Chapter 10 Sample Test A and B PDF

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Chapter 10 Sample Test A

1. The business cycle occurs because ______. A. the Bank of Canada is constantly increasing the quantity of money B. potential GDP is increasing, and increases in aggregate demand cannot keep pace with increases in long-run aggregate supply C. the government is constantly trying to produce an inflationary gap, but expenditures in the economy cannot keep pace with the government's agenda D. aggregate demand and short-run aggregate supply fluctuate, but the money wage rate does not adjust quickly enough to keep real GDP at potential GDP

2. Economic growth is the persistent increase in ______. Economic growth is accompanied by inflation when the ______. A. short-run aggregate supply; AD curve shifts rightward at a slower rate than the SAS curve shifts rightward B. aggregate demand and potential GDP; AD curve shifts rightward at a slower rate than the LAS curve shifts rightward C. aggregate demand; LAS curve shifts rightward at a faster rate than the AD curve shifts rightward D. potential GDP; AD curve shifts rightward at a faster rate than the LAS curve shifts rightward 3. Choose the correct statement. A. The quantity of real GDP demanded is the sum of the real consumption expenditure, investment, government expenditure, and exports minus imports. B. The higher the price level, the greater is the quantity of real GDP demanded. C. The aggregate demand curve slopes downward because of the wealth effect and the money wage rate. D. The quantity of real GDP demanded depends on the quantity of real GDP supplied.

4. The graph shows an aggregate demand curve. Draw a curve that shows the effect on aggregate demand of an increase in the expected future inflation rate. Label it

An increase in expected future income _______. An increase in the expected future inflation rate _______. A. increases aggregate demand today; increases aggregate demand today B. increases aggregate demand in the future but has no influence on aggregate demand today; increases aggregate demand in the future but has no influence on aggregate demand today C. increases aggregate demand today; has no influence on aggregate demand today or in the future D. decreases aggregate demand today but increases aggregate demand in the future; decreases aggregate demand today but increases aggregate demand in the future

An increase in expected future profits _______. A. increases aggregate demand today B. increases aggregate demand in the future but has no influence on aggregate demand today C. decreases aggregate demand today but increases aggregate demand in the future D. has no influence on aggregate demand today or in the future

5. The graph shows a business cycle. Draw points on the curve that show when the economy is at: 1) full employment. Label it 1. 2) a below full-employment equilibrium. Label it 2. 3) an above full-employment equilibrium. Label it 3.

In the graph, the vertical distance between the horizontal Potential GDP line and point 2 is _____ gap. At point 2, the intersection of the AD and SAS curves is to the _____ of the LAS curve. A. B. C. D.

an inflationary; right; an inflationary; left; a recessionary; left; a recessionary; right

The vertical distance between the horizontal Potential GDP line and point 3 is _____ gap. At point 3, the intersection of the AD and SAS curves is to the _____ of the LAS curve. A. B. C. D.

a recessionary; right a recessionary; left an inflationary; right an inflationary; left

6. Draw an aggregate demand curve. Label it AD. Draw a short-run aggregate supply curve. Label it SAS. Draw a point at the short-run macroeconomic equilibrium. Label it 1. Draw a point on the SAS curve at which inventories pile up. Label it 2. When unwanted inventories pile up, _____. Prices _____. A. B. C. D.

the quantity of real GDP supplied is greater than the quantity of real GDP demanded; fall long-run aggregate supply is greater than short-run aggregate supply; fall the quantity of real GDP demanded is greater than the quantity of real GDP supplied; rise short-run aggregate supply is greater than aggregate demand; fall

7. Which of the following statements about the monetarist view of the macroeconomy is incorrect? A. B. C. D.

Left alone, the economy rarely operates at full employment. Taxes should be kept low to avoid disincentive effects that decrease potential GDP. All recessions result from inappropriate monetary policy. The money wage rate is sticky.

8. A ______ macroeconomist believes that the economy is self-regulating and always at full employment. A ______ macroeconomist believes the economy requires active help from fiscal policy and monetary policy to maintain full employment. A. B. C. D.

Keynesian; new Keynesian classical; Keynesian new classical; monetarist classical; monetarist

9. Examples of fiscal policy that increase aggregate demand include ______. A. a decrease in taxes and a decrease in interest rates B. an increase in transfer payments and an increase in interest rate C. a decrease in taxes and an increase in the quantity of money D. an increase in government expenditure, a decrease in taxes, and an increase in transfer payments 10. Potential GDP increases when _______. A. B. C. D.

Export increases The price level falls The price level rises The full-employment of quantity of labour increases

11. The graph gives a long-run aggregate supply curve and a short-run aggregate supply curve. Draw a new curve that shows the effect of a rise in the money wage rate. Label it.

With a rise in the money wage rate, ______. A. firms have an incentive to produce more because they can charge a higher price B. potential GDP decreases in the long run because the size of the labour force decreases C. firms have an incentive to use more capital-intensive methods in production, which will increase potential GDP in the long run D. the quantity that firms are willing to supply at each price level decrease

12. Draw an aggregate demand curve in an economy with a below full-employment equilibrium. Label it AD. Draw a point at the below full-employment equilibrium. Draw a horizontal arrow at the equilibrium price level that shows the output gap.

The output gap in the graph is ______ because ______. A. a deflationary gap; the only way for the economy to return to full employment is for the price level to fall B. a recessionary gap; potential GDP exceeds real GDP C. a below full-employment gap; the unemployment rate is greater than the natural rate D. an inflationary gap; potential GDP exceeds real GDP

13. The graph shows the economy in long-run equilibrium. Then the world economy expands and the demand for Canadian-produced goods increases. Draw a curve that shows: 1) the effect of increased demand for Canadian-produced goods. Label it 1. 2) the effect of a rising money wage rate that returns the economy to full employment. Label it 2. Draw a point at the new long-run equilibrium.

An economy is in a long-run equilibrium. An increase in aggregate demand creates ______ gap. A rise in the money wage rate decreases ______ and returns the economy to a fullemployment equilibrium.

A. B. C. D.

an inflationary; the quantity of real GDP demanded a positive; short-run aggregate supply a recessionary; short-run aggregate supply an inflationary; short-run aggregate supply and long-run aggregate supply

14. The graph shows an economy's long-run aggregate supply curve. Draw an aggregate demand curve and a short-run aggregate supply curve such that when the economy is in long-run equilibrium, the price level is 110. Label the curves. Draw a point at the long-run macroeconomic equilibrium.

In the long-run macroeconomic equilibrium, ______. A. the AD and SAS curves determine the price level and technology advances so that the LAS curve intersects the AD curve at the equilibrium price level B. real GDP is always increasing C. potential GDP and short-run aggregate supply determine the price leve D. potential GDP and aggregate demand determine the price level, and the money wage rate adjusts so that the SAS curve intersects the LAS curve at the long-run equilibrium price level 15. The business cycle is actually a continuous series of different ______. A. B. C. D.

potential GDP values short-run macroeconomic equilibrium nominal GDP values full-employment equilibriums

16. Choose the correct statement. A. Aggregate supply is the relationship between the quantity of real GDP supplied and potential GDP. B. Aggregate supply and the quantity of real GDP supplied are two ways of expressing the same concept. C. At any given time, the quantity of capital and the state of technology are fixed because they depend on decisions made in the past, and the quantity of labour is fixed because it depends on the population. D. The relationship between the quantity of real GDP supplied and the price level is different in the long run than in the short run.

17. Draw an aggregate demand curve in an economy with an above full-employment equilibrium. Label it AD. Draw a point at the above full-employment equilibrium. Draw a horizontal arrow at the equilibrium price level that shows the output gap.

The output gap in the graph is ______ because ______. A. an inflationary gap; potential GDP is less than real GDP B. a recessionary gap; potential GDP is less than real GD C. an inflationary gap; the only way for the economy to return to full employment is for the price level to rise D. an above full-employment gap; the unemployment rate is less than the natural rate

18. As we move up along the short-run aggregate supply curve, ______. A. the real wage rate, the prices of other resources, and potential GDP remain constant B. potential GDP increases C. the money wage rate, the prices of other resources, and potential GDP remain constant

D. the money wage rate and the prices of other resources change by the same percentage

19. The graph shows a long-run aggregate supply curve and a short-run aggregate supply curve. Draw an arrow along one of the curves that illustrates a rise in the price level when the money wage rate remains unchanged. Label it 1. Draw an arrow along one of the curves that illustrates a rise in the price level accompanied by the same percentage rise in the money wage rate. Label it 2.

An increase in the price level when the money wage rate remains unchanged increases ______. A. B. C. D.

aggregate supply potential GDP the quantity of real GDP supplied factor prices by the same percentage as the increase in the price level

20. As we move up along the long-run aggregate supply curve, ______. A. B. C. D.

the prices of goods and services remain constant the prices of goods and services increase and the money wage rate decreases the money wage rate remains constant the real wage rate remains constant

Chapter Test 10-B

1. Choose the statement about the business cycle that is correct. A. In a business cycle, real GDP shows steady growth and steady inflation. B. The business cycle moves from a below full-employment equilibrium to an above fullemployment equilibrium to a full-employment equilibrium. C. The business cycle occurs because aggregate demand and short-run aggregate supply fluctuate but the money wage rate does not adjust quickly enough to keep real GDP at potential GDP. D.The gap between the price level at full employment and the price level at an above fullemployment equilibrium is the inflationary gap.

2. The graph shows an economy's long-run aggregate supply curve and aggregate demand curve. Draw two curves that show the economy experiencing economic growth with inflation. Label the curves. Draw a point at the new long-run price level.

High inflation accompanies economic growth when ______. A. B. C. D.

the quantity of money increases rapidly the quantity of labour grows, capital is accumulated, and technology advances there is a burst of technological advancement aggregate demand increases at the same pace as short-run aggregate supply

3. Draw an aggregate demand curve. Label it AD. Draw an arrow on the AD curve that shows the international substitution effect when the price level falls. Label it 1. Draw an arrow on the AD curve that shows the international substitution effect when the price level rises. Label it 2.

An international substitution effect arises because when the Canadian price level rises, _______. A. saving increases to increase future consumption in the future when the price level falls B. people spend less on the more expensive Canadian-made items and they spend more on the less expensive foreign-made item C. Canadian imports decrease and Canadian exports increase D. Canadian real wealth increases and people buy more foreign-made goods and fewer Canadian-made goods 4. A business cycle can be described by the following sequence: ______ equilibrium, ______ equilibrium, ______ equilibrium. A. full-employment; below full-employment; above full-employment B. below full-employment; full-employment; below full-employment C. above full-employment; below full-employment; full-employment D. below full-employment; full-employment; above full-employment

5. When the price level, the money wage rate, and other factor prices rise by the same percentage, there is a movement along ______. Potential GDP ______. A. the LAS curve; does not change B. the LAS curve and the SAS curve; does not change and the quantity of real GDP supplied increases C. the LAS curve and the SAS curve; decreases D. the LAS curve; decreases

When the price level rises but the money wage rate and other factor prices remain the same, there is a movement along ______. The quantity of real GDP supplied ______ A. the LAS curve and the SAS curve; decreases B. the SAS curve; increases C. the SAS curve; decreases D. the LAS curve; decreases 6. The graph shows an economy in long-run equilibrium. The price of oil rises. Draw a curve that shows the effect of this event. Label it 1. Draw a point at the new short-run equilibrium. Label it E1. Draw a curve that shows the economy returning toward a full-employment equilibrium with no action by the central bank or the government. Label it 2. Draw a point at the new short-run equilibrium. Label it E2.

Stagflation ______. A. has not been experienced in Canada since the Great Depression B. occurs when aggregate demand decreases by more than short-run aggregate supply increases C. is another name for an inflationary gap D. is a combination of recession and inflation

7. Choose the correct statement about the LAS curve. A. Along the LAS curve the money wage rate is constant and the real wage rate rises as the price level rises. B. The LAS shifts rightward when the SAS curve shifts rightward and shifts leftward when the SAS curve shifts leftward. C. The LAS curve is vertical because potential GDP is independent of the price level. D. The LAS curve shifts rightward when the money wage rate falls.

8. Long-run macroeconomic equilibrium ______. A. occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied, at the point of intersection of the AD curve and the SAS curve B. comes about because the real wage rate adjusts C. occurs when real GDP equals potential GDP, and the LAS, SAS, and AD curves intersect D. occurs when real GDP equals potential GDP and the money wage rate equals the real wage rate

9. A rise in the money wage rate ______. A. does not change the LAS curve because along the LAS curve a rise in the money wage rate is accompanied by an equal percentage change in the price level B. does not change short-run aggregate supply because along the SAS curve relative prices remain constant C. increases short-run aggregate supply because a rise in the money wage rate increases costs, so firms are willing to supply more only at a higher price level D. decreases potential GDP because the full-employment quantity of labour decreases

10. Draw an aggregate demand curve. Label it AD. Draw a short-run aggregate supply curve. Label it SAS. Draw a point at the short-run macroeconomic equilibrium. Label it 1. Draw a point on the SAS curve at which firms are unable to meet the demand for their output. Label it 2.

When firms are unable to meet the demand for their output, _____. Prices _____. A. aggregate demand is greater than short-run aggregate supply; rise B. the quantity of real GDP supplied is greater than the quantity of real GDP demanded; fall C. the quantity of real GDP demanded is greater than the quantity of real GDP supplied; rise D. short-run aggregate supply is greater than long-run aggregate supply; rise 11. Which of the following statements about the Keynesian view of the macroeconomy is incorrect? A. Technological change is the most significant influence on both aggregate demand and aggregate supply. B. The money wage rate is extremely sticky in the downward direction, so there is no automatic mechanism for eliminating a recessionary gap. C. To achieve and maintain full employment, active help from fiscal policy and monetary policy is required. D. Expectations are based on "animal spirits."

12. The graph shows a business cycle Draw a vertical arrow that shows: 1) a recessionary gap. Label it 1. 2) an inflationary gap. Label it 2. Draw a point that shows the economy at full employment.

At arrow 1 in the graph, the economy is in ______ full- employment equilibrium and the intersection of the AD and SAS curves is to the ______ of the LAS curve. A. a below; left B. an above; right C. a below; right D. an above; left

At arrow 2, the economy is in ______ full-employment equilibrium and the intersection of the AD and SAS curves is to the ______ of the LAS curve. A. B. C. D.

an above; right a below; right an above; left a below; left

13. Aggregate demand increases if expected future income, inflation, or profits ______. And aggregate demand if fiscal policy ______ government expenditure. A. increase; decreases B. decrease; decreases C. decrease; increases D. increase; increases Aggregate demand increases if fiscal policy ______ taxes or ______ transfer payments. A. increases; increases B. decreases; decreases C. decreases; increases D. increases; decreases Aggregate demand increases if monetary policy ______ the quantity of money and ______ interest rates. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases Aggregate demand increases if the exchange rate ______ or foreign income ______. A. decreases; decreases B. increases; increases C. increases; decreases D. decreases; increases

14. The table gives an economy's aggregate demand, short-run aggregate supply, and long-run aggregate supply schedules. Draw the LAS curve, the SAS curve and the AD curve. Label the curves. Draw a point at the short-run macroeconomic equilibrium. Draw a horizontal arrow at the equilibrium price that shows the output gap

The graph shows _______ gap. A. an inflationary B. no output C. a recessionary 15. Choose the correct statement. A. The SAS curve shifts rightward when the price level falls. B. Along the SAS curve, the real wage rate and the price level change by the same percentage. C. The quantity of real GDP supplied equals potential GDP at the price level at which the real wage rate is at its full-employment equilibrium level. D. In the short run, a rise in the price level brings no change in the quantity of real GDP supplied.

16. Give some examples of monetary policy that decrease aggregate demand. A. an increase in taxes and a decrease in the quantity of money B. a decrease in taxes and a decrease in interest rates C. a decrease in the quantity of money and an increase in interest rates D. an increase in transfer payments and an increase in interest rates

17. The ...