Chapter 12 questions

Question 1

Three equivalent ways to measure GDP are total _____, total _____, and total ______.

A. profits; production; saving
B. expenditure; income; profits
C. investment; consumption; saving
D. production; income; expenditure

Answer 1

D. production; income; expenditure

Question 2

A country’s actual output _____ potential output.

A. can never exceed
B. can never be below
C. can temporarily exceed
D. will be approximately equal to

Answer 2

C. can temporarily exceed

Question 3

Typically unemployment _____ during a recession and _____ during an expansion.

A. rises; rises even more
B. rises; falls
C. rises; does not change
D. falls; rises

Answer 3

B. rises; falls

Question 4

The following data give the dates of successive turning points in U.S. economic activity and the corresponding levels of real GDP at the time.
Turning Point Date. Real GDP in billions
A July 1953 1992.2
B May 1954 1941.0
C April 1957 2182.7
D. April 1958 2117.4
E April 1960 2391.0
Which of the turning points are peaks?

A. (A), (B), and (C)
B. (C), (D), and (E)
C. (A), (C), and (E)
D. (B) and (D)

Answer 4

C. (A), (C), and (E)

Question 5

The following data give the dates of successive turning points in U.S. economic activity and the corresponding levels of real GDP at the time.
Turning Point Date. Real GDP in billions
A July 1953 1992.2
B May 1954 1941.0
C April 1957 2182.7
D. April 1958 2117.4
E April 1960 2391.0
Which of the turning points are troughs?

A. (A), (B), and (C)
B. (C), (D), and (E)
C. (A), (C), and (E)
D. (B) and (D)

Answer 5

D. (B) and (D)

Question 6

The following data give the dates of successive turning points in U.S. economic activity and the corresponding levels of real GDP at the time.
Turning Point Date. Real GDP in billions
A July 1953 1992.2
B May 1954 1941.0
C April 1957 2182.7
D. April 1958 2117.4
E April 1960 2391.0
Which of the following periods was a recession?

A. July 1953 through May 1954
B. May 1954 through April 1957
C. July 1953 through April 1957
D. May 1954 through April 1958

Answer 6

A. July 1953 through May 1954

Question 7

When the economy is producing at a quantity greater than its long-run aggregate supply:

A. it is pushing some of its resources to operate beyond capacity.
B. the economy is experiencing greater economic growth.
C. it causes a bubble to form in one of its major sectors.
D. It is not possible to produce beyond the long-run aggregate supply curve.

Answer 7

A. it is pushing some of its resources to operate beyond capacity.

Question 8

The long-run aggregate supply curve represents:

A. potential output in the economy.
B. the level of output possible if the economy is operating at full capacity.
C. a production function for the entire economy.
D. All of these are true.

Answer 8

D. All of these are true.

Question 9

When a supply-side shock is assumed to be permanent:

A. only the SRAS curve shifts
B. both the LRAS curve and the SRAS curve shift.
C. neither the LRAS curve nor the SRAS curve shifts.
D. only the LRAS curve shifts.

Answer 9

B. both the LRAS curve and the SRAS curve shift

Question 10

Which of the following events would cause the short-run aggregate supply curve to shift?
A. The price level increases unexpectedly
B. Consumers become more pessimistic about the economy
C. During an economic boom, congress passes a guest worker law that enables up to 5 million foreign workers to get work permits in the U.S
D. The cost of steel decreases significantly for manufacturing firms
E. The Affordable Care Act is amended to require employers to provide health insurance to part-time as well as full-time employees

Answer 10

C. During an economic boom, congress passes a guest worker law that enables up to 5 million foreign workers to get work permits in the U.S
D. The cost of steel decreases significantly for manufacturing firms
E. The Affordable Care Act is amended to require employers to provide health insurance to part-time as well as full-time employees

Question 11

As the number or quality of available resources improves, which reduces the cost of production, ______ shifts to the _____.

A. aggregate demand; left
B. aggregate demand; right
C. aggregate supply; left
D. aggregate supply; right

Answer 11

D. aggregate supply; right

Question 12

Anything that causes the cost of production to temporarily decrease will cause 1._________ aggregate supply curve(s) to 2.________________ Ceteris paribus, this will temporarily 3._____________ output and 4.________ the price level.

Answer 12

1. the short-run
2. shift right
3. increase
4. decrease

Question 13

The wealth effect describes:

A. the fact that changes in the price level affect real household wealth, which affects planned consumption.
B. the impact that changes in real GDP have on household wealth.
C. the fact that changes in the interest rate cause changes in the exchange rate.
D. the impact of changes in the price level on money demand

Answer 13

A. the fact that changes in the price level affect real household wealth, which affects planned consumption

Question 14

The exchange rate effect describes:

A. the fact that an increase in the price level causes the dollar to appreciate which reduces net exports.
B. the impact that changes in real GDP have on household wealth.
C. the fact that changes in the real GDP cause changes in the exchange rate.
D. the impact of changes in the price level on the money supply.

Answer 14

A. the fact that an increase in the price level causes the dollar to appreciate which reduces net exports.

Question 15

An increase in the price level will cause:

A. A leftward shift of the aggregate demand curve.
B. A rightward shift of the aggregate demand curve.
C. A downward movement along the aggregate demand curve.
D. An upward movement along the aggregate demand curve

Answer 15

D. An upward movement along the aggregate demand curve

Question 16

The aggregate demand curve shifts when there are changes in:

A. the price level.
B. aggregate spending that are not caused by changes in output or the price level.
C. planned spending that are caused only by changes in output or the price level.
D. real GDP or real output and income.

Answer 16

B. aggregate spending that are not caused by changes in output or the price level.

Question 17

Which of the following events would cause the aggregate demand curve to shift to the right?

A. Consumers become more pessimistic about the future state of the economy.
B. The price level decreases, causing consumers to spend more
C. Consumers become more optimistic about the future state of the economy.
D. The price level increases, causing consumers to spend less.

Answer 17

C. Consumers become more optimistic about the future state of the economy.

Question 18

For a given price level, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the ______ shifts _____.

A. aggregate demand curve; right
B. aggregate demand curve; left
C. aggregate supply curve; upward
D. aggregate supply curve; downward

Answer 18

B. aggregate demand curve; left

Question 19

Throughout the 19th and 20th centuries, the U.S. economy experienced frequent ups and downs, but over the past 200 years, the real GDP in the U.S. rose from roughly $8.2 billion to over $16.1 trillion, an increase by a factor of nearly 2,000 times.

This growth represents a change in __________________.

Answer 19

long-run aggregate

Question 20

In 2009, during the height of the U.S. financial crisis, real GDP fell 3.5 percent, and the Consumer Price Index fell from 215.3 to 214.9. Was this recession likely caused by a shift in aggregate demand or aggregate supply?

This recession was likely caused by ____________________.

Answer 20

a decrease in aggregate demand

Question 21

In 1974, GDP fell by 0.6 percent, and inflation increased from 6.2 percent to 11.0 percent. Was this recession likely caused by a shift in aggregate demand or aggregate supply?

This recession was likely caused by _______________.

Answer 21

a decrease in aggregate supply

Question 22

The economy is in long-run equilibrium:

A. when the AD and SRAS curves intersect the LRAS curve at potential output Y*.
B. when the AD and SRAS curves intersect, regardless of the level of output.
C. when the AD intersects the vertical LRAS.
D. when the SRAS intersects the vertical LRAS.

Answer 22

A. when the AD and SRAS curves intersect the LRAS curve at potential output Y*.

Question 23

Fluctuations around the long-run aggregate supply curve:

A. are called the business cycle.
B. are referred to as expansionary and recessionary gaps.
C. are normal for an economy.
D. All of these are true.

Answer 23

D. All of these are true.

Question 24

When actual output exceeds potential output, there is ______ output gap and there will be pressure on the price level to ____.

A. an expansionary; increase
B. an expansionary; decrease
C. a recessionary; increase
D. a recessionary; decrease

Answer 24

A. an expansionary; increase

Question 25

When actual output is less than potential output, there is ______ output gap and there will be pressure on the price level to ____. A. an expansionary; increase B. an expansionary; decrease C. a recessionary; decrease D. a recessionary; increase

Answer 25

C. a recessionary; decrease

Question 26

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ______ in the price level, leading to a(n) ______ in output. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

Answer 26

B. increase; decrease

Question 27

The self-correcting property of the economy means that output gaps are eventually eliminated by: A. rising or falling prices. B. falling prices only. C. increasing or decreasing potential output. D. government policy.

Answer 27

A. rising or falling prices.