Question 1

Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap?

Accepted Answer

During a recessionary gap, there is a decrease in aggregate demand and output falls below potential output. To correct this gap, wages would need to decrease to lower costs of production and encourage hiring and increase in output.

Question 2

Consider an AD/AS model in long- run equilibrium. An output gap, caused by a leftward shift of the AD curve, would be eliminated if

Accepted Answer

In the AD/AS model, a leftward shift of the AD curve creates a negative output gap. If wages and other factor prices fall quickly, it reduces production costs, shifting the AS curve to the right, which helps restore long-run equilibrium by closing the output gap.

Question 3

The Phillips curve describes the relationship between

Accepted Answer

The Phillips curve shows the relationship between unemployment and the rate of change of wages. It suggests that as unemployment decreases, the rate of wage growth will increase, leading to higher inflation. Alternatively, when unemployment increases, the rate of wage growth slows, leading to lower inflation.

Question 4

Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a shift in .

Accepted Answer

In the long run, the economy self-corrects as wages and prices adjust, leading to a rightward shift in the AS curve, restoring real GDP to potential output.

Question 5

Consider the basic AD/AS macro model in long- run equilibrium. An expansionary AD shock will the price level and output in the short run. In the long run, the price level will
And output .

Accepted Answer

In the short run, an expansionary AD shock increases both the price level and output. In the long run, the price level increases further, but output returns to its potential level.

Question 6

What economists sometimes call the "long- run aggregate supply curve" is

Accepted Answer

In the long run, the aggregate supply curve is vertical because it represents the economy's maximum sustainable output, which is determined by factors like technology and resources, and is not affected by the price level.

Question 7

In the long run in the AD/AS macro model we can say that

Accepted Answer

In the long run, the economy settles at the potential output level determined by the aggregate supply curve, represented by Y*. The price level in the long run is also determined by the intersection of aggregate demand and aggregate supply, which is represented by the AD curve. Therefore, long-run real GDP is determined by Y*, and the long-run price level is determined by the AD curve.

Question 8

If the economy is experiencing an inflationary output gap, the adjustment process operates as follows:

Accepted Answer

In an inflationary output gap situation, the economy is producing above its potential output level, leading to rising prices and a need for adjustment. As wages rise due to higher demand for labor, unit costs also rise, which leads to a leftward shift of the aggregate supply (AS) curve. This shift means that firms are producing less than before at any given price level, and thus price levels rise further until the economy settles at a new equilibrium.

Question 9

Consider the basic AD/AS macro model in long- run equilibrium. An expansionary AD shock would have _ output effect in the short run and _ output effect in the long run.

Accepted Answer

In the short run, an expansionary AD shock would increase output due to a shift in the AD curve. However, in the long run, prices and wages adjust to the new equilibrium, shifting the SAS curve leftward until output returns to its original level. Therefore, in the long run, there would be no effect on output.

Question 10

Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a shift in .

Accepted Answer

A positive AS shock will shift the AS curve to the right, leading to an increase in real GDP in the short run. However, in the long run, the AD curve will shift to the left, as the increase in real GDP will lead to higher prices, which will reduce aggregate demand. This will bring real GDP back to its potential level.

Question 11

An inflationary output gap is characterized by

Accepted Answer

An inflationary output gap occurs when the actual real GDP exceeds potential output, which means that the economy is producing at an unsustainable rate and prices are likely to rise due to excess demand.

Question 12

Automatic fiscal stabilizers the impact of demand or supply shocks on the economy since government's net tax revenues during booms and during recessions.

Accepted Answer

The answer of Automatic fiscal stabilizers the impact of demand...

Question 13

Consider the AD/AS model. Since output in the long run is determined by Y^*, the only role of the AD curve is to determine the price level. This is true because the

Accepted Answer

In the long run, output (Y*) is determined by factors such as technology and resources, not by the price level, making it independent of the AD curve.

Question 14

If the economy in the short run is experiencing a recessionary gap, we are likely to see

Accepted Answer

A recessionary gap means there is a contraction of output and employment, leading to higher unemployment rates. As a result, more workers would need to rely on employment-insurance benefits.

Question 15

As the macro economy adjusts from the short run to the long run,

Accepted Answer

In the long run, wages and other factor prices adjust to eliminate output gaps, bringing the economy back to its potential output level.

Question 16

If the short- run macroeconomic equilibrium occurs with real GDP less than Y*, the economy is

Accepted Answer

If the short-run macroeconomic equilibrium occurs with real GDP less than Y*, which is the potential or full-employment level of output, it means that the economy is producing below its capacity. This implies that there are unused resources such as labor and capital, and firms are not operating at their optimal level. In this case, there is a recessionary gap, which indicates that the economy is not producing enough to create full employment and meet the needs of consumers.

Question 17

Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long- run effects on potential output?

Accepted Answer

The answer of Suppose the economy is in macroeconomic equilibrium...

Question 18

Consider an economy with a relatively steep AS curve. If the AD curve shifts to the left, then the price level will and national output will .

Accepted Answer

In an economy with a steep AS curve, a leftward shift in the AD curve will lead to a fall in both price level and national output. This is because the steep AS curve implies that the economy is operating at or close to its potential output level, and any decrease in AD will lead to a significant decrease in output, while the steepness of the AS curve will prevent prices from adjusting sufficiently to prevent this fall in output. Therefore, the correct answer is D.

Question 19

If wages rise faster than increases in labour productivity, then unit labour costs will

Accepted Answer

Unit labour costs (ULC) is the ratio of labour costs to labour productivity. If wages rise faster than productivity, then ULC will increase. This means that the cost of producing a unit of output will increase. As a result, the AS curve will shift leftward as higher production costs will reduce the profitability of firms and reduce their ability to supply goods at the same price levels. Therefore, the best answer is E.

Question 20

The study of short- run cyclical fluctuations usually assumes, for simplicity, that there are no changes in

Accepted Answer

In the short run, potential GDP is assumed to remain constant, focusing on fluctuations around this level.

Quiz 24: From the Short Run to the Long Run: the Adjustment of Factor Prices