Question 1

The actual GDP for an economy is:

Accepted Answer

B

Question 2

When an economy is producing at a point on its production possibility frontier:

Accepted Answer

When an economy is producing at a point on its production possibility frontier (PPF), it means that it is utilizing all available resources efficiently, thus producing at its potential GDP. The PPF represents the maximum combination of goods or services that can be produced in an economy with the available resources and technology, assuming that all resources are fully employed.

Question 3

In the long run, _____ the level of output produced in an economy.

Accepted Answer

In the long run, the level of output produced in an economy is determined by factors such as technology, resources, and labor productivity, rather than by prices or wages, which are more influential in the short run.

Question 4

An economy's potential GDP is deﬁned as the level of output:

Accepted Answer

Potential GDP is defined as the level of output that an economy can produce when all factors of production (such as labor and capital) that are willing to be employed are being used at their maximum sustainable capacity, without causing inflation to accelerate.

Question 5

If nominal wages and prices both double, then _____.

Accepted Answer

When both nominal wages and prices double, the real wage (the purchasing power of the wages) remains the same, which means the level of employment is likely to remain unchanged as well, assuming other factors are constant. The real wage, employment decisions, and labor supply are not directly affected by changes in nominal values when they move proportionately.

Question 6

A rise in in?ationary expectations in the economy will:

Accepted Answer

A rise in inflationary expectations shifts the short-run Phillips curve upward because workers and firms adjust their expectations and demand higher wages and prices to compensate for the anticipated higher inflation, not directly affecting labor productivity, long-run equilibrium level of GDP, or causing workers to negotiate for lower nominal wages.

Question 7

What is real wage?

Accepted Answer

Real wage refers to the purchasing power of wages, which is the nominal wage adjusted for inflation. This means it reflects how much goods and services the wages can actually buy, taking into account changes in price levels.

Question 8

If the annual real income of an individual is £45,000 and the annual inﬂation rate is 3 per cent, compute the nominal income.

Accepted Answer

Nominal income is calculated by adjusting the real income for the inflation rate. The formula to calculate nominal income is: Nominal Income = Real Income * (1 + Inflation Rate). Therefore, £45,000 * (1 + 0.03) = £45,000 * 1.03 = £46,350.

Question 9

Which of the following is true of an economy in the long run?

Accepted Answer

In the long run, an economy is expected to operate on its production possibility frontier, indicating that it is utilizing all available resources efficiently. Choices B, C, and D describe conditions that are not characteristic of a healthy long-run economy.

Question 10

According to the short-run Phillips curve, an increase in government spending aimed at reducing unemployment will lead to:

Accepted Answer

The short-run Phillips curve suggests that policies aimed at reducing unemployment, such as increasing government spending, can lead to higher inflation. This is because increased demand from higher spending can push prices up when the economy is near or at full employment.

Question 11

The downward slope of the Phillips curve implies that:

Accepted Answer

The Phillips curve illustrates the trade-off between unemployment and inflation, suggesting that reducing inflation often comes with higher unemployment rates and vice versa.

Question 12

Consider an economy that is operating at the intersection of the long-run and short-run Phillips curve. The level of inﬂation is 2.5 per cent, while the level of unemployment is 3.8 per cent. This implies that:

Accepted Answer

When an economy is operating at the intersection of the long-run and short-run Phillips curve, it is at its natural rate of unemployment. The given level of unemployment (3.8%) is thus the natural rate in this context.

Question 13

In which of the following cases is the output gap zero?

Accepted Answer

The output gap is zero when an economy is producing at its maximum potential, which occurs when it operates on its production possibility frontier. This means all resources are being used efficiently, and the actual output equals potential output.

Question 14

According to the Phillips curve analysis, a fall in inﬂationary expectations in an economy would:

Accepted Answer

The Phillips curve suggests that in the long run, inflation expectations do not affect the natural rate of unemployment, implying that unemployment will not be impacted in the long run by changes in inflationary expectations.

Question 15

What does the Phillips curve show?

Accepted Answer

The Phillips curve illustrates the inverse relationship between the rate of inflation and the unemployment rate. Essentially, it suggests that lower unemployment in an economy is associated with higher rates of inflation, and vice versa.

Question 16

Consider an economy that is both in long-run and short-run equilibrium. Which of the following is likely to cause a positive output gap?

Accepted Answer

A positive output gap occurs when actual output is greater than potential output. Implementation of new technology that increases the productivity of existing workers (C) can lead to an increase in output without an immediate increase in input costs, thus creating a positive output gap. Increases in production costs (A), higher interest rates (B), and higher income taxes (D) are more likely to reduce output or increase the cost of production, which does not lead to a positive output gap.

Question 17

The level of GDP associated with the long run is called _____.

Accepted Answer

Potential GDP refers to the level of output that an economy can produce at a constant inflation rate when it is utilizing all of its resources efficiently. It represents the maximum sustainable level of output that an economy can achieve in the long run without increasing inflation.

Question 18

The long-run Phillips curve suggests that:

Accepted Answer

The long-run Phillips curve suggests that in the long run, unemployment reaches its natural rate and is not affected by the rate of inflation, indicating that there is no trade-off between inflation and unemployment in the long run. This is because, over time, expectations adjust to actual inflation, rendering monetary policy ineffective in influencing real variables like unemployment.

Question 19

Active ﬁscal and monetary policy is required to move an economy back to equilibrium when:

Accepted Answer

Active fiscal and monetary policy is most effective in situations where prices and wages are slow to adjust. This sluggishness can prevent the economy from naturally returning to equilibrium, necessitating government intervention to stimulate or cool down the economy.

Question 20

Consider an economy that is operating at the intersection of the short-run and long run Phillips curves. The level of unemployment is 2.5 per cent while the level of inﬂation is 4 per cent. At this point, if speculation about oil price hikes increase inﬂationary expectations in this economy, which of the following must happen?

Accepted Answer

When inflationary expectations increase, the short-run Phillips curve shifts upward, leading to a higher level of inflation at the new equilibrium.

Quiz 13: Inflation, Output and Economic Policy