gap
C) rising prices that correct an expansionary gap
D) the tendency of the short-run aggregate supply curve to shift until it intersects the aggregate demand curve at potential GDP
E) an active approach to a recession or depression

Question 19

When self-correction works to eliminate an expansionary gap, _____

A) both money wages and real wages increase.
B) money wages increase while real wages decrease.
C) both money wages and real wages decrease.
D) money wages decrease while real wages increase.
E) money wages remain unchanged.

Question 20

Which of the following is a difference between an active approach to close a recessionary gap and a passive approach to close a recessionary gap?

A) The level of real GDP would be higher in the long run with the active approach, while it would be lower with the passive approach.
B) The level of real GDP would be lower in the long run with the active approach, while it would be higher with the passive approach.
C) The price level would be higher and the level of real GDP would be lower in the long run with the active approach, whereas the price level would be lower and real GDP level would be higher with the passive approach.
D) Only the price level would be lower in the long run with the active approach, whereas it would be higher with the passive approach.
E) Only the price level would be higher in the long run with the active approach, whereas it would be lower with the passive approach.

Question 21

Which of the following is true of lags associated with discretionary policy?

A) Such lags extend only from the time a problem occurs in an economy to the time it is recognized by the government.
B) Such lags extend only from the time a problem is recognized by the government to the time an agreed-on policy is approved of.
C) Such lags extend only from the time a policy is approved to the time the policy is implemented.
D) Such lags can be reduced by taxation.
E) Such lags extend only from the time a problem occurs in an economy to the time a corrective policy has an impact on the economy.

Question 22

Long time lags hamper the effectiveness of economic policy because _____

A) people don't want to wait for economic recovery.
B) the longer unemployment lasts, the more intense inflation becomes.
C) by the time the impact of a policy is felt, a new problem may have come along that requires a different policy, which may make the economic situation even worse.
D) if inflation is allowed to continue for too long, it becomes immune to policy interference.
E) if unemployment is allowed to continue for too long, it becomes immune to policy interference.

Question 23

The selection of a new policy takes place during a period of time known as the _____

A) activity lag.
B) decision-making lag.
C) effectiveness lag.
D) implementation lag.
E) recognition lag.

Question 24

Those who favor a passive approach to policy often argue that changes in prices and wages will shift the _____

A) short-run aggregate supply curve before active policy shifts the aggregate demand curve.
B) short-run aggregate supply curve only after active policy shifts the aggregate demand curve.
C) short-run aggregate supply curve more than active policy shifts the aggregate demand curve.
D) short-run aggregate supply curve less than active policy shifts the aggregate demand curve.
E) short-run aggregate supply curve in a direction opposite the shift in the aggregate demand curve.

Question 25

The _____ lag is typically longer for fiscal policy than monetary policy.

A) supply
B) cyclical
C) effectiveness
D) implementation
E) recognition

Question 26

Policy makers may not know that the economy is in a recession until six months after the recession starts; this phenomenon is known as the _____

A) implementation lag.
B) policy coordination problem.
C) decision-making lag.
D) recognition lag.
E) effectiveness lag.

Question 27

Those who favor a passive approach to policy believe that _____

A) discretionary monetary policy can be used to help an economy since monetary policy lags are short.
B) discretionary fiscal policy can be used to help an economy since fiscal policy lags are short.
C) lags associated with implementing policies are too long and unstable for discretionary policy to be effective.
D) despite the lags involved, implementing discretionary policy is preferable to inaction.
E) automatic stabilizers cannot be used to help an economy since monetary policy lags are short.

Question 28

The time it takes for a new policy to register its full impact on an economy after it has been put in force is known as the _____

A) activity lag.
B) decision-making lag.
C) effectiveness lag.
D) implementation lag.
E) recognition lag.

Question 29

An implementation lag is the time it takes _____

A) for policy makers to decide what to do.
B) for the chosen policy to have its full impact on an economy.
C) to identify trouble in an economy and to assess its severity.
D) to put a selected policy into action.
E) before a policy's effects on an economy are noticed by ordinary people.

Question 30

Which of the following lags reduces the effectiveness of active policy?

A) preliminary lag
B) accounting lag
C) self-correction lag
D) recognition lag
E) execution lag

Question 31

During inflation, the optimal discretionary fiscal policy would be _____

A) to decrease taxes.
B) to increase government spending.
C) to decrease the reserve ratio.
D) to increase taxes.
E) to decrease the market interest rate.

Question 32

If the short-run equilibrium output of the United States exceeds the potential output, the Fed _____

A) employs an active monetary policy to close a recessionary gap.
B) employs an active monetary policy to close an expansionary gap.
C) relies on a passive approach to close a recessionary gap.
D) relies on a passive approach to close an expansionary gap.
E) employs an expansionary fiscal policy.

Question 33

The time it takes to identify and examine the nature and seriousness of an economic problem is the _____

A) activity lag.
B) decision-making lag.
C) effectiveness lag.
D) implementation lag.
E) recognition lag.

Question 34

The time required _____ is not a time lag associated with using discretionary policy to correct an economic problem.

A) to recognize a problem
B) to decide how to handle a problem
C) to set a policy change in action
D) for a policy to affect economic variables
E) to observe public reaction after a policy announcement is made

Question 35

The country of Glassen has experienced an expansionary gap for the last three years. The advocates of passive policy believe that _____

A) the short-run aggregate supply will shift to the left to close the expansionary gap.
B) the short-run aggregate supply will shift to the right to close the expansionary gap.
C) rising prices will shift the aggregate demand curve to the left.
D) the price level will fall relatively quickly to close the expansionary gap.
E) the aggregate demand curve will shift to the right as wages increase.

Question 36

The time it takes for the Fed's purchase of government securities to ultimately change aggregate demand is called the _____

A) recognition lag.
B) implementation lag.
C) effectiveness lag.
D) decision-making lag.
E) self-correction lag.

Question 37

Which of the following pairs of lags are typically shorter for monetary policy than for fiscal policy?

A) the recognition lag and the implementation lag
B) the effectiveness lag and the decision-making lag
C) the decision-making lag and the implementation lag
D) the implementation lag and the effectiveness lag
E) the recognition lag and the effectiveness lag

Question 38

After World War II, the average U.S. recession has lasted _____

A) a few months.
B) about half a year.
C) a little less than a year.
D) about three weeks.
E) about two years.

Question 39

Suppose policy makers are concerned about a shortage of long-term capital investment. To remedy the problem, various plans to cut capital gains taxes have been suggested. The delay in picking a plan is called the _____

A) implementation lag.
B) policy coordination problem.
C) decision-making lag.
D) recognition lag.
E) effectiveness lag.

Question 40

Suppose a recession surprises economic forecasters who did not see it coming. This is an example of a(n) _____

A) cyclical lag.
B) recognition lag.
C) decision-making lag.
D) implementation lag.
E) effectiveness lag.

Question 41

If the time taken for an economy to self-correct is shorter than the active policy lags, then _____

A) active policy will shift the short-run aggregate supply curve more than the aggregate demand curve.
B) active policy is likely to destabilize the economy.
C) time is required to accumulate evidence that the economy is performing below its potential.
D) the aggregate demand curve will shift more rapidly than the short-run aggregate supply curve.
E) active policy will work better than passive policy.

Question 42

Which of the following is an outcome of prolonged unemployment?

A) an improvement in labor skills
B) an increase in the inflation rate
C) a decrease in frictional unemployment
D) a fall in potential GDP
E) an increase in the size of the labor force

Question 43

Which of the following is true of rational expectations?

A) People form expectations on the basis of information about past as well as future actions of policy makers.
B) Wage agreements do not reflect inflationary expectations if workers expect continued inflation.
C) Rational people cannot easily anticipate the effects of discretionary policy on the price level and output.
D) The role of expectations is applicable only in the context of monetary policy.
E) The effectiveness of a particular government policy is independent of people's expectations.

Question 44

According to the rational expectations school, _____

A) on average people have very little idea of what to expect from government policy makers.
B) people form expectations by focusing only on the private sector.
C) changes in the expected price level shift the aggregate demand curve.
D) people do not consider likely government policies when forming expectations, choosing to remain rationally ignorant.
E) people form expectations in part by considering the probable future actions of government policy makers.

Question 45

_____ won the 1995 Nobel Prize in Economics for his studies of rational expectations.

A) George Akerlof
B) Paul Samuelson
C) Kenneth Arrow
D) Robert Lucas
E) Simon Kuznets

Question 46

If workers and firms expect continued inflation, their wage agreements _____

A) are contingent on changes in policy.
B) are based on the weighted averages of previous inflation rates.
C) are based on the lowest historical inflation rate.
D) are based on present inflation rates.
E) reflect these inflationary expectations.

Question 47

Those who favor an active approach to policy believe that _____

A) discretionary monetary policy cannot be used to help an economy since monetary policy lags are long.
B) discretionary fiscal policy cannot be used to help an economy since fiscal policy lags are long.
C) the lags associated with implementing policies are too long and unstable for discretionary policy to be effective.
D) despite the lags involved, implementing discretionary policy is preferable to inaction.
E) discretionary fiscal policy cannot be used to help an economy since it leads to inflation.

Question 48

Which of the following is a problem associated with an active policy such as a stimulus package?

A) an increase in the unemployment rate
B) an increase in inflationary pressure
C) an increase in the market interest rate
D) a decrease in the market interest rate
E) a decrease in money demand

Question 49

Which of the following is not a valid criticism of discretionary fiscal policy?

A) The implementation of fiscal policy is sometimes difficult.
B) Time lags in fiscal policy are long.
C) Fiscal policy works only during periods of stagflation.
D) Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income.
E) Fiscal policy might have undesirable long-term effects on aggregate supply.

Question 50

Which of the following macroeconomic variables is most dependent on whether the government pursues an active approach to policy or a passive approach to policy?

A) aggregate supply
B) investment demand
C) money demand
D) money supply
E) interest rates

Question 51

Discretionary policy advocates believe _____

A) that there is a high cost associated with the use of discretionary policy.
B) that self-corrective forces in an economy work slowly.
C) that natural adjustments of wages and prices can help attain potential output.
D) in rational expectations.
E) that an active stabilization policy imposes troubling fluctuations in the price level and real GDP.

Question 52

According to the rational expectations theory, people base their expectations about inflation on _____

A) the announcement of a change in policy.
B) weighted averages of previous inflation rates, with the most distant getting the heaviest weight.
C) all information available to them.
D) changes in monetary policy only.
E) changes in both monetary and fiscal policy.

Question 53

Which of the following is correct?

A) Monetary authorities do not have to testify before Congress to offer an assessment of the economy.
B) The Fed does not announce its "bias" concerning future changes in order to keep the element of surprise.
C) The Fed holds press conferences to be more transparent about FOMC policy.
D) The Fed is not transparent about FOMC policy.
E) Fed officials are not permitted to deliver speeches around the country.

Question 54

Passive policy advocates rely on an economy's natural ability to correct itself in case of unemployment because of _____

A) the lack of any real concern for those who have no jobs.
B) the conviction that unemployment is relatively harmless.
C) the belief that active economic policy is likely to be either ineffective or harmful.
D) the desire to await further economic data before intervening.
E) the belief in the law of diminishing returns.

Question 55

The effectiveness of a particular government policy depends in part on _____

A) public announcements.
B) rumors.
C) hope.
D) best possible outcomes.
E) what people expect.

Question 56

Aggregate supply depends on _____

A) what sort of macroeconomic course policy makers are expected to pursue.
B) the inflationary expectations of firms and workers.
C) short-run output and employment.
D) having discretionary policies in place to stimulate aggregate demand.
E) having passive policies in place to stimulate aggregate demand.

Question 57

Which of the following statements supports the passive approach to close a recessionary gap?

A) It is likely that policies will be subject to time lags.
B) Prolonged unemployment may cause an economy's potential real GDP to fall.
C) Workers' skills may grow rusty during a prolonged recession.
D) It is likely that unemployed workers will drop out of the labor force.
E) Firms may neglect their capital stock during a prolonged recession.

Question 58

An effective policy of governmental intervention in an economy requires all of the following except one. Which is the exception?

A) the will to reject sound policy if it gets in the way of political considerations
B) the ability to estimate the economy's potential level of output
C) the ability to predict what would happen without intervention
D) an assortment of effective tools of discretionary policy
E) the ability to achieve effective cooperation between fiscal and monetary policy makers

Question 59

The short-run aggregate supply curve is drawn for _____

A) a given expected price level reflected in long-term wage contracts.
B) a given expected price level reflected in short-term wage contracts.
C) an actual price level reflected in long-term wage contracts.
D) an actual price level reflected in short-term wage contracts.
E) the highest price level possible reflected in long-term wage contracts.

Question 60

Exhibit 16.3

Refer to Exhibit 16.3. At point a, workers and firms expect a price level of _____

A) P.
B) P'.
C) P".
D) between 0 and P'.
E) between P' and P.

Question 61

Brandon, an economist, is a believer of the rational expectations school. According to him, which of the following is likely to affect the levels of output and employment in an economy?

A) an expansionary monetary policy, if it is fully anticipated
B) a recessionary monetary policy, if it is fully anticipated
C) a monetary policy that is unanticipated
D) a fiscal policy that is anticipated
E) the Fed's announcement of no change in monetary policy

Question 62

If the price level increases more rapidly than expected, _____

A) output will decrease.
B) output will increase.
C) output will not change.
D) real wages will increase.
E) unemployment will increase.

Question 63

If an economy is at potential GDP and an expansionary policy is correctly anticipated, the result will be _____

A) a short-run fall in output and employment.
B) little or no increase in GDP.
C) an increase in wages along with a dramatic fall in the price level.
D) a rapidly expanding economy.
E) a severe recession.

Question 64

The time-inconsistency problem is likely to arise in Cadmia if _____

A) attempts are made to coordinate monetary policy with fiscal policy.
B) there is a lag between the announcement of a monetary policy and its implementation.
C) policy makers initially aim to keep the price level stable but do not follow through as promised.
D) policy makers do not allow enough time for a new policy to take effect.
E) there is a deep conflict among monetary policy makers.

Question 65

Exhibit 16.3

Refer to Exhibit 16.3. An expansionary monetary policy increases the aggregate demand curve to _____, stimulates output and employment in the short run to equilibrium point _____, with output at _____.

A) AD, a, Q
B) AD, a, Q'
C) AD, c, Q
D) AD, b, Q
E) AD', b, Q'

Question 66

Exhibit 16.4

Refer to Exhibit 16.4. If the Fed follows the announced stable-price policy of keeping prices at P' and keeping the economy at its potential, the Fed must stimulate aggregate demand as much as workers and firms expect (shown by point_____), but this is _____.

A) c, inflationary
B) d, inflationary
C) e, inflationary
D) c, deflationary
E) d, deflationary

Question 67

For an economy to eliminate inflation once people have begun to anticipate it, _____

A) a passive policy approach must be followed.
B) the monetary authorities must announce their decisions.
C) actual inflation must be greater than anticipated inflation.
D) cold turkey solutions that lead to further inflation must be avoided.
E) a recession will have to be endured until expectations have been reduced.

Question 68

Exhibit 16.3

Refer to Exhibit 16.3. If the Fed follows the announced course, the aggregate demand curve will be _____ and equilibrium will be at point _____, where the price level is as expected and the economy is producing _____, the potential output.

A) AD, a, Q
B) AD, a, Q'
C) AD, c, Q
D) AD', b, Q'

Question 69

According to the rational expectations school, if the Fed announces a policy of rapid growth in the money supply, but then puts the brakes on money expansion without any announcement, which of the following is likely to be the short-run result?

A) an unexpected surge in aggregate demand
B) an unexpected drop in aggregate demand
C) an anticipated surge in aggregate demand
D) an anticipated drop in aggregate demand
E) no change in aggregate demand

Question 70

Given the expected price level, policies for reaching potential GDP will work best if the money supply is _____

A) large, so that prices at potential GDP are below expectations and people can afford to buy enough goods to support the natural level of employment.
B) large enough that prices at potential GDP exceed expectations and firms can afford to hire workers.
C) small, so that prices at potential GDP fall below expectations and people can afford to buy enough goods to support the natural level of employment.
D) small, so that prices at potential GDP exceed expectations and firms can afford to hire workers.
E) exactly the size that makes prices equal to the prices people expected to prevail.

Question 71

Exhibit 16.3

Refer to Exhibit 16.3. An expansionary monetary policy and higher wage agreements will eventually cause the short-run aggregate supply curve in to shift _____, intersecting ____ at point _____, the economy's potential output.

A) leftward, AD', a
B) leftward, AD', b
C) leftward, AD', c
D) leftward, A', a
E) leftward, AD, b

Question 72

If resource owners anticipated a monetary growth rate of 6 percent, but the money supply actually grew at only 2 percent, then _____

A) real wages would fall.
B) output would decrease.
C) output would remain unchanged.
D) output would increase, but only if nominal wages increased more rapidly than prices.
E) the expected inflation rate was less than the actual rate.

Question 73

_____, the time-inconsistency problem is eliminated.

A) When an inflation or a recession is correctly anticipated
B) When lags associated with monetary and fiscal policy are extremely short
C) When discretionary macro policy is replaced with fixed policy rules that are well publicized
D) When expectations about an economy adjust very slowly
E) When the price level in an economy adjusts over time with changes in aggregate demand

Question 74

Exhibit 16.4

Refer to Exhibit 16.4. If the Fed follows the announced stable-price policy of keeping prices at P', short-run output at point _____ is less than the economy's potential output of _____.

A) c, Q
B) d, Q
C) e, Q
D) c, Q'
E) d, Q'

Question 75

Suppose the Fed announced a policy of rapid growth in the money supply in 2015, but then put the brakes on money expansion without any announcement. If in 2016, Fed officials announce again that an expansion is planned, it is most likely that _____

A) people will believe in the announcement since the conditions that created a need for the expansion are probably still in effect.
B) people will believe in the announcement since they expect the Fed to implement the expansionary policy, despite not doing so in the past.
C) people will not believe in the announcement since they reason that the conditions that created a need for the expansion must have changed in the meantime.
D) people will believe in the announcement because an expansionary monetary policy is easier to implement than a contractionary monetary policy.
E) there will be further uncertainty about the Fed following through on the policies it announces.

Question 76

Economists of the rational expectations school believe that expansionary monetary policy is fully effective only if _____

A) the policy is anticipated by workers and firms.
B) it causes the aggregate supply curve to shift to the left.
C) the economy is operating at or above its potential output level.
D) policy makers follow through on their previously announced plans.
E) the policy is totally unexpected.

Question 77

Exhibit 16.4

Refer to Exhibit 16.4. If the Fed announces it plans to keep prices stable at P' but workers and firms, expect monetary policy to be expansionary, then their expectations are depicted by the short-run aggregate supply curve SRAS at a price level ____

A) P.
B) P'.
C) P".
D) between 0 and P'.
E) between P' and P.

Question 78

Some economists believe that when workers and firms expect a contractionary monetary policy, _____

A) they try to prevent the price level from increasing.
B) their actions lead to a further increase in output.
C) they are likely to negotiate for relatively lower wages.
D) the monetary authority is forced to cancel its planned recessionary policy.
E) both output and employment increase even more than was originally planned.

Question 79

Exhibit 16.3

Refer to Exhibit 16.3. An expansionary monetary policy and higher wage agreements will eventually cause the short-run aggregate supply curve in to shift _____. Output once again returns to the economy's potential GDP at _____, but in the process the price level changes to _____.

A) leftward, Q, P
B) leftward, Q, P'
C) leftward, Q, P"
D) leftward, Q', P
E) leftward, Q', P'

Question 80

Exhibit 16.3

Refer to Exhibit 16.3. The short-run aggregate supply curve, SRAS is based on wage contracts reflecting an expected price level of _____

A) P.
B) P'.
C) P".
D) between 0 and P'.
E) between P' and P.