Question 1

The actual GDP for an economy is:
A) the level of output that is produced using only domestic factors of production.
B) the same as the short-run equilibrium GDP.
C) the total value of goods and services in the economy, after adjusting for prices.
D) the level of output that is not determined by prices or wages.

Accepted Answer

B

Question 2

When an economy is producing at a point on its production possibility frontier:
A) it is not utilizing all the resources available for production.
B) it is producing at its potential GDP.
C) monetary policy needs to be used to bring the economy to full employment.
D) taxes need to be increased to slow the economy.

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.
A) the production possibility frontier does not have any impact on
B) the level of in?ation determines
C) nominal wages determine
D) neither price nor wages have any impact on

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:
A) that is produced when all factors of production that are willing to be employed are being used.
B) that is produced when the economy operates at a point under its production possibility
C) that can be produced when all factors of production are employed in equal proportions.
D) that is produced in the economy in the short run.

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 _____.
A) the real wage will increase
B) the level of employment will remain unchanged
C) ﬁrms will hire more workers
D) the supply of labour will decrease

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:
A) lead to an increase in labour productivity.
B) shift the short-run Phillips curve upward.
C) lead to a fall in the long-run equilibrium level of GDP.
D) cause workers to negotiate lower nominal wages.

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?
A) The level of wages earned by workers after accounting for taxes.
B) The total wages earned by all the workers in the economy.
C) The wage that could be earned by someone if they moved to a better job.
D) The nominal wage that has been adjusted for in?ation.

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.
A) £45,000
B) £43,689.32
C) £58,500
D) £46,350

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?
A) The economy operates on its production possibility frontier.
B) The rate of inﬂation is expected to be very high.
C) Wage rates increase faster than inﬂation rates.
D) There is a high level of unemployment in the economy.

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:
A) an increase in the rate of inﬂation.
B) an increase in the level of potential GDP.
C) a government budget surplus.
D) a decline in aggregate demand.

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:
A) monetary policy is more appropriate than ?scal policy in controlling in?ation.
B) it is not possible for the economy to achieve full employment.
C) policy makers face a trade-off between unemployment and in?ation.
D) it is possible to maintain high levels of employment at low and stable price levels.

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:
A) the economy is operating at a point inside its production possibility frontier.
B) any increase in interest rates at this point will move the economy up along the short-run
C) any increase in aggregate demand at this point will move the economy down along the short-run Phillips curve.
D) the natural rate of unemployment in this economy is 3.8 per cent.

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?
A) When consumer con?dence declines due to bad economic performance.
B) When the economy operates on its production possibility frontier.
C) When unemployment increases due to an increase in real wages.
D) When in?ation in the economy is equal to its target level.

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:
A) lead to higher nominal wages in the long run.
B) not affect unemployment in the long run.
C) lead to an increase in unemployment in the long run.
D) increase the real wage in the long run.

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?
A) The output gap for an economy over a number of years.
B) The relationship between output and interest rates.
C) The relationship between unemployment and in?ation.
D) The growth rate of potential GDP over a period of time.

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?
A) An increase in production costs due to an increase in oil prices.
B) A substantial increase in interest rates.
C) Implementation of new technology that increases productivity of existing workers.
D) Introduction of higher income tax rates.

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 _____.
A) actual GDP
B) potential GDP
C) surplus GDP
D) deﬁcit GDP

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:
A) a fall in in?ationary expectations will lead to an increase in nominal wages.
B) there is a trade-off between unemployment and in?ation.
C) unemployment is constant in the long run, irrespective of the rate of in?ation.
D) ?scal policy is an effective tool in increasing the level of employment in the long run.

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:
A) the pace of adjustment of prices and wages is sluggish.
B) wages and prices are highly ﬂexible.
C) the long-run aggregate supply curve is upward sloping.
D) the aggregate demand curve is vertical.

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?
A) The level of unemployment will be higher than 2.5 per cent at the new equilibrium.
B) The short-run Phillips curve will move up and the new level of inﬂation will be higher than 4
C) The economy will move up along the short-run Phillips curve, increasing the level of inﬂation above 4 per cent.
D) The short-run Phillips curve will move down from its original position.

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

The actual GDP for an economy is:

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

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

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

If nominal wages and prices both double, then _____.

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

What is real wage?

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

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

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

The downward slope of the Phillips curve implies that:

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:

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

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

What does the Phillips curve show?

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?

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

The long-run Phillips curve suggests that:

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