Question 1

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

Accepted Answer

E

Question 2

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

Accepted Answer

The active policy approach suggests that the government should use fiscal and monetary policies to stimulate aggregate demand in order to eliminate a recessionary gap. This can be done through increasing government spending or reducing taxes, which will increase consumer and investment spending. Decreasing wages (A) or implementing wage and price controls (B) are not effective solutions as they can have negative effects on employment and market efficiency. Eliminating a recessionary gap should not lead to an increase in unemployment (D) or a new recession (E) as it involves increasing output and demand.

Question 3

Self-correction works to close a recessionary gap because _____

Accepted Answer

In a recessionary gap, there is a labor surplus, which leads to downward pressure on wages. As wages fall, production costs decrease, encouraging firms to hire more workers and increase output, thus closing the recessionary gap.

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.

Accepted Answer

The answer of Exhibit 16.1
 
-Refer to Exhibit 16.1, which...

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 _____

Accepted Answer

According to those who favor an active approach to policy, the expansionary gap should be eliminated through contractionary fiscal or monetary policy, bringing the economy back to potential output. At this point, the economy can attain equilibrium at the intersection of the AD and LRAS curves, which is point C in the exhibit. At point C, the price level is stable, and real GDP equals potential output. Thus, the correct choice is C.

Question 6

If an economy's actual GDP exceeds its potential GDP, _____

Accepted Answer

When an economy's actual GDP exceeds its potential GDP, it indicates an overheated economy where demand outstrips supply, leading to inflationary pressures. Self-correcting mechanisms, such as an increase in wages and input costs due to high demand, will eventually shift the short-run aggregate supply (SRAS) curve to the left, bringing the economy back towards its potential GDP. This process helps to moderate the economy by reducing the output and increasing prices, thus cooling down the demand.

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 _____

Accepted Answer

Those who favor a passive approach to policy believe that the economy will self-correct over time. Point B represents the equilibrium where real GDP equals potential output, indicating the elimination of the expansionary gap without active intervention.

Question 8

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

Accepted Answer

The answer of Which of the following is consistent with...

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?

Accepted Answer

Those who advocate a passive approach to economic policy believe that the economy will naturally correct itself without intervention. Therefore, doing nothing would be the most likely policy stance during a recession.

Question 10

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

Accepted Answer

The answer of If a passive approach is followed in...

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 _____

Accepted Answer

According to those who favor a passive approach to policy, the economy will attain equilibrium at potential output when the short-run aggregate supply curve shifts to the right due to a fall in real wages. They argue that any attempts to actively shift the aggregate demand curve through government spending or monetary policy will only lead to inflation without any sustainable increase in real GDP. Therefore, they prefer to let the market adjust on its own through changes in relative prices and wages.

Question 12

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

Accepted Answer

The answer of For those who favor an active approach,...

Question 13

An economy experiencing an expansionary gap _____

Accepted Answer

An expansionary gap occurs when actual output exceeds potential output, leading to a tightening of resources, particularly labor. As the demand for labor increases, money wages, real wages, and prices rise, leading to a situation in which labor shortages drive up costs. This is known as an inflationary gap, and option A best describes this situation.

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 _____

Accepted Answer

The answer of Exhibit 16-2
 
-Refer to Exhibit 16.2, which...

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 _____

Accepted Answer

The answer of Exhibit 16-2
 
-Exhibit 16.2 shows the price...

Question 16

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

Accepted Answer

When the economy adjusts to potential GDP as prices fall and real output increases, it means that the economy was in a recessionary gap, and it has now self-corrected. In a recessionary gap, the economy is producing less than potential GDP, and there is idle labor and capital. As prices fall, firms become more willing to hire and produce, which leads to an increase in real output. Ultimately, the self-correcting process brings the economy back to potential GDP where there is no longer idle labor and capital. Therefore, the correct answer is C.

Question 17

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

Accepted Answer

An active approach to closing an expansionary gap typically involves contractionary fiscal or monetary policy, which would decrease aggregate demand, shifting the aggregate demand curve leftward.

Question 18

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

Accepted Answer

An active approach to a recession or depression involves government intervention in the economy, such as fiscal or monetary policy. While such intervention can help stabilize the economy in the short run, it may also interfere with the self-correcting mechanisms of the market and create unintended consequences. Therefore, it is considered inconsistent with a self-correcting economy.

Question 19

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

Accepted Answer

In an expansionary gap, demand for labor increases, leading to higher money wages. However, as prices also rise due to increased demand, the purchasing power (real wages) of workers decreases, hence money wages increase while real wages decrease.

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?

Accepted Answer

An active approach to close a recessionary gap typically involves using fiscal or monetary policy to stimulate the economy, which can lead to higher price levels in the long run due to increased demand. In contrast, a passive approach relies on the economy's natural adjustment mechanisms, which might not result in higher price levels.

Quiz 16: Macro Policy Debate: Active or Passive?