Question 1

Suppose the economy is experiencing a recessionary gap. Which of the following sequences best describes the adjustment process back to potential GDP ($Y^*$)?

Accepted Answer

Unemployment rises → wages fall → SRAS shifts right → GDP returns to $Y^*$

Question 2

If the economy is above potential GDP ($Y^*$), which of the following is most likely to occur in the adjustment period?

Accepted Answer

Wages rise, increasing costs for firms, causing the short-run aggregate supply (SRAS) to shift left.

Question 3

Which of the following best defines potential GDP ($Y^*$)?

Accepted Answer

The level of output where unemployment is normal, wages are stable, and the economy is at its 'home point.'

Question 4

A positive aggregate demand (AD) shock causes which of the following initial effects?

Accepted Answer

GDP rises above $Y^*$, creating an inflationary gap.

Question 5

During the adjustment period after an inflationary gap, what happens to the price level and GDP in the long run?

Accepted Answer

Price level rises, GDP returns to $Y^*$

Question 6

Which of the following best explains why fiscal policy is used during output gaps?

Accepted Answer

To help the economy return to $Y^*$ more quickly than it would through wage adjustment alone.

Question 7

If the government wants to close a recessionary gap using fiscal policy, which action should it take?

Accepted Answer

Increase government spending or cut taxes

Question 8

Which of the following statements is TRUE regarding the adjustment process after an aggregate demand shock?

Accepted Answer

Output gaps cause wage changes, which shift SRAS and return GDP to $Y^*$.

Question 9

Suppose business confidence falls sharply, leading to a decrease in investment. What is the likely sequence of events in the economy?

Accepted Answer

AD shifts left → GDP falls below $Y^*$ → unemployment rises → wages fall → SRAS shifts right → GDP returns to $Y^*$

Question 10

Which of the following best describes the role of wage 'stickiness' in the short run?

Accepted Answer

Wages do not adjust immediately, so GDP can move away from $Y^*$ in the short run.

Question 11

If the government raises taxes during an inflationary gap, what is the intended effect?

Accepted Answer

To decrease aggregate demand and help return GDP to $Y^*$

Question 12

Which of the following is NOT a characteristic of the economy at potential GDP ($Y^*$)?

Accepted Answer

Wages are rising rapidly

Question 13

A country experiences a sudden increase in consumer spending. What is the most likely short-run effect on the economy?

Accepted Answer

Aggregate demand shifts right, creating an inflationary gap

Question 14

Which of the following best summarizes the long-run outcome after an output gap, assuming no government intervention?

Accepted Answer

Wage adjustments shift SRAS, returning GDP to $Y^*$

Question 15

If the economy is in a recessionary gap and the government does nothing, what will eventually happen according to the adjustment process?

Accepted Answer

Wages will fall, SRAS will shift right, and GDP will return to $Y^*$

Question 16

Which of the following is a direct result of an inflationary gap?

Accepted Answer

Unemployment falls below its normal rate, leading to rising wages

Question 17

Which policy action would be most appropriate if the economy is experiencing an inflationary gap?

Accepted Answer

Decrease government spending or raise taxes

Question 18

In the context of the adjustment process, what is the primary function of the short-run aggregate supply (SRAS) curve?

Accepted Answer

To shift in response to wage changes, helping GDP return to $Y^*$

Question 19

Which of the following best describes the sequence of events after a negative AD shock?

Accepted Answer

AD shifts left → GDP falls below $Y^*$ → unemployment rises → wages fall → SRAS shifts right → GDP returns to $Y^*$

Question 20

Why does the price level typically rise after the economy returns to $Y^*$ following an inflationary gap?

Accepted Answer

Because wages and costs have increased, shifting SRAS left and raising the price level

Macroeconomic Adjustment: From Short Run to Long Run (Chapter 9 Study Notes)

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