Q: If real GDP ($Y$) is less than potential output ($Y^*$), what is the value of the output gap and what does it indicate?

$Y - Y^* < 0$; a recessionary gap

Q: Which statement about the long-run aggregate supply curve is correct?

It is vertical at $Y^*$, indicating no relationship between price level and potential output.

Q: A negative aggregate supply shock, such as a sudden increase in oil prices, will initially cause which of the following?

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

Q: Which of the following best explains the concept of 'downward wage stickiness'?

Wages tend to rise rapidly during inflationary gaps but fall slowly during recessionary gaps.

Q: Consider the Phillips curve. What does it illustrate in the context of the adjustment process?

A negative relationship between unemployment and the rate of change in nominal wages.

Q: Suppose the government implements an expansionary fiscal policy during a recession. What is the most likely short-run effect?

Aggregate demand shifts right, increasing real GDP.

Q: Which of the following is a limitation of discretionary fiscal stabilization policy?

It is subject to long and uncertain lags, making 'fine tuning' difficult.

Q: Which of the following best describes the paradox of thrift in the short run?

An increase in desired saving leads to a reduction in aggregate demand and GDP.

Question 1

Which of the following best describes the assumptions made in the short run in macroeconomic analysis?

Accepted Answer

Factor prices are assumed to be constant and technology is assumed to be constant.

Question 2

Suppose the economy is experiencing an inflationary output gap. What is the expected adjustment in wages and the aggregate supply (AS) curve?

Accepted Answer

Wages tend to rise, shifting the AS curve up.

Question 3

If real GDP ($Y$) is less than potential output ($Y^*$), what is the value of the output gap and what does it indicate?

Accepted Answer

$Y - Y^* < 0$; a recessionary gap

Question 4

Which statement about the long-run aggregate supply curve is correct?

Accepted Answer

It is vertical at $Y^*$, indicating no relationship between price level and potential output.

Question 5

A negative aggregate supply shock, such as a sudden increase in oil prices, will initially cause which of the following?

Accepted Answer

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

Question 6

Which of the following best explains the concept of 'downward wage stickiness'?

Accepted Answer

Wages tend to rise rapidly during inflationary gaps but fall slowly during recessionary gaps.

Question 7

Consider the Phillips curve. What does it illustrate in the context of the adjustment process?

Accepted Answer

A negative relationship between unemployment and the rate of change in nominal wages.

Question 8

Suppose the government implements an expansionary fiscal policy during a recession. What is the most likely short-run effect?

Accepted Answer

Aggregate demand shifts right, increasing real GDP.

Question 9

Which of the following is a limitation of discretionary fiscal stabilization policy?

Accepted Answer

It is subject to long and uncertain lags, making 'fine tuning' difficult.

Question 10

If the marginal propensity to consume (MPC) is 0.8 and the net tax rate ($t$) is 0.25, what is the value of the simple multiplier?

Accepted Answer

$\frac{1}{1-0.8(1-0.25)}$

Question 11

Which of the following best describes the paradox of thrift in the short run?

Accepted Answer

An increase in desired saving leads to a reduction in aggregate demand and GDP.

Question 12

In the adjustment process, what role does potential output ($Y^*$) play?

Accepted Answer

It acts as an anchor, with output gaps causing factor prices to adjust until $Y$ returns to $Y^*$.

Question 13

Which of the following is true about automatic fiscal stabilizers?

Accepted Answer

They dampen the output response to shocks by reducing the size of the simple multiplier.

Question 14

Suppose the government increases $G$ (government purchases) in the short run. What is the expected adjustment process in the long run?

Accepted Answer

Real GDP returns to potential output, but the price level is higher.

Question 15

Which of the following is NOT a reason why fine tuning of fiscal policy is difficult?

Accepted Answer

Fiscal policy always produces the desired effect immediately.

Question 16

If the economy is at $Y = Y^*$, what is true about unemployment?

Accepted Answer

Unemployment equals the natural rate (NAIRU), consisting of structural and frictional unemployment.

Question 17

Which of the following is a possible long-run consequence of a permanent increase in government spending ($G$)?

Accepted Answer

A lower rate of accumulation of private capital if government investment crowds out private investment.

Question 18

After a positive aggregate demand shock, what is the sequence of events in the adjustment process?

Accepted Answer

AS shifts up, wages rise, and the inflationary gap closes as $Y$ returns to $Y^*$.

Question 19

Which of the following best describes the effect of a reduction in the net personal income tax rate ($t$) in the short run and long run?

Accepted Answer

Short-run: real GDP increases; Long-run: real GDP returns to potential output at a higher price level.

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

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