Question 1

In the long-run total spending affects ______, and output is determined by _______.

Accepted Answer

In the long run, aggregate demand affects nominal variables like prices. In the long run, however, the economy's ability to produce, which is related to the economy's available inputs and productivity, determines output.

Question 2

If firms maintain preset prices in the short run, then the primary cause of outputs gaps is changes in:

Accepted Answer

If firms maintain preset prices in the short run, shifts in aggregate demand and economy-wide spending will create output gaps. When spending decreases, firms cannot sell all their outputs at preset prices resulting in an increase in inventories, reduced production, and a decrease in output. On the other hand, when spending increases, firms will increase production and output resulting in a short-term increase in output above potential output.

Question 3

In the short-run total spending affects ____, and in the long-run total spending affects ______.

Accepted Answer

In the short run, total spending can influence real variables like output. In the long run, however, total spending can only influence nominal variables like prices.

Question 4

The economy of Omega operates according to Okun's law. In Omega, the actual and the natural rates of unemployment equal 5 percent, and real GDP equals $10 trillion. What is potential GDP in Omega?

Accepted Answer

Since the actual rate of unemployment in Omega equals the natural rate of unemployment, the economy is operating at its potential, so potential GDP is $10.0 trillion.

Question 5

According to Okun's Law, when the output gap is negative, cyclical unemployment:

Accepted Answer

Okun's Law states that for every 1% decrease in output gap below potential GDP, cyclical unemployment increases by 0.5-1%. Therefore, when the output gap is negative, cyclical unemployment is positive.

Question 6

If all prices adjusted immediately to balance the quantities supplied and demanded for all goods and services:

Accepted Answer

In a perfectly competitive market, prices would adjust immediately to balance the quantities supplied and demanded for all goods and services. This means that there would be no shortages or surpluses in the market, and the economy would operate at full employment, meaning there would be no output gaps.

Question 7

According to Okun's Law, when cyclical unemployment is positive, then the output gap:

Accepted Answer

According to Okun's Law, there is an inverse relationship between the output gap and cyclical unemployment. A positive cyclical unemployment rate implies that the economy is operating below its potential level of output, resulting in a negative output gap. Therefore, the answer is B.

Question 8

The economy of Omega operates according to Okun's law. In Omega, potential GDP and real GDP equal $7 trillion, and the natural rate of unemployment equals 6 percent. What is the actual rate of unemployment in Omega?

Accepted Answer

Okun's law states that for every 1 percent that actual GDP falls below potential GDP, the actual unemployment rate will rise by 0.5 percent. Since potential and real GDP are equal, there is no GDP gap in Omega. Therefore, the actual rate of unemployment will be equal to the natural rate, which is 6 percent.

Question 9

According to Okun's Law, when cyclical unemployment is negative, then the output gap:

Accepted Answer

According to Okun's Law, there is an inverse relationship between the output gap and cyclical unemployment. When cyclical unemployment is negative, it means the actual unemployment rate is below the natural rate of unemployment, which indicates strong economic growth and increased demand for labor. As a result, the output gap is positive, meaning the actual GDP is above potential GDP.

Question 10

According to Okun's Law, when the output gap is positive, cyclical unemployment:

Accepted Answer

A positive output gap indicates that actual output is above potential output, suggesting that the economy is operating above its full capacity. In such a scenario, cyclical unemployment is negative, as the demand for labor is higher than the supply.

Question 11

"Smart" vending machines, which adjust prices automatically according to changes in demand factors (like time of day or outside temperature), are examples of:

Accepted Answer

Smart vending machines are able to adjust their prices based on demand factors, enabling them to use flexible price setting. This allows them to maximize revenue and meet demand more effectively than vending machines that have preset prices.

Question 12

If real GDP is less than potential GDP, then:

Accepted Answer

When real GDP is less than potential GDP, it indicates an economic recession or underperformance, leading to higher actual unemployment rates compared to the natural rate.

Question 13

In the long run, output gaps are eliminated by:

Accepted Answer

As households and businesses change buying patterns, prices eventually must change to reflect the new demand for output.

Question 14

Contrary to the behavior that would be required to eliminate output gaps, many firms in the economy:

Accepted Answer

Many firms adjust their prices only periodically, rather than constantly changing prices in response to short-term changes in demand or supply. This behavior can contribute to output gaps, as prices may not adjust quickly enough to changes in aggregate demand or supply, leading to temporary imbalances between the quantity of goods produced and the quantity demanded at prevailing prices. However, this behavior is also consistent with the fact that many firms face menu costs or other constraints that make it costly or difficult to adjust prices frequently.

Question 15

Varying the quantity of output produced and sold at preset prices is called:

Accepted Answer

Meeting demand refers to adjusting the quantity of output produced and sold at preset prices to match the level of demand for the product. This is an important strategy for businesses to ensure that they are efficiently producing and selling their products.

Question 16

In the short-run ______ determines output, and in the long-run ______ determines output.

Accepted Answer

In the short-run, total spending determines output because businesses can adjust production levels based on the current level of demand. In the long-run, potential output (determined by factors such as technology, capital stock, and labor force) determines output because businesses can only produce as much as the economy is capable of producing. Prices may play a role in determining output in the short-run, but they are not the primary determinant.

Question 17

In the long run, total spending only influences:

Accepted Answer

In the long run, changes in total spending do not influence real variables like economic capacity, but only influence nominal variables like inflation.

Question 18

The economy of Omega operates according to Okun's law. In Omega, the actual and the natural rates of unemployment equal 5 percent, and potential GDP equals $10 trillion. What is real GDP in Omega?

Accepted Answer

Okun's law states that for every 1% deviation from the natural rate of unemployment, there will be a 2% deviation from potential GDP. In Omega, the actual and natural rates of unemployment are equal at 5%, indicating that there is no deviation from the natural rate. Therefore, real GDP is equal to potential GDP, which is $10.0 trillion.

Quiz 10: Money, Prices, and the Federal Reserve

In the long-run total spending affects , and output is determined by _.