Deck 9: Classical Macroeconomics and the Self-Regulating Economy

Question 1

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

A)producing a level of Real GDP that is greater than the level of natural Real GDP.
B)in a recessionary gap.
C)producing a level of Real GDP that is less than the level of natural Real GDP.
D)a and b
E)b and c

Answer 1

A

Question 2

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

Answer 2

B

Question 3

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

A)in a recessionary gap.
B)in either a recessionary gap or an inflationary gap,but we need more information to determine which one.
C)in an inflationary gap.
D)at full-employment Real GDP.

Answer 3

C

Question 4

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)an inflationary gap.
B)a recessionary gap.
C)long-run equilibrium.
D)none of the above

Question 5

Suppose the economy's short-run equilibrium is at a point to the right of Natural Real GDP.Which of the following statements 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 6

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

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

Question 7

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 8

When the economy is producing Real GDP at the 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 9

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 10

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 11

Suppose the economy's short-run equilibrium level is at a point to the left of Natural Real GDP.Which of the following statements 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 12

The long-run aggregate supply (LRAS)curve is

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

Question 13

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 14

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 15

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 16

When the economy is producing the level of output equal to natural 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 17

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

A)producing a level of Real GDP that is greater than the level of natural Real GDP.
B)in an inflationary gap.
C)producing a level of Real GDP that is less than the level of natural Real GDP.
D)a and b
E)b and c

Question 18

If the economy is currently in a recessionary gap,

A)all economists will agree that the economy can remove itself from the recessionary gap without government intervention.
B)some economists will argue that the economy can remove itself from the recessionary gap without government intervention.
C)no economist will state that the economy can remove itself from the recessionary gap without government intervention.
D)all economists will agree that over time the recessionary gap will worsen.

Question 19

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)less than or greater than the natural unemployment rate,but we cannot determine which one.
E)b and d

Question 20

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)an inflationary gap.
B)a recessionary gap.
C)long-run equilibrium.
D)none of the above

Question 21

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 22

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 23

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 24

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 25

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)a constant 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 26

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 27

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 28

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 29

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 30

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

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 31

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 32

The unemployment rate is equal to the natural unemployment rate at

A)some point within the interior of the physical PPF but beyond 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 33

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 government policymakers.
D)are the desirable results of microeconomic price adjustments.

Question 34

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 35

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

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 36

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 37

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 38

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 39

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 40

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 the natural unemployment rate.
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 41

Exhibit 9-5
Refer to Exhibit 9-5.Imagine 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 42

Exhibit 9-5
Refer to Exhibit 9-5.Point A on graph (2)would correspond to the intersection of an AD curve and a SRAS curve at 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 43

Exhibit 9-5
Refer to Exhibit 9-5.Imagine 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 44

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 45

Exhibit 9-5
Suppose the AD curve and the SRAS curve intersect to the left of the LRAS curve.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 46

Exhibit 9-5
Suppose the AD curve and the SRAS curve intersect to the right of the LRAS curve.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 47

Exhibit 9-5
Refer to Exhibit 9-5.Point G on graph (2)would correspond to the intersection of an AD curve and a SRAS curve at 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 48

Exhibit 9-5
Refer to Exhibit 9-5.Imagine 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 49

Exhibit 9-5
Refer to Exhibit 9-5.Point B on graph (2)would correspond to the intersection of an AD curve and a SRAS curve at 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 50

Exhibit 9-5
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 51

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 52

Exhibit 9-5
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 53

Exhibit 9-5
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 54

Exhibit 9-5
Refer to Exhibit 9-5.Point C on graph (2)would correspond to the intersection of an AD curve and a SRAS curve at 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 55

Exhibit 9-5
If the natural unemployment rate is 5.5 percent,then the economy is at long-run equilibrium 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

Question 56

Exhibit 9-5
Refer to Exhibit 9-5.Imagine 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 57

Exhibit 9-5
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 58

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 59

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 economy will move to long-run equilibrium 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 60

Exhibit 9-5
Refer to Exhibit 9-5.Imagine 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 61

If an economy's institutional production possibilities frontier (institutional PPF)shifts rightward,the economy's

A)natural unemployment rate rises.
B)natural unemployment rate falls.
C)Natural Real GDP declines.
D)physical PPF shifts leftward.
E)physical PPF shifts rightward.

Question 62

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 63

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

A)flexible prices
B)flexible wages
C)a labor market in which wages fall if there is a surplus
D)a labor market in which wages rise if there is a shortage
E)none of the above (all are consistent with a self-regulating economy)

Question 64

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 65

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 66

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

A)below;soon rise
B)above;soon rise
C)below;soon fall
D)above;remain unchanged
E)none of the above

Question 67

Exhibit 9-5
The frictional unemployment rate is 2.5 percent,the structural unemployment rate is 3.1 percent,and the economy's current unemployment rate is 5.6 percent.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 68

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 69

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 70

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 71

If the economy is operating at a point beyond its institutional production possibilities frontier (institutional PPF),then the economy is

A)producing Natural Real GDP and operating at the natural unemployment rate.
B)producing less than Natural Real GDP and operating below the natural unemployment rate.
C)producing more than Natural Real GDP and operating above the natural unemployment rate.
D)producing more than Natural Real GDP and operating below the natural unemployment rate.
E)none of the above

Question 72

Exhibit 9-5
The structural unemployment rate is 2.3 percent,the frictional unemployment rate is 2.4 percent,and the economy's 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 73

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 74

Suppose the natural unemployment rate is 5 percent.Which of the following observations is consistent with an economy that is self-regulating?

A)The unemployment rate in the economy is always above 5 percent.
B)The unemployment rate in the economy is always below 5 percent.
C)There is a tendency for the unemployment rate in the economy to move toward 5 percent if it is not already there.
D)If the unemployment rate in the economy is greater than 5 percent,wages start to rise.
E)If the unemployment rate in the economy is less than 5 percent,wages start to fall.

Question 75

Which of the following statements is true?

A)If current Real GDP is greater than Natural Real GDP,the economy is in a recessionary gap.
B)If current Real GDP is less than Natural Real GDP,the economy is in long-run equilibrium.
C)Wages are flexible if the economy is self-regulating.
D)Wages rise but prices remain constant in long-run equilibrium.
E)All economists believe the economy is self-regulating.

Question 76

Which of the following statements is false?

A)If the economy is self-regulating,wages are flexible.
B)The frictional unemployment rate equals the natural unemployment rate minus the structural unemployment rate.
C)If the economy is producing Natural Real GDP,it is operating at the natural unemployment rate.
D)The economy is operating at full employment if it is producing more than Natural Real GDP.

Question 77

Exhibit 9-5
The structural unemployment rate is 1.3 percent,the frictional unemployment rate is 2.1 percent,and the economy's 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 78

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 79

Exhibit 9-5
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

Exhibit 9-5
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