Deck 9: Classical Macroeconomics and the Self-Regulating Economy

Question 1

Exhibit 9-1
Refer to Exhibit 9-1.The economy is currently producing Q₁.If an economist believes the economy can move itself without government intervention to Q_N,then he believes that the

A) LRAS curve will shift leftward until it intersects the SRAS and AD curves at Q₁.
B) AD curve will shift rightward and intersect the SRAS curve at point B.
C) SRAS curve will shift rightward and intersect the AD curve at point A.
D) economy will likely stay "stuck" in short-run equilibrium.

Answer 1

SRAS curve will shift rightward and intersect the AD curve at point A.

Question 2

If Real GDP is less than Natural Real GDP,then the (actual)unemployment rate is

A) less than the natural unemployment rate.
B) equal to the natural unemployment rate.
C) greater than the natural unemployment rate.
D) equal to full employment.
E) b and d

Answer 2

greater than the natural unemployment rate.

Question 3

An economy is producing its Natural Real GDP when the rate of unemployment is equal to the __________ unemployment rate.

A) frictional
B) structural
C) sum of the frictional unemployment rate and the structural
D) seasonal
E) cyclical

Answer 3

sum of the frictional unemployment rate and the structural

Question 4

A recessionary gap exists when AD and SRAS

A) fail to intersect.
B) intersect to the right of Natural Real GDP.
C) intersect to the left of Natural Real GDP.
D) both have a positive slope.

Question 5

If Real GDP is greater than Natural Real GDP,the economy is in a(n)

A) frictional gap.
B) structural gap.
C) recessionary gap.
D) inflationary gap.

Question 6

Exhibit 9-1
Refer to Exhibit 9-1.The unemployment rate is lower at

A) Q₁ than Q_N.
B) Q_N than Q₁.
C) point A than point B.
D) point B than point A.

Question 7

Suppose the economy's short-run equilibrium point is to the left of the Natural Real GDP.Which of the following is true?

A) The economy is in an inflationary gap.
B) The economy is in a recessionary gap.
C) The economy is in long-run equilibrium.
D) This situation is actually impossible.

Question 8

If the economy is in a recessionary gap,

A) Real GDP is greater than Natural Real GDP.
B) Real GDP is equal to Natural Real GDP.
C) Real GDP is less than Natural Real GDP.
D) the (actual)unemployment rate is less than the natural unemployment rate.
E) a and d

Question 9

When the economy is at its full employment Real GDP,the unemployment rate is equal to

A) zero.
B) the natural unemployment rate.
C) the frictional unemployment rate.
D) the structural unemployment rate.

Question 10

If the SRAS curve intersects the AD curve to the left of Natural Real GDP,the economy is

A) in a recessionary gap.
B) at Natural Real GDP.
C) in an inflationary gap.
D) at full-employment Real GDP.

Question 11

The long-run aggregate supply (LRAS)curve is

A) horizontal.
B) vertical.
C) positively sloped.
D) negatively sloped.

Question 12

An inflationary gap exists when AD and SRAS

A) fail to intersect.
B) intersect to the right of Natural Real GDP.
C) intersect to the left of Natural Real GDP.
D) both have a positive slope.

Question 13

If the natural unemployment rate is 5 percent and the current unemployment rate is 6 percent,then the economy is

A) producing more Real GDP than it does at full employment.
B) in an inflationary gap.
C) producing less Real GDP than it does at full employment.
D) a and b
E) b and c

Question 14

If the SRAS curve intersects the AD curve to the right of Natural Real GDP,the economy is

A) in a recessionary gap.
B) at Natural Real GDP.
C) in an inflationary gap.
D) at full-employment Real GDP.

Question 15

When the economy is producing Real GDP at a level at which the LRAS curve intersects the AD curve the economy is

A) in a recessionary gap.
B) in long-run equilibrium.
C) in an inflationary gap.
D) operating at less than full-employment output.

Question 16

Suppose the economy's short-run equilibrium point is to the right of the Natural Real GDP.Which of the following is true?

A) The economy is in an inflationary gap.
B) The economy is in a recessionary gap.
C) The economy is in long-run equilibrium.
D) This situation is actually impossible.

Question 17

If the natural unemployment rate is 7 percent and the current unemployment rate is 5 percent,then the economy is

A) producing more Real GDP than it does at full employment.
B) in a recessionary gap.
C) producing less Real GDP than it does at full employment.
D) a and b
E) b and c

Question 18

If Real GDP is less than Natural Real GDP,the economy is in

A) an inflationary gap.
B) a recessionary gap.
C) an unemployment gap.
D) a real gap.

Question 19

If the economy is currently in a recessionary gap,

A) all economists will argue that the economy can remove the gap itself.
B) some economists will argue that the economy can remove the gap itself.
C) no economist will argue that the economy can remove the gap itself.
D) all economists will argue that over time the recessionary gap will worsen.

Question 20

Exhibit 9-1
Refer to Exhibit 9-1.The economy is currently producing Q₁.At this level of Real GDP,the economy is in a(n)

A) inflationary gap.
B) recessionary gap.
C) unemployment gap.
D) high Real GDP gap.
E) none of the above

Question 21

Exhibit 9-2
Refer to Exhibit 9-2.The economy is currently producing Q₁.At this level of Real GDP,the economy is in a(n)

A) inflationary gap.
B) recessionary gap.
C) unemployment gap.
D) high Real GDP gap.
E) none of the above

Question 22

Exhibit 9-3
Refer to Exhibit 9-3.If the economy is in equilibrium at point B,

A) the (actual)unemployment rate is less than the natural unemployment rate.
B) the (actual)unemployment rate is equal to the natural unemployment rate.
C) the (actual)unemployment rate is greater than the natural unemployment rate.
D) the relationship between the (actual)unemployment rate and the natural unemployment rate cannot be determined from the available information.

Question 23

Exhibit 9-2
Refer to Exhibit 9-2.The economy is currently producing Q₁.At this level of Real GDP,the economy is experiencing

A) a shortage in the labor market.
B) a surplus in the labor market.
C) neither a shortage nor a surplus in the labor market.
D) all of the above are equally likely

Question 24

When there is a recessionary gap, (actual)Real GDP is __________ Natural Real GDP,and the (actual)unemployment rate is __________ the natural rate of unemployment.

A) greater than;less than
B) greater than;greater than
C) greater than;equal to
D) less than;greater than
E) less than;less than

Question 25

The economy can operate

A) beyond its institutional PPF but not beyond its physical PPF.
B) on both its institutional PPF and its physical PPF,but not at the same time.
C) under its physical PPF but not under its institutional PPF.
D) a and b
E) a,b,and c

Question 26

The more institutional constraints that exist in a particular society,

A) the closer the institutional PPF will lie to the physical PPF.
B) the farther out from the origin the institutional PPF will lie.
C) the closer to the origin the institutional PPF will lie.
D) the closer to the origin the institutional PPF will lie and the farther out from the origin the physical PPF will lie.

Question 27

Exhibit 9-3
Refer to Exhibit 9-3.The economy is in short-run equilibrium and has an inflationary gap at point

A) A.
B) B.
C) C.
D) D.
E) E.

Question 28

Exhibit 9-3
Refer to Exhibit 9-3.If the economy is in short-run equilibrium at point C,

A) the (actual)unemployment rate is less than the natural unemployment rate.
B) the (actual)unemployment rate is equal to the natural unemployment rate.
C) the (actual)unemployment rate is greater than the natural unemployment rate.
D) the relationship between the (actual)unemployment rate and the natural unemployment rate cannot be determined from the available information.

Question 29

In a self-regulating economy,inflationary and recessionary gaps produce shifts of the

A) AD curve that maintain the short-run 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) SRAS curve that move the economy to a long-run equilibrium point.

Question 30

The natural rate of unemployment exists at

A) some point within the interior of the PPF but outside the limits of the institutional PPF.
B) some point within the interior of the physical PPF,but we cannot locate it with more accuracy.
C) some point within the interior of the institutional PPF,but we cannot locate it with more accuracy.
D) every point on the institutional PPF.
E) every point on the physical PPF.

Question 31

Exhibit 9-3
Refer to Exhibit 9-3.The economy is in short-run equilibrium and has a recessionary gap at point

A) A.
B) B.
C) C.
D) D.
E) E.

Question 32

The physical production possibilities frontier illustrates the different combinations of goods that society can produce given

A) the constraints of finite resources and the current state of technology.
B) the price level.
C) its institutional constraints.
D) the natural rate of unemployment.
E) the constraints of finite resources and the current state of technology and institutional constraints.

Question 33

A recessionary gap exists if (actual)Real GDP is __________ Natural Real GDP.

A) less than
B) greater than
C) equal to
D) b and c
E) none of the above

Question 34

Exhibit 9-3
Refer to Exhibit 9-3.If the economy is in short-run equilibrium at point A,

A) the (actual)unemployment rate is less than the natural unemployment rate.
B) the (actual)unemployment rate is equal to the natural unemployment rate.
C) the (actual)unemployment rate is greater than the natural unemployment rate.
D) the relationship between the (actual)unemployment rate and the natural unemployment rate cannot be determined from the available information.

Question 35

Exhibit 9-3
Refer to Exhibit 9-3.The economy is in long-run equilibrium at point

A) A.
B) B.
C) C.
D) D.
E) E.

Question 36

Exhibit 9-1
Refer to Exhibit 9-1.The economy is currently producing Q₁.An economist who believes wages are flexible in the downward direction would argue that

A) it is likely the economy will soon move to point B.
B) it is likely the economy will soon move to point A.
C) it is not likely the economy will move to point A on its own accord now or anytime soon.
D) Real GDP will soon take a downturn.

Question 37

Exhibit 9-1
Refer to Exhibit 9-1.If the economy is self-regulating,the price level is

A) lower in short-run equilibrium than in long-run equilibrium.
B) lower in long-run equilibrium than in short-run equilibrium.
C) higher in long-run equilibrium than in short-run equilibrium.
D) lower when the economy is in a recessionary gap than when it is in long-run equilibrium.
E) a and c

Question 38

When there is an inflationary gap, (actual)Real GDP is __________ Natural Real GDP,and the (actual)unemployment rate is __________ the natural rate of unemployment.

A) greater than;less than
B) greater than;greater than
C) less than;greater than
D) less than;less than
E) less than;equal to

Question 39

In a "self-regulating" economy,inflationary and recessionary gaps

A) never occur.
B) are eliminated by forces internal to the economy,without government intervention.
C) are eliminated by timely actions of economic policymakers.
D) are the desirable results of microeconomic price adjustments.

Question 40

The institutional production possibilities frontier illustrates the different combinations of goods that society can obtain given

A) the constraints of finite resources and the current state of technology.
B) the price level.
C) its institutional constraints.
D) the natural rate of unemployment.
E) the constraints of finite resources and the current state of technology and institutional constraints.

Question 41

Exhibit 9-5
Refer to Exhibit 9-5.Picture an AD curve intersecting an SRAS curve at Point K on graph (1).Which point(s)would this correspond to on graph (2)?

A) A or B
B) C
C) D or E
D) F
E) G

Question 42

Exhibit 9-4
Refer to Exhibit 9-4.Assume the economy is currently in long-run equilibrium with the price level equal to P₃.If foreigners begin to buy more U.S.goods,the economy will,in the short run,move to which of the following equilibrium combinations of price level and Real GDP?

A) P₂,Q₄.
B) P₃,Q₃.
C) P₄,Q₂.
D) P₄,Q₄.
E) P₅,Q₃.

Question 43

Exhibit 9-4
Refer to Exhibit 9-4.Assuming the economy is in an inflationary gap at a short-run equilibrium point with the price level at P₂,the movement toward long-run equilibrium will be

A) down and along AD₁.
B) up and along AD₂.
C) down and along SRAS₁.
D) up and along SRAS₂.
E) down and along SRAS₂.

Question 44

Exhibit 9-4
Refer to Exhibit 9-4.Which of the following is true at the Real GDP level of Q₃?

A) The unemployment rate is equal to its natural level.
B) The cyclical unemployment rate is zero.
C) The economy is in long-run equilibrium.
D) all of the above
E) none of the above

Question 45

Exhibit 9-5
Refer to Exhibit 9-5.Picture an AD curve intersecting an SRAS curve at Point L on graph (1).Which point(s)would this correspond to on graph (2)?

A) A or B
B) C
C) D or E
D) F
E) G

Question 46

Exhibit 9-5
Refer to Exhibit 9-5.Picture an AD curve intersecting an SRAS curve at Point J on graph (1).Which point(s)would this correspond to on graph (2)?

A) A or B
B) C
C) E or F
D) F
E) G

Question 47

Exhibit 9-4
Refer to Exhibit 9-4.Assume the economy is self-regulating and currently is in long-run equilibrium with the price level equal to P₅.If something happens that shifts the AD curve to the AD₁ position,the economy will eventually settle down at a long-run equilibrium point of __________.

A) P₅,Q₃.
B) P₄,Q₄.
C) P₃,Q₃.
D) P₃,Q₅.
E) P₄,Q₂.

Question 48

Suppose the economy is self-regulating and the (actual)unemployment rate is less than the natural unemployment rate.This means that the economy is producing a level of output

A) above its natural level and will eventually cut back on output.
B) below its natural level and will eventually increase output.
C) below its natural level but no forces exist to automatically increase output.
D) above its natural level and institutional constraints will automatically be reduced so as to allow the economy to continue producing this level.
E) none of the above

Question 49

Exhibit 9-5
Refer to Exhibit 9-5.Picture an AD curve intersecting an SRAS curve at Point M on graph (1).Which point(s)would this correspond to on graph (2)?

A) A or B
B) C
C) E or F
D) F
E) G

Question 50

Exhibit 9-5
Refer to Exhibit 9-5.Picture an AD curve and an SRAS curve intersecting at Point I on graph (1).Which point(s)would this correspond to on graph (2)?

A) A or B
B) C
C) D or E
D) F
E) G

Question 51

Exhibit 9-5
Refer to Exhibit 9-5.Point A on graph (2)corresponds to which point(s)on graph (1)?

A) I or J
B) K
C) L or M
D) I or L
E) J or M

Question 52

Classical economics refers to an era in the history of economic thought that stretched from about

A) 1750 to the early 1900s.
B) 1935 to the 1970s.
C) 1800 to the mid 1900s.
D) 1600 to the mid 1800s.

Question 53

Exhibit 9-5
Refer to Exhibit 9-5.Point C on graph (2)corresponds to which point(s)on graph (1)?

A) I or J
B) K
C) L or M
D) I or L
E) J or M

Question 54

If an economy is operating __________ its institutional production possibilities frontier,it is producing __________ output than it would be at full employment.

A) below;less
B) below;more
C) above;less
D) above;more
E) a and d

Question 55

Exhibit 9-4
Refer to Exhibit 9-4.Assume the economy is self-regulating and currently is in long-run equilibrium with the price level equal to P₃.After an initial increase in U.S.exports,the long-run equilibrium will be brought about by a shift from

A) AD₃ to AD₁.
B) SRAS₁ to SRAS₂.
C) SRAS₂ to SRAS_1.
D) AD₃ to AD₂.
E) none of the above

Question 56

Which of the following statements is true?

A) The economy can operate outside (or beyond)its institutional PPF and its physical PPF,but only for a short while.
B) The economy can operate outside its physical PPF,if only for a short while,but can never operate outside its institutional PPF.
C) The economy can operate outside its institutional PPF,if only for a short while,but can never operate outside its physical PPF.
D) The economy can never operate outside its institutional PPF or its physical PPF,even for a short while.
E) none of the above

Question 57

Exhibit 9-5
Refer to Exhibit 9-5.Assume that the economy starts off at point A on graph (2)with an effective minimum wage law in place.After inflation erodes the purchasing power of the minimum wage,the economy is likely to move to a point such as

A) B.
B) G.
C) F.
D) C.
E) None of the above,because the minimum wage has no influence on the amount of goods produced.

Question 58

Exhibit 9-4
Refer to Exhibit 9-4.When AD and SRAS cross at point (P₁,Q₃),the economy is in

A) a recessionary gap.
B) an inflationary gap.
C) long-run equilibrium.
D) a and c
E) b and c

Question 59

Exhibit 9-5
Refer to Exhibit 9-5.Point G on graph (2)corresponds to which point(s)on graph (1)?

A) I or J
B) K
C) L or M
D) I or L
E) J or M

Question 60

Exhibit 9-5
Refer to Exhibit 9-5.Point B on graph (2)corresponds to which point(s)on graph (1)?

A) I or J
B) K
C) L or M
D) I or L
E) J or M

Question 61

If the current unemployment rate is less than the natural unemployment rate,then the economy is

A) in long-run equilibrium.
B) in an inflationary gap.
C) in a recessionary gap.
D) producing at full employment.
E) b and d

Question 62

If the current Real GDP is less than Natural Real GDP,then the economy is

A) in long-run equilibrium.
B) in a recessionary gap.
C) in an inflationary gap.
D) possibly in short-run equilibrium.
E) b and d

Question 63

Some economists believe the economy is self-regulating.What does this mean?

A) It means the economy can remove itself from recessionary and inflationary gaps and produce at Natural Real GDP.
B) It means the economy is always in long-run equilibrium producing Natural Real GDP.
C) It means that inflationary gaps naturally change into recessionary gaps.
D) It means that recessionary gaps naturally change into inflationary gaps.
E) c and d

Question 64

If the economy is self-regulating,then it follows that

A) recessionary and inflationary gaps are temporary economic states.
B) wages will fall when the economy is in a recessionary gap.
C) wages will rise when the economy is in an inflationary gap.
D) the economy is always in long-run equilibrium.
E) a,b and c

Question 65

If the economy is in long-run equilibrium,

A) prices will rise but wages will remain constant.
B) neither prices nor wages will change.
C) it is producing Natural Real GDP.
D) prices will remain constant but wages may rise.
E) b and c

Question 66

The frictional unemployment rate is 2.5 percent,the structural unemployment rate is 3.1 percent,and the current unemployment rate (in the economy)is 5.6.The economy is in

A) an inflationary gap producing more than Natural Real GDP.
B) a recessionary gap producing more than Natural Real GDP.
C) an inflationary gap producing Natural Real GDP.
D) a recessionary gap producing less than Natural Real GDP.
E) long-run equilibrium.

Question 67

If the economy is self-regulating and in a recessionary gap,what happens?

A) Wages rise,the SRAS curve shifts leftward,and both Real GDP and the price level rise.
B) Wages fall,the SRAS curve shifts leftward,the price level rises,and Real GDP falls.
C) Wages fall,the SRAS curve shifts rightward,and both the price level and Real GDP fall.
D) Wages fall,the SRAS curve shifts rightward,the price level falls,and Real GDP rises.
E) none of the above

Question 68

A laissez-faire macroeconomic policy,based on a __________ in self regulating properties of the economy,implies __________ by the government.

A) belief,active policymaking
B) belief,noninterference
C) disbelief,active policymaking
D) disbelief,noninterference

Question 69

The structural unemployment rate is 2.3 percent,the frictional unemployment rate is 2.4 percent,and the current unemployment rate is 4.1 percent.The economy is in

A) a recessionary gap producing less than Natural Real GDP.
B) an inflationary gap producing more than Natural Real GDP.
C) long-run equilibrium.
D) an inflationary gap producing Natural Real GDP.
E) a recessionary gap producing more than Natural Real GDP.

Question 70

If the economy is self-regulating and in a recessionary gap,

A) wages and prices will fall.
B) wages will fall,but prices will rise.
C) neither wages nor prices will change.
D) wages will rise,but prices will fall.
E) wages and prices will rise.

Question 71

If the economy is self-regulating and in an inflationary gap,

A) wages and prices will fall.
B) wages will rise,but prices will fall.
C) wages and prices will rise.
D) wages will fall,but prices will rise.
E) neither wages nor prices will change.

Question 72

Suppose AD and SRAS intersect to the left of LRAS.Which of the following is true?

A) The economy is in a recessionary gap.
B) The economy is in an inflationary gap.
C) The economy is in a long-run equilibrium.
D) This situation is actually impossible.

Question 73

Suppose AD and SRAS intersect to the right of LRAS.Which of the following is true?

A) The economy is in a recessionary gap.
B) The economy is in an inflationary gap.
C) The economy is in a long-run equilibrium.
D) This situation is actually impossible.

Question 74

The structural unemployment rate is 1.3 percent,the frictional unemployment rate is 2.1 percent,and the current unemployment rate is 4.9 percent.The economy is in

A) a recessionary gap producing less than Natural Real GDP.
B) an inflationary gap producing more than Natural Real GDP.
C) long-run equilibrium.
D) an inflationary gap producing Natural Real GDP.
E) a recessionary gap producing more than Natural Real GDP.

Question 75

A necessary condition for a money economy to be self-regulating is that

A) wages must be flexible in an upward direction,but not in a downward direction.
B) the economy must always be operating on its institutional production possibilities frontier.
C) wages must be flexible in a downward direction,but not in an upward direction.
D) interest rates must be flexible in the credit market.
E) none of the above

Question 76

If the economy is self-regulating and current Real GDP is greater than Natural Real GDP,the economy is operating __________ the natural unemployment rate and wages will soon __________.

A) below;fall.
B) above;fall
C) below;rise
D) above;rise
E) none of the above

Question 77

A necessary condition for the economy to be self-regulating is that

A) wages must be relatively high.
B) the labor market must always be in equilibrium.
C) the interest rate must be above its equilibrium level.
D) wages must be flexible in both an upward and downward direction.
E) none of the above

Question 78

If the current unemployment rate is equal to the natural unemployment rate,then current Real GDP is

A) greater than Natural Real GDP.
B) equal to Natural Real GDP.
C) equal to the Real GDP produced at full employment.
D) less than Natural Real GDP.
E) b and c

Question 79

If the economy is producing Natural Real GDP,then the

A) current unemployment rate is greater than the natural unemployment rate.
B) current unemployment rate is less than the natural unemployment rate.
C) economy is at full employment.
D) economy is operating at the natural unemployment rate.
E) c and d

Question 80

If the natural unemployment rate is 5.5 percent,then the economy is at full employment when the actual unemployment rate is

A) more than 5.5 percent.
B) between 0 and 5.5 percent.
C) 0 percent.
D) 5.5 percent.
E) none of the above