Question 1

Suppose the economy is experiencing a recessionary gap. According to the adjustment process described in Chapter 9, what sequence of events is most likely to occur as the economy returns to potential output ($$Y^*$$)?

Accepted Answer

Wages fall, production costs decrease, SRAS shifts right, GDP returns to $$Y^*$$

Question 2

Which of the following best explains why the Long-Run Aggregate Supply (LRAS) curve is vertical in the AD–AS model?

Accepted Answer

Because potential output ($$Y^*) is $$determined by resources, capital, labour, and technology, not by the price level

Question 3

If the economy is in an inflationary gap, what happens to wages and the Short-Run Aggregate Supply (SRAS) curve over time?

Accepted Answer

Wages rise, SRAS shifts left

Question 4

Which of the following statements about sticky wages is correct?

Accepted Answer

Wages adjust upward quickly during booms but fall slowly during slumps

Question 5

A recessionary output gap implies that:

Accepted Answer

The economy’s resources are being used at less than their normal capacity

Question 6

The Phillips Curve describes the relationship between:

Accepted Answer

Unemployment and the rate of change of wages

Question 7

Suppose the marginal propensity to consume (MPC) is 0.8, the tax rate ($$t) is 0.25$$, and the marginal propensity to import ($$m) is 0.1. $$Using the simple multiplier formula $$\displaystyle Multiplier = \frac{1}{1 - [MPC(1-t) - m]}$$, what is the value of the multiplier?

Accepted Answer

$$\displaystyle 2.86$$

Question 8

Which of the following is considered an automatic stabilizer in the context of macroeconomic policy?

Accepted Answer

Employment-insurance payments

Question 9

How do automatic stabilizers affect the size of the simple multiplier?

Accepted Answer

They reduce the size of the multiplier

Question 10

If the value of the simple multiplier increases, what happens to the slope of the Aggregate Demand (AD) curve?

Accepted Answer

The AD curve becomes flatter

Question 11

Which of the following best describes the relationship between the slope of the AD curve and the stability of real GDP in the presence of Aggregate Supply (AS) shocks?

Accepted Answer

A flatter AD curve means real GDP is less stable during AS shocks

Question 12

Suppose the government increases the marginal tax rate ($$t) in $$the simple multiplier formula $$\displaystyle Multiplier = \frac{1}{1 - [MPC(1-t) - m]}. $$What is the effect on the multiplier and on GDP stability?

Accepted Answer

The multiplier decreases and GDP becomes more stable

Question 13

Which of the following is NOT typically considered an automatic stabilizer in the AD–AS model?

Accepted Answer

Cost-of-living escalators in private contracts

Question 14

If the economy is experiencing an inflationary gap, which of the following is most likely to occur as part of the adjustment process?

Accepted Answer

Labour shortages develop, wages rise, SRAS shifts left

Question 15

Which of the following chains of events best describes the adjustment mechanism when actual GDP is below potential GDP ($$Y^*$$)?

Accepted Answer

Excess supply of labour → wages fall → SRAS shifts right → GDP returns to $$Y^*$$

Question 16

Which of the following best summarizes the effect of automatic stabilizers on the economy during a negative demand shock?

Accepted Answer

They reduce the size of the multiplier, making GDP more stable

Question 17

If the marginal propensity to consume (MPC) decreases, what is the effect on the simple multiplier and the slope of the AD curve?

Accepted Answer

The multiplier decreases and the AD curve becomes steeper

Question 18

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

Accepted Answer

It requires that factor prices (like wages) are flexible

Question 19

Suppose the government introduces a new transfer payment that automatically increases when unemployment rises. According to the AD–AS model, what is the likely effect on the economy’s response to shocks?

Accepted Answer

The multiplier decreases and GDP becomes more stable

Macroeconomics Chapter 9: Adjustment, Multiplier, AD–AS, and Automatic Stabilizers — Guided Study

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