b.
C
c.
E or F
d.
F
e.
G
60. Refer to Exhibit 9-5. Imagine an AD curve intersecting an SRAS curve at Point K on graph (1). Which point(s) would
this correspond to on graph (2)?
a.
A or B
b.
C
c.
D or E
d.
F
e.
G
1
Moderate
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61. Suppose the AD curve and the SRAS curve intersect to the right of the LRAS curve. Which of the following is true?
a.
The economy is in a recessionary gap.
b.
The economy is in an inflationary gap.
c.
The economy is in a long-run equilibrium.
d.
This situation is actually impossible.
b
1
Easy
Understanding and applying economic models
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62. Suppose the AD curve and the SRAS curve intersect to the left of the LRAS curve. Which of the following is true?
a.
The economy is in a recessionary gap.
b.
The economy is in an inflationary gap.
c.
The economy is in a long-run equilibrium.
d.
This situation is actually impossible.
b
1
Moderate
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63. A laissez-faire macroeconomic policy, based on a __________ in self regulating properties of the economy, implies
__________ by the government.
a.
belief; active policymaking
b.
belief; noninterference
c.
disbelief; active policymaking
d.
disbelief; noninterference
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64. If the natural unemployment rate is 5.5 percent, then the economy is at long-run equilibrium when the actual
unemployment rate is
a.
more than 5.5 percent.
b.
between 0 and 5.5 percent.
c.
0 percent.
d.
5.5 percent.
e.
none of the above
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65. If the current Real GDP is less than Natural Real GDP, then the economy is
a.
b.
c.
d.
e.
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66. If the current unemployment rate is less than the natural unemployment rate, then the economy is
a.
in long-run equilibrium.
b.
in an inflationary gap.
c.
in a recessionary gap.
d.
producing at full employment.
e.
b and d
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67. If the current unemployment rate is equal to the natural unemployment rate, then current Real GDP is
a.
greater than Natural Real GDP.
b.
equal to Natural Real GDP.
c.
equal to the Real GDP produced at full employment.
d.
less than Natural Real GDP.
e.
b and c
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68. If the economy is producing Natural Real GDP, then the
a.
current unemployment rate is greater than the natural unemployment rate.
b.
current unemployment rate is less than the natural unemployment rate.
c.
economy is at full employment.
d.
economy is operating at the natural unemployment rate.
e.
c and d
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69. The frictional unemployment rate is 2.5 percent, the structural unemployment rate is 3.1 percent, and the economy’s
current unemployment rate is 5.6 percent. The economy is in
Understanding and applying economic models
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a.
an inflationary gap producing more than Natural Real GDP.
b.
a recessionary gap producing more than Natural Real GDP.
c.
an inflationary gap producing Natural Real GDP.
d.
a recessionary gap producing less than Natural Real GDP.
e.
long-run equilibrium.
70. The structural unemployment rate is 1.3 percent, the frictional unemployment rate is 2.1 percent, and the economy’s
current unemployment rate is 4.9 percent. The economy is in
a.
a recessionary gap producing less than Natural Real GDP.
b.
an inflationary gap producing more than Natural Real GDP.
c.
long-run equilibrium.
d.
an inflationary gap producing Natural Real GDP.
e.
a recessionary gap producing more than Natural Real GDP.
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71. The structural unemployment rate is 2.3 percent, the frictional unemployment rate is 2.4 percent, and the economy’s
current unemployment rate is 4.1 percent. The economy is in
a.
a recessionary gap producing less than Natural Real GDP.
b.
an inflationary gap producing more than Natural Real GDP.
c.
long-run equilibrium.
d.
an inflationary gap producing Natural Real GDP.
e.
a recessionary gap producing more than Natural Real GDP.
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72. Some economists believe the economy is self-regulating. What does this mean?
a.
It means the economy can remove itself from recessionary and inflationary gaps and produce at Natural Real
GDP.
b.
It means the economy is always in long-run equilibrium producing Natural Real GDP.
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c.
It means that inflationary gaps naturally change into recessionary gaps.
d.
It means that recessionary gaps naturally change into inflationary gaps.
e.
c and d
73. If the economy is self-regulating and in a recessionary gap, what happens?
a.
Wages rise, the SRAS curve shifts leftward, and both Real GDP and the price level rise.
b.
Wages fall, the SRAS curve shifts leftward, the price level rises, and Real GDP falls.
c.
Wages fall, the SRAS curve shifts rightward, and both the price level and Real GDP fall.
d.
Wages fall, the SRAS curve shifts rightward, the price level falls, and Real GDP rises.
e.
none of the above
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74. A necessary condition for the economy to be self-regulating is that
a.
wages must be relatively high.
b.
the labor market must always be in equilibrium.
c.
the interest rate must be above its equilibrium level.
d.
wages must be flexible in both an upward and downward direction.
e.
none of the above
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75. If the economy is in long-run equilibrium,
a.
prices will rise but wages will remain constant.
b.
neither prices nor wages will change.
c.
it is producing Natural Real GDP.
d.
prices will remain constant but wages may rise.
e.
b and c
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76. If the economy is self-regulating and in an inflationary gap,
a.
wages and prices will fall.
b.
wages will rise, but prices will fall.
c.
wages and prices will rise.
d.
wages will fall, but prices will rise.
e.
neither wages nor prices will change.
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77. If the economy is self-regulating and in a recessionary gap,
a.
wages and prices will fall.
b.
wages will fall, but prices will rise.
c.
neither wages nor prices will change.
d.
wages will rise, but prices will fall.
e.
wages and prices will rise.
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78. A necessary condition for a money economy to be self-regulating is that
a.
wages must be flexible in an upward direction, but not in a downward direction.
b.
the economy must always be operating on its institutional production possibilities frontier.
c.
wages must be flexible in a downward direction, but not in an upward direction.
d.
interest rates must be flexible in the credit market.
e.
none of the above
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79. If the economy is self-regulating, then it follows that
a.
recessionary and inflationary gaps are temporary economic states.
b.
wages will fall when the economy is in a recessionary gap.
c.
wages will rise when the economy is in an inflationary gap.
d.
the economy is always in long-run equilibrium.
e.
a, b and c
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80. If the economy is self-regulating and current Real GDP is greater than Natural Real GDP, the economy is operating
__________ the natural unemployment rate and wages will soon __________.
a.
below; fall.
b.
above; fall
c.
below; rise
d.
above; rise
e.
none of the above
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81. If the economy is self-regulating and current Real GDP is less than Natural Real GDP, the economy is operating
__________ the natural unemployment rate and wages will __________.
a.
below; soon rise
b.
above; soon rise
c.
below; soon fall
d.
above; remain unchanged
e.
none of the above
Understanding and applying economic models
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82. Which of the following is not consistent with a self-regulating economy?
a.
flexible prices
b.
flexible wages
c.
a labor market in which wages fall if there is a surplus
d.
a labor market in which wages rise if there is a shortage
e.
none of the above (all are consistent with a self-regulating economy)
83. Suppose the natural unemployment rate is 5 percent. Which of the following observations is consistent with an
economy that is self-regulating?
a.
The unemployment rate in the economy is always above 5 percent.
b.
The unemployment rate in the economy is always below 5 percent.
c.
There is a tendency for the unemployment rate in the economy to move toward 5 percent if it is not already
there.
d.
If the unemployment rate in the economy is greater than 5 percent, wages start to rise.
e.
If the unemployment rate in the economy is less than 5 percent, wages start to fall.
1
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84. Which of the following statements is false?
a.
If the economy is self-regulating, wages are flexible.
b.
The frictional unemployment rate equals the natural unemployment rate minus the structural unemployment
rate.
c.
If the economy is producing Natural Real GDP, it is operating at the natural unemployment rate.
d.
The economy is operating at full employment if it is producing more than Natural Real GDP.
d
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85. Which of the following statements is true?
a.
If current Real GDP is greater than Natural Real GDP, the economy is in a recessionary gap.
b.
If current Real GDP is less than Natural Real GDP, the economy is in long-run equilibrium.
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c.
Wages are flexible if the economy is self-regulating.
d.
Wages rise but prices remain constant in long-run equilibrium.
e.
All economists believe the economy is self-regulating.
86. If the economy is operating at a point beyond its institutional production possibilities frontier (institutional PPF), then
the economy is
a.
producing Natural Real GDP and operating at the natural unemployment rate.
b.
producing less than Natural Real GDP and operating below the natural unemployment rate.
c.
producing more than Natural Real GDP and operating above the natural unemployment rate.
d.
producing more than Natural Real GDP and operating below the natural unemployment rate.
e.
none of the above
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87. If an economy’s institutional production possibilities frontier (institutional PPF) shifts rightward, the economy’s
a.
natural unemployment rate rises.
b.
natural unemployment rate falls.
c.
Natural Real GDP declines.
d.
physical PPF shifts leftward.
e.
physical PPF shifts rightward.
Understanding and applying economic models
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88. The economy is currently operating at a point on its physical production possibilities frontier (physical PPF). It is
a.
producing Natural Real GDP and operating below the natural unemployment rate.
b.
producing more than Natural Real GDP and operating above the natural unemployment rate.
c.
producing more than Natural Real GDP and operating below the natural unemployment rate.
d.
in long-run equilibrium.
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89. Which of the following statements is true?
a.
The long-run aggregate supply (LRAS) curve shows the Real GDP the economy is prepared to supply at
different price levels, assuming wage rates and all other resource prices have fully adjusted to eliminate a
recessionary or inflationary gap.
b.
Laissez-faire is a government policy of raising aggregate demand in order to eliminate a recessionary gap.
c.
An economy can operate beyond its physical PPF, but not beyond its institutional PPF.
d.
If the economy is self-regulating, it is always in long-run equilibrium.
e.
a and c
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90. If the economy is currently operating below its institutional production possibilities frontier (institutional PPF), it is
a.
in long-run equilibrium.
b.
in a recessionary gap.
c.
in an inflationary gap.
d.
definitely not self-regulating.
e.
b and d
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91. A person who believes the economy is self-regulating also believes that
a.
when there is a surplus in the labor market, the wage rate falls, and when there is a shortage in the labor
market, the wage rate rises.
b.
it is better if the economy is in an inflationary gap than a recessionary gap.
c.
prices are flexible but wages are not.
d.
the economy is always in long-run equilibrium.
e.
the real balance effect does not operate in a recessionary gap.
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92. According to Say’s law, in a money economy a reduction in consumption spending causes a __________ shift of the
saving curve and therefore a __________ in the interest rate.
a.
leftward; rise
b.
leftward; fall
c.
rightward; rise
d.
rightward; fall
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93. In the classical view of the credit market, a rise in saving produces a rise in investment via a
a.
rising interest rate.
b.
falling interest rate.
c.
rising price level.
d.
falling price level.
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94. According to classical economists, the economy
a.
always operates at a point below its institutional production possibilities frontier (PPF).
b.
always operates close to or on its institutional PPF.
c.
seldom operates close to or on its institutional PPF.
d.
never operates close to or on its institutional PPF.
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95. Say’s law states that
a.
demand creates its own supply.
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b.
the more supply there is, the lower prices are.
c.
supply creates supply.
d.
supply creates its own demand.
e.
none of the above
96. According to Say’s law,
a.
the demand curve is negatively sloped.
b.
the supply curve is positively sloped.
c.
supply creates its own demand.
d.
economic units should produce those goods for which they are low-opportunity-cost producers.
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97. In a barter economy, Say’s law implies there
a.
can be a general overproduction of goods.
b.
can be a general underproduction of goods.
c.
cannot be a general overproduction or underproduction of goods.
d.
can be a general overproduction of goods but never a general underproduction of goods.
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98. Which of the following is most nearly consistent with Say’s law?
a.
When a person produces one good, he or she plans to demand other goods.
b.
When a person produces a good, he or she plans to sell it.
c.
When a person buys a good, he or she plans to pay for it with money.
d.
When a person goes to work, he or she plans to produce.
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99. According to Say’s law, there can be
a.
neither a general overproduction nor a general underproduction of goods.
b.
a general overproduction but not a general underproduction of goods.
c.
a general underproduction but not a general overproduction of goods.
d.
both a general overproduction and a general underproduction of goods.
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100. The classical economists felt that wages and prices were flexible in
a.
neither the upward direction nor the downward direction.
b.
the upward direction but not in the downward direction.
c.
the downward direction but not in the upward direction.
d.
both the upward and downward directions.
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101. In order for Say’s law to hold in a money economy,
a.
there must be more than four goods.
b.
funds saved must give rise to an equal amount of funds earned.
c.
funds saved must give rise to an equal amount of funds invested.
d.
none of the above
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102. According to classical economists,
a.
spending equals saving.
b.
saving equals income.
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c.
income equals wealth.
d.
none of the above
103. The classical economists argued that saving is matched by an equal amount of investment because of
a.
wage flexibility.
b.
price flexibility.
c.
money flexibility.
d.
interest rate flexibility.
e.
b and c
d
1
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104. According to classical economists, the relationship between the amount of funds households plan to save and the
interest rate is
a.
indirect.
b.
inverse.
c.
direct.
d.
independent.
1
Moderate
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105. The classical economists felt that saving would be equal to investment because
a.
wages are flexible.
b.
prices of domestic goods are flexible.
c.
interest rates are flexible.
d.
prices of imports are flexible.
1
d
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106. According to the classical economists, which of the following statements is false?
a.
There is a direct relationship between the amount individuals save and the interest rate.
b.
There is a direct relationship between the amount business firms invest and the interest rate.
c.
As the interest rate rises, the quantity supplied of loanable funds rises.
d.
Interest rate flexibility will ensure that saving is equal to investment.
b
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107. According to classical economists, the relationship between the amount of funds firms invest and the interest rate is
a.
direct.
b.
inverse.
c.
indirect.
d.
independent.
b
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108. According to classical economists, if the amount of funds households save is greater than the amount of funds firms
invest, then
a.
the interest rate will fall, ultimately moving to a level where the amount of funds households plan to save
equals the amount of funds firms plan to invest.
b.
the interest rate will rise, ultimately moving to a level where the amount of funds households plan to save
equals the amount of funds firms plan to invest.
c.
the interest rate will remain constant and people will simply buy more goods.
d.
more money will he used for leisure purposes, since households save in order to consume leisure at some later
time.
e.
none of the above
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109. The classical economists felt that there would be no general overproduction of goods because of
a.
wage-price flexibility.
b.
the law of diminishing utility.
c.
the law of comparative advantage.
d.
contestable markets.
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110. Which of the following is consistent with the classical position on wages and prices?
a.
Wages and prices are inflexible in the downward direction, but not in the upward direction.
b.
Wages are inflexible in the downward direction, but prices are flexible.
c.
Wages and prices are flexible.
d.
Prices are inflexible in the downward direction, but wages are flexible.
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111. Which of the following statements is false?
a.
The classical economists believed that government should manage the economy.
b.
The classical economists believed in a policy of laissez-faire.
c.
The classical economists believed that the economy was self-regulating.
d.
The classical economists believed equilibrium output would be full-employment output.
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112. According to classical economists, if interest rates are flexible,
a.
saving will equal investment.
b.
saving may be greater than investment.
c.
saving may be less than investment.
d.
any of the above
Bloom’s: Application
113. According to the classical theorists, it is impossible to have a
a.
surplus of a particular product.
b.
shortage of a particular product.
c.
decrease in the demand for a product.
d.
decrease in the supply of a product.
e.
general overproduction of products.
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114. According to Say’s law,
a.
if there is demand for a good, someone will supply it.
b.
production creates demand sufficient to purchase all goods and services produced.
c.
supply and demand work together to determine price.
d.
trading takes longer in a barter economy than in a money economy.
e.
none of the above
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Exhibit 9-6
United States – BUSPROG: Analytic
Bloom’s: Comprehension