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Foundations of Macroeconomics, 7e (Bade/Parkin)
Chapter 8 Potential GDP and the Natural Unemployment Rate
8.1 Potential GDP
1) The Classical macroeconomic model proposes that
A) government intervention is required to help the economy reach its potential.
B) real GDP equals potential GDP as long as inlation equals zero.
C) changes in the quantity of money are critical in driving economic growth.
D) markets work eiciently to produce the best macroeconomic outcomes.
E) socialism produces the most eicient economic outcomes for a society.
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
2) The Keynesian macroeconomic model states that
A) the economy is inherently unstable and government intervention is required to maintain
continued economic growth.
B) markets work eiciently to produce the best macroeconomic outcomes.
C) luctuations in the quantity of money are responsible for most economic recessions.
D) changes in technology generate business cycles.
E) the economy is fairly stable.
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
3) According the Keynesian macroeconomic model, which of the following was responsible
for starting the Great Depression?
A) too little private spending
B) too little government spending
C) high taxes
D) decreases in the quantity of money
E) decreases in technology
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
1
4) Which of the following ideas relect the Monetarist macroeconomic model?
i) The Monetarist model supports the Classical model, in general.
ii) Decreases in the growth rate of the quantity of money trigger recessions.
iii) Government intervention is an appropriate tool to steady the economy.
A) i and ii
B) i only
C) i, ii and iii
D) ii and iii
E) i and iii
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
5) The Monetarist model expands the Keynesian model by proposing that
A) decreases in the quantity of money lead to higher interest rates.
B) the government should lower taxes promote economic growth.
C) decreases in tax rates generate higher consumption.
D) decreases in the growth rate of the quantity of money trigger expansions by controlling
inlation.
E) markets should be left alone to determine the optimal outcome.
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
6) The Lucas Wedge shows
A) the negative impact a slowdown in real GDP growth has on potential GDP.
B) the increased impact of government spending on real GDP.
C) the negative impact inlation has on consumer spending.
D) the positive impact lower taxes have on real GDP.
E) whether a country needs to slow its real GDP growth rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Written and oral communication
2
7) The Lucas Wedge is estimated to
A) total over $406,000 per person as a result of the slowdown in the growth rate of real
GDP.
B) have reached about $13,000 per person in the last year.
C) be about 2 percent of real GDP per year.
D) be negative due to the severe recession in 2008-2009.
E) be positive in some years and negative in others.
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Revised
AACSB: Written and oral communication
8) Which of the following would have the biggest payof?
A) restoring real GDP growth to its 1960s growth rate
B) eliminating the Okun Gap
C) increasing the Okun Gap
D) making the Okun Gap equal the Lucas Wedge
E) increasing the Lucas Wedge
Skill: Level 4: Applying models
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
9) The level of real GDP the economy produces at full employment is called
A) sustainable GDP.
B) nominal GDP.
C) potential GDP.
D) maximum GDP.
E) Lucas GDP.
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Revised
AACSB: Relective thinking
3
10) The level of real GDP the economy produces at full employment is
A) nominal GDP.
B) potential GDP.
C) never reached in reality.
D) called the Lucas level.
E) real GDP.
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Revised
AACSB: Relective thinking
11) Suppose that Australia has fully employed all of its resources. This situation means that
Australia
A) is operating at its potential GDP.
B) is growing at a faster rate than the United States.
C) has a negative Okun Gap.
D) has a positive Lucas Wedge.
E) is experiencing zero unemployment.
Skill: Level 3: Using models
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
12) If the economy is fully employed, which of the following is true?
A) The price level equals 100.
B) Real and nominal GDP are equal.
C) Real and potential GDP are equal.
D) The unemployment rate is zero.
E) Real GDP cannot increase.
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
4
13) Potential GDP is the level of
A) real GDP that the economy would produce if it was at full employment.
B) nominal GDP that the economy would produce if it was at full employment.
C) real GDP that the economy would produce if there was no inlation.
D) nominal GDP that the economy would produce if there was no inlation.
E) real GDP that the economy would produce if there was no unemployment.
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
14) Potential GDP is
A) equal to the maximum amount of goods and services that can be produced at any given
time.
B) another name for real GDP.
C) the level of output produced when the economy is fully employed.
D) a measure of the short term luctuations in real GDP.
E) another name for nominal GDP.
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
15) Potential GDP
A) is the same as real GDP.
B) is the same as nominal GDP.
C) is another name for the Lucas Wedge.
D) is the level of output produced when the economy is fully employed.
E) shows that the Okun Gap vastly exceeds the Lucas Wedge.
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
5
16) If New Zealand is operating at potential GDP, which of the following is true?
i) New Zealand only has frictional and structural unemployment.
ii) There is no inlation in New Zealand.
iii) New Zealand has positive net exports.
A) i, ii and iii
B) i only
C) i and ii
D) i and iii
E) ii only
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
17) The idea that potential GDP is the sustainable upper limit of production means that
A) real GDP may be temporarily larger than potential GDP, but not permanently.
B) the economy is operating environmentally eiciently.
C) real GDP may be temporarily less than potential GDP.
D) inlation must always occur in a growing economy.
E) unemployment can only temporarily be zero in a healthy economy.
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
18) Suppose an economist stated that Brazil had achieved its potential GDP 2013. This
would imply that at this level of real GDP, Brazil experienced
A) peak in its business cycle in 2013.
B) unemployment equal to zero.
C) inlation equal to zero.
D) full employment.
E) a negative Okun Gap.
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
6
19) Suppose Germany's economy is experiencing full employment. This means that, in
Germany,
A) the unemployment rate is equal to zero.
B) real GDP is equal to potential GDP.
C) real GDP is greater than potential GDP.
D) potential GDP is greater than real GDP.
E) real GDP equals nominal GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
20) At full employment, actual ________ equals ________.
A) nominal GDP; potential GDP
B) real GDP; potential GDP
C) real GDP; nominal GDP
D) potential GDP; nominal GDP
E) unemployment; zero
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
21) Which of the following is true?
A) Real GDP luctuates around potential GDP.
B) Potential GDP luctuates around nominal GDP.
C) Nominal GDP luctuates around real GDP.
D) Real GDP never equals potential GDP.
E) The Okun Gaps are much larger than the Lucas Wedge.
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
7
22) Over the business cycle, real GDP luctuates around
A) the business cycle trough.
B) the business cycle peak.
C) nominal GDP.
D) potential GDP.
E) the Lucas Wedge.
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
23) Which of the following statement or statements are correct about potential GDP?
i. Actual real GDP equals potential GDP when the economy is at full employment.
ii. Real GDP can be less than potential GDP.
iii. When real GDP equals potential GDP, it also equals nominal GDP.
A) i only
B) ii only
C) ii and iii
D) i and ii
E) i, ii, and iii
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
24) Choose which statement is most correct.
A) Real GDP can never exceed potential GDP.
B) Real GDP must always equal potential GDP.
C) At times, real GDP can exceed potential GDP.
D) Nominal GDP can never exceed potential GDP.
E) Nominal GDP must always equal potential GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
8
25) The amount of real GDP produced at any one time depends on
i) a ixed amount of capital.
ii) a ixed level of technology.
iii) decisions people make about leisure versus working.
A) ii only
B) ii and iii
C) i and ii
D) i only
E) i, ii and iii
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
26) The sustainable upper limit of real GDP is a level of GDP that is
A) greater than potential GDP, but by how much greater is unknown and controversial.
B) less than potential GDP, but by how much less is unknown and controversial.
C) potential GDP.
D) determined only by what is the full employment equilibrium in the labor market.
E) None of the above answers is correct because there is no sustainable upper limit to real
GDP because real GDP can always be increased.
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
27) As an economic expansion approaches its peak, it is very likely that real GDP will
A) exceed nominal GDP.
B) exceed potential GDP.
C) equal nominal GDP but not potential GDP.
D) be less than potential GDP.
E) equal nominal GDP and equal potential GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
9
28) During a business cycle recession, it is very likely that real GDP will
A) exceed nominal GDP.
B) be less than potential GDP.
C) equal nominal GDP but not equal potential GDP.
D) equal nominal GDP and equal potential GDP.
E) be greater than potential GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
29) A country reports that its actual real GDP is greater than its potential GDP. It must be
that
A) an error was made when calculating actual real GDP.
B) the price level is increasing.
C) more workers decided to quit work in order to enjoy leisure time.
D) the excess by which real GDP exceeds potential GDP is only temporary, and eventually
real GDP will decrease to be equal to potential GDP.
E) None of the above answers is correct because it is impossible for a country's real GDP to
exceed its potential GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
30) A country's potential GDP is determined, in part, by
A) the equilibrium price level.
B) demand and supply in the labor market.
C) the Lucas Wedge.
D) actual real GDP.
E) the Okun Gap.
Skill: Level 1: Deinition
Section: Checkpoint 8.1
Status: Old
AACSB: Relective thinking
10
