Q: The Phillips Curve illustrates the relationship between which two variables?

Unemployment and the rate of change in wages.

Q: Suppose the government uses fiscal stabilization policy to address a recessionary gap. What is a practical limitation of this approach?

Decision and execution lags can delay the impact of fiscal policy.

Question 1

Which of the following is an assumption of the short-run macroeconomic model?

Accepted Answer

Factor prices are exogenous and do not adjust within the model.

Question 2

Suppose the economy is experiencing an inflationary gap ($Y > Y^*$). What is the most likely effect on wages?

Accepted Answer

Wages will rise due to excess demand for labour and increased bargaining power of workers.

Question 3

In the adjustment process, what causes factor prices to change?

Accepted Answer

Output gaps, where actual output differs from potential output.

Question 4

Which statement best describes the long-run equilibrium in the AD-AS model?

Accepted Answer

It is achieved when the intersection of the AD and AS curves occurs at potential output ($Y^*$) and there is no output gap.

Question 5

What is the main difference between the short run and the long run in macroeconomic models?

Accepted Answer

In the short run, factor prices are exogenous, while in the long run they are fully adjusted to output gaps.

Question 6

If a negative aggregate supply (AS) shock occurs, what is the expected effect on price level ($P$) and real GDP ($Y$)?

Accepted Answer

$P$ will increase and $Y$ will decrease.

Question 7

Which of the following best explains the concept of 'potential output as an anchor'?

Accepted Answer

Any output gap causes factor prices to adjust, eventually bringing real GDP back to potential output ($Y^*$).

Question 8

Which scenario is most likely to result in downward wage stickiness?

Accepted Answer

A recessionary gap where $Y < Y^*$ and there is excess supply of labour.

Question 9

The Phillips Curve illustrates the relationship between which two variables?

Accepted Answer

Unemployment and the rate of change in wages.

Question 10

Suppose the government uses fiscal stabilization policy to address a recessionary gap. What is a practical limitation of this approach?

Accepted Answer

Decision and execution lags can delay the impact of fiscal policy.

Question 11

If the marginal propensity to consume ($c$) is 0.8, the net tax rate ($t$) is 0.25, and the marginal propensity to import ($m$) is 0.1, what is the value of the simple multiplier ($z$)?

Accepted Answer

$z = \frac{1}{1 - c(1-t) + m}$, so $z = \frac{1}{1 - 0.8(1-0.25) + 0.1} = \frac{1}{1 - 0.8 	imes 0.75 + 0.1} = \frac{1}{1 - 0.6 + 0.1} = \frac{1}{0.5} = 2$

Question 12

Which of the following best describes the effect of automatic fiscal stabilizers?

Accepted Answer

They reduce the value of the multiplier and dampen fluctuations in real GDP.

Question 13

What is the paradox of thrift in the context of short-run macroeconomics?

Accepted Answer

An increase in saving reduces the level of real GDP in the short run.

Question 14

Which of the following is true about the effect of a positive aggregate demand (AD) shock in the long run?

Accepted Answer

It raises the price level but leaves real GDP unchanged in the long run.

Question 15

If the government reduces tax rates, what are the possible effects according to the study materials?

Accepted Answer

A short-run demand stimulus and a possible longer-run increase in the level and growth rate of potential output.

Question 16

Which of the following best describes 'fine tuning' in fiscal policy?

Accepted Answer

Making frequent policy changes to maintain output at potential.

Question 17

A negative supply shock shifts the AS curve leftward. What is the immediate effect on the AE curve?

Accepted Answer

The AE curve shifts downward due to a rise in the price level.

Question 18

Why do temporary tax changes generally have less impact on aggregate demand than permanent changes?

Accepted Answer

Consumers and firms are less likely to change their spending behavior in response to temporary changes.

Question 19

If an increase in government purchases leads to an increase in potential output, what is the effect on crowding out?

Accepted Answer

The negative effects from crowding out are reduced.

Question 20

Which of the following is NOT a key assumption of the adjustment process state?

Accepted Answer

Factor prices are fully adjusted/endogenous.

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

Study Guide - Practice Questions

Study Guide - Flashcards