Question 1

Which of the following best explains why output returns to potential GDP ($$Y^*) in $$the long run after a shock?

Accepted Answer

Because factor prices, especially wages, are flexible in the long run and adjust to restore equilibrium.

Question 2

Suppose the economy is experiencing a recessionary output gap. Which sequence of events is most likely to occur according to the adjustment process described in the study materials?

Accepted Answer

Unemployment rises, excess supply of labour develops, wages fall, production costs decrease, and the short-run aggregate supply (SRAS) curve shifts right.

Question 3

What is the main reason that recessions can last longer than booms, according to the concept of sticky wages?

Accepted Answer

Wages are slow to fall during slumps because workers resist wage cuts, but rise more quickly during booms.

Question 4

If the actual GDP is less than potential GDP, which of the following is most likely to occur in the labour market?

Accepted Answer

There will be an excess supply of labour, putting downward pressure on wages.

Question 5

Which of the following best describes the phenomenon of 'sticky wages'?

Accepted Answer

Wages adjust slowly downward during recessions but rise more quickly during booms.

Question 6

A negative aggregate supply (AS) shock will most likely result in which of the following outcomes?

Accepted Answer

A leftward shift of the AS curve, higher prices, lower output, and a recessionary output gap.

Question 7

Which of the following policies would be most effective in closing a recessionary output gap?

Accepted Answer

Increasing exports to boost aggregate demand (AD).

Question 8

The Phillips curve describes the relationship between which two economic variables?

Accepted Answer

Unemployment and wage growth (inflation).

Question 9

Suppose the aggregate demand (AD) curve is relatively flat. What does this imply about the size of the multiplier and the stability of GDP during aggregate supply (AS) shocks?

Accepted Answer

The multiplier is large, and GDP is less stable during AS shocks.

Question 10

Which of the following is an example of an automatic stabilizer that reduces the size of the multiplier?

Accepted Answer

Income taxes that increase as income rises.

Question 11

If the short-run aggregate supply (SRAS) curve shifts rightward, which of the following is most likely to occur?

Accepted Answer

Output increases and the price level falls.

Question 12

During an inflationary gap, what is the typical adjustment process in the labour market?

Accepted Answer

Labour shortages cause wages to rise quickly, increasing production costs and shifting SRAS left.

Question 13

Which of the following equations best represents the relationship between actual GDP ($$Y$$), potential GDP ($$Y^*$$), and the output gap?

Accepted Answer

$$	ext{Output Gap} = Y - Y^*$$

Question 14

If automatic stabilizers are effective, what is the impact on the multiplier and the stability of GDP?

Accepted Answer

The multiplier is reduced, making GDP more stable in response to shocks.

Question 15

A country experiences a negative aggregate supply shock due to a sudden increase in oil prices. What is the most likely short-run effect on output and the price level?

Accepted Answer

Output decreases and the price level increases.

Question 16

Which of the following best explains why the short-run aggregate supply (SRAS) curve shifts right during a recessionary gap?

Accepted Answer

Falling wages reduce production costs, making it profitable for firms to increase output.

Question 17

If the government wants to reduce the size of the multiplier to stabilize GDP, which policy would be most effective?

Accepted Answer

Implementing progressive income taxes that increase as income rises.

Question 18

Which of the following statements about the adjustment from the short run to the long run is correct?

Accepted Answer

In the long run, wages and other factor prices adjust, causing SRAS to shift and output to return to potential GDP.

Question 19

Suppose the economy is in a boom and experiencing an inflationary gap. According to the sticky wage theory, what is likely to happen to wages and the SRAS curve?

Accepted Answer

Wages rise quickly, increasing production costs and shifting SRAS left.

Question 20

Which of the following best describes the effect of a small multiplier on the aggregate demand (AD) curve and GDP stability?

Accepted Answer

A small multiplier makes the AD curve steeper and GDP more stable during shocks.

From the Short Run to the Long Run: The Adjustment of Factor Prices (Chapter 9 Study Notes)

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