Question 1

In the short run
A) the level of GDP is determined by the demand and supply for labor, the supply of capital, and technological progress.
B) increases in the money supply increase GDP.
C) prices are flexible.
D) the economy always operates at full employment.

Accepted Answer

In the short run, increases in the money supply can indeed increase GDP by stimulating demand. This is because, in the short run, prices and wages do not adjust immediately to changes in the money supply, allowing for real effects on the economy.

Question 2

The long run in macroeconomics is the period of time in which prices do not change or do not change very much.

Accepted Answer

In macroeconomics, the long run is a period in which all prices, including wages, are fully flexible and can adjust in response to changes in supply and demand, allowing the economy to reach full employment or its natural level of output.

Question 3

In the short run, the level of GDP is determined primarily by the aggregate supply.

Accepted Answer

In the short run, the level of GDP is determined primarily by the interaction of aggregate demand and aggregate supply. Changes in either aggregate demand or aggregate supply can lead to changes in the level of GDP.

Question 4

In the short run, decreases in government spending will
A) increase the level of prices and GDP.
B) decrease the level of GDP.
C) increase the level of prices.
D) have no effect on either the level of prices or GDP.

Accepted Answer

Decreases in government spending will lead to a decrease in the level of GDP in the short run. This is because government spending is a component of aggregate demand, and a decrease in government spending will lead to a decrease in aggregate demand, causing a decrease in the level of GDP.

Question 5

Suppose an economy that has been operating at full employment has been experiencing 4 percent annual inflation. If output later falls to a level that is less than potential output, prices generally will begin to rise at
A) a rate of 4 percent.
B) a rate greater than 4 percent.
C) a rate less than 4 percent.
D) a rate of 0 percent.

Accepted Answer

If output falls below potential output, there will be a decrease in demand for goods and services, leading to a decrease in prices. Additionally, the decrease in output will lead to a decrease in the demand for labor, which will result in an increase in unemployment. The increase in unemployment will decrease the bargaining power of workers and reduce their ability to demand increases in wages. As a result, businesses will not face pressure to increase prices, and therefore, prices will rise at a rate less than 4 percent.

Question 6

If GDP is ________ potential output, the economy is in a ________ and prices and wages will tend to decrease.
A) below; recession
B) below; boom
C) above; recession
D) above; boom

Accepted Answer

When GDP is below potential output, the economy is in a recession as it is producing below its capacity. This leads to a decrease in prices and wages as demand is low and businesses are not able to generate high revenue.

Question 7

The level of GDP is determined by the same factors in the long run as in the short run.

Accepted Answer

In the short run, GDP is primarily influenced by demand-side factors such as consumer spending, government spending, and net exports. In the long run, GDP is determined by supply-side factors, including the quantity and quality of labor, capital, technology, and natural resources.

Question 8

Suppose the unemployment rate is ________ the natural rate. We would expect to see GDP ________ potential output, falling wages, and falling prices.
A) above; below
B) above; above
C) below; below
D) below; above

Accepted Answer

When the unemployment rate is above the natural rate, it indicates an economy in a recessionary period. In this scenario, GDP is expected to be below potential output, and because of the surplus of labor, wages will fall, causing a decrease in prices.

Question 9

Suppose an economy that has been operating at full employment has been experiencing 4 percent annual inflation. If output later exceeds potential output, prices generally will begin to rise at
A) a rate of 4 percent.
B) a rate greater than 4 percent.
C) a rate less than 4 percent.
D) a rate of 0 percent.

Accepted Answer

When the output exceeds potential output, the economy is said to be operating beyond full employment. This causes an increase in demand which leads to an increase in prices. Since the economy was already experiencing 4 percent inflation at full employment, the prices will begin to rise at a rate greater than 4 percent.

Question 10

Wages and prices throughout an economy will rise above previous inflation rates when
A) imports increase dramatically.
B) fewer goods are exported abroad.
C) output exceeds potential output.
D) unemployment has highs and lows.

Accepted Answer

When output exceeds potential output, resources in the economy are being used up faster than they can be replenished. This can lead to higher demand for goods and services, causing wages and prices to rise at a higher rate than previous inflation rates. A and B are not correct, as they do not directly relate to the relationship between wages and prices and inflation rates. D is also not correct, as rises and falls in unemployment do not necessarily directly impact inflation rates.

Question 11

Suppose GDP ________ the level of potential output. We would expect to see ________ unemployment, rising wages, and rising prices.
A) exceeds; high
B) exceeds; low
C) is below; high
D) is below; low

Accepted Answer

When GDP exceeds the level of potential output, it indicates an economy operating above its sustainable capacity, leading to low unemployment due to high demand for labor, which in turn causes wages and prices to rise due to increased demand and competition for resources.

Question 12

In the short run, ________ in the supply of money ________ the level of output.
A) increases; decrease
B) increases; do not change
C) increases; increase
D) decreases; do not change

Accepted Answer

An increase in the supply of money in the short run will increase the level of output. This is due to the fact that an increase in the supply of money leads to lower interest rates, which in turn stimulates investment and consumer spending, thus increasing output levels.

Question 13

When employees demand higher wages as a result of price increases which were caused by higher wages being paid by companies, it is called
A) economic inflation.
B) the wage-price spiral.
C) out of kilter fiscal policies.
D) a recession.

Accepted Answer

The wage-price spiral is a phenomenon where wage increases lead to price increases, which lead to further wage demands, causing a cycle of inflation. This occurs when companies increase wages to keep up with the rising cost of living, and then pass on those increased costs to consumers through higher prices for goods and services. As a result, employees demand higher wages to maintain their standard of living, and the cycle continues.

Question 14

Wages and prices throughout an economy are less than previous inflation rates when what occurs?
A) Imports increase dramatically.
B) More goods are exported abroad.
C) Output exceeds potential output.
D) Output is less than potential output.

Accepted Answer

When output is less than potential output, it typically indicates that the economy is not operating at full capacity, leading to lower demand for labor and goods. This situation can result in wages and prices rising at a slower pace than previous inflation rates, as there is less pressure on prices due to the underutilization of resources.

Question 15

A wage-price spiral occurs when
A) rising wages cause higher prices, which in turn cause higher wages.
B) rising wages cause higher prices, which in turn cause lower wages.
C) falling wages cause higher prices, which in turn cause lower wages.
D) falling wages cause falling prices, which in turn cause higher wages.

Accepted Answer

In a wage-price spiral, rising wages lead to an increase in production costs, which causes firms to increase the prices of their goods and services. When prices rise, workers demand higher wages to maintain their purchasing power, and the cycle continues. This can lead to inflation and a decrease in the value of a currency. Therefore, the correct choice is A, where rising wages cause higher prices, which in turn cause higher wages.

Question 16

In the long run, any decreases in aggregate demand
A) decrease the level of prices and output.
B) decrease the level of prices.
C) decrease the level of output.
D) have no effect on either the level of prices or of output.

Accepted Answer

In the long run, decreases in aggregate demand primarily decrease the level of prices. According to classical economic theory, in the long run, the economy is able to adjust to changes in aggregate demand, and output returns to its natural level, but prices adjust to reflect the change in demand.

Question 17

In macroeconomics, the period of time in which prices have fully adjusted to any economic changes is called the short run.

Accepted Answer

The period of time in which prices have fully adjusted to any economic changes is called the long run, not the short run in macroeconomics.

Question 18

If potential output is ________ than the current level of GDP, the unemployment rate is ________ the natural rate.
A) greater; above
B) greater; below
C) less; above
D) less; at

Accepted Answer

When potential output is greater than the current level of GDP, it indicates that the economy is not producing at its full capacity, which typically results in a higher unemployment rate than the natural rate.

Question 19

When GDP is below potential output, prices fall because
A) firms can easily find new workers and are forced to offer higher wages, which decreases the costs of production.
B) firms can easily find new workers and can offer lower wages, which decreases the costs of production.
C) firms find it difficult to hire and retain workers and are forced to offer higher wages, which increases the costs of production.
D) firms find it difficult to hire and retain workers and can offer higher wages, which decreases the costs of production.

Accepted Answer

When GDP is below potential output, there is less demand for goods and services, which leads to falling prices. In this scenario, firms can easily find new workers and can offer lower wages, which decreases the costs of production. Lower production costs result in lower prices for goods and services. Therefore, B is the correct answer. A, C, and D are incorrect because they suggest that firms are forced to offer higher wages, which would increase production costs and lead to higher prices, contradicting the premise of the question.

Question 20

In the long run
A) prices are sticky.
B) the economy operates at full employment.
C) increases in government spending do not effect other uses of output.
D) increases in the money supply increase the level of output.

Accepted Answer

In the long run, the economy is expected to adjust to its full employment level, where all available resources are utilized efficiently. Prices are not sticky in the long run (they adjust to changes in supply and demand), and increases in government spending and the money supply primarily affect price levels rather than output in the long-term perspective.

Quiz 15: Modern Macroeconomics: From the Short Run to the Long Run

In the short run

The long run in macroeconomics is the period of time in which prices do not change or do not change very much.

In the short run, the level of GDP is determined primarily by the aggregate supply.

In the short run, decreases in government spending will

Suppose an economy that has been operating at full employment has been experiencing 4 percent annual inflation. If output later falls to a level that is less than potential output, prices generally will begin to rise at

If GDP is potential output, the economy is in a and prices and wages will tend to decrease.

The level of GDP is determined by the same factors in the long run as in the short run.

Suppose the unemployment rate is the natural rate. We would expect to see GDP potential output, falling wages, and falling prices.

Suppose an economy that has been operating at full employment has been experiencing 4 percent annual inflation. If output later exceeds potential output, prices generally will begin to rise at

Wages and prices throughout an economy will rise above previous inflation rates when

Suppose GDP the level of potential output. We would expect to see unemployment, rising wages, and rising prices.

In the short run, in the supply of money the level of output.

When employees demand higher wages as a result of price increases which were caused by higher wages being paid by companies, it is called

Wages and prices throughout an economy are less than previous inflation rates when what occurs?

A wage-price spiral occurs when

In the long run, any decreases in aggregate demand

In macroeconomics, the period of time in which prices have fully adjusted to any economic changes is called the short run.

If potential output is than the current level of GDP, the unemployment rate is the natural rate.

When GDP is below potential output, prices fall because

In the long run