Chapter 9

Chapter 9—Classical Macroeconomics and the Self-Regulating Economy
MULTIPLE CHOICE
1. When the economy is at its full employment Real GDP, the unemployment rate is equal to
a. zero.
b. the natural unemployment rate.
c. the frictional unemployment rate.
d. the structural unemployment rate.
ANS: B PTS: 1 DIF: Difficulty: Easy
NAT: BUSPROG: Analytic
LOC: DISC: Understanding and applying economic models KEY: Bloom's: Knowledge
2. An economy is producing its Natural Real GDP when the rate of unemployment is equal to the
__________ unemployment rate.
a. frictional
b. structural
c. sum of the frictional unemployment rate and the structural
d. seasonal
e. cyclical
ANS: C PTS: 1 DIF: Difficulty: Easy
LOC: DISC: Understanding and applying economic models KEY: Bloom's: Comprehension
3. If Real GDP is less than Natural Real GDP, the economy is in

a. an inflationary gap.
b. a recessionary gap.
c. an unemployment gap.
d. a real gap.
4. If the SRAS curve intersects the AD curve to the left of Natural Real GDP, the economy is
a. in a recessionary gap.
b. at Natural Real GDP.
c. in an inflationary gap.
d. at full-employment Real GDP.
ANS: A PTS: 1 DIF: Difficulty: Easy
5. If the SRAS curve intersects the AD curve to the right of Natural Real GDP, the economy is
b. at Natural Real GDP.
d. at full-employment Real GDP.
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6. If Real GDP is less than Natural Real GDP, then the (actual) unemployment rate is
a. less than the natural unemployment rate.
b. equal to the natural unemployment rate.
c. greater than the natural unemployment rate.
d. equal to full employment.
e. b and d
ANS: C PTS: 1 DIF: Difficulty: Moderate
7. If Real GDP is greater than Natural Real GDP, the economy is in a(n)
a. frictional gap.
b. structural gap.
c. recessionary gap.
d. inflationary gap.
ANS: D PTS: 1 DIF: Difficulty: Moderate
8. If the economy is currently in a recessionary gap,

a. all economists will argue that the economy can remove the gap itself.
b. some economists will argue that the economy can remove the gap itself.
c. no economist will argue that the economy can remove the gap itself.
d. all economists will argue that over time the recessionary gap will worsen.
LOC: DISC: Understanding and applying economic models KEY: Bloom's: Application
9. If the natural unemployment rate is 5 percent and the current unemployment rate is 6 percent, then the
economy is
a. producing more Real GDP than it does at full employment.
b. in an inflationary gap.
c. producing less Real GDP than it does at full employment.
d. a and b
e. b and c
ANS: C PTS: 1 DIF: Difficulty: Challenging
10. If the natural unemployment rate is 7 percent and the current unemployment rate is 5 percent, then the
economy is
a. producing more Real GDP than it does at full employment.
b. in a recessionary gap.
c. producing less Real GDP than it does at full employment.
d. a and b
e. b and c
ANS: A PTS: 1 DIF: Difficulty: Challenging
11. The long-run aggregate supply (LRAS) curve is

a. horizontal.
b. vertical.
c. positively sloped.
d. negatively sloped.
12. If the economy is in a recessionary gap,

a. Real GDP is greater than Natural Real GDP.
b. Real GDP is equal to Natural Real GDP.
c. Real GDP is less than Natural Real GDP.
d. the (actual) unemployment rate is less than the natural unemployment rate.
e. a and d
13. When the economy is producing Real GDP at a level at which the LRAS curve intersects the AD curve
the economy is
b. in long-run equilibrium.
d. operating at less than full-employment output.
14. Suppose the economy's short-run equilibrium point is to the right of the Natural Real GDP. Which of
the following is true?
a. The economy is in an inflationary gap.
b. The economy is in a recessionary gap.
c. The economy is in long-run equilibrium.
d. This situation is actually impossible.
15. Suppose the economy's short-run equilibrium point is to the left of the Natural Real GDP. Which of
the following is true?
a. The economy is in an inflationary gap.
b. The economy is in a recessionary gap.
16. An inflationary gap exists when AD and SRAS

a. fail to intersect.
b. intersect to the right of Natural Real GDP.
c. intersect to the left of Natural Real GDP.
d. both have a positive slope.
ANS: B PTS: 1 DIF: Difficulty: Moderate
17. A recessionary gap exists when AD and SRAS

a. fail to intersect.
b. intersect to the right of Natural Real GDP.
c. intersect to the left of Natural Real GDP.
d. both have a positive slope.
Exhibit 9-1
18. Refer to Exhibit 9-1. The economy is currently producing Q1. At this level of Real GDP, the economy
is in a(n)
a. inflationary gap.
b. recessionary gap.
c. unemployment gap.
d. high Real GDP gap.
e. none of the above
19. Refer to Exhibit 9-1. The economy is currently producing Q1. If an economist believes the economy
can move itself without government intervention to QN, then he believes that the
a. LRAS curve will shift leftward until it intersects the SRAS and AD curves at Q 1.
b. AD curve will shift rightward and intersect the SRAS curve at point B.
c. SRAS curve will shift rightward and intersect the AD curve at point A.
d. economy will likely stay "stuck" in short-run equilibrium.
20. Refer to Exhibit 9-1. The unemployment rate is lower at

a. Q1 than QN.
b. QN than Q1.
c. point A than point B.
d. point B than point A.
21. Refer to Exhibit 9-1. If the economy is self-regulating, the price level is
a. lower in short-run equilibrium than in long-run equilibrium.
b. lower in long-run equilibrium than in short-run equilibrium.
c. higher in long-run equilibrium than in short-run equilibrium.
d. lower when the economy is in a recessionary gap than when it is in long-run equilibrium.
e. a and c
22. Refer to Exhibit 9-1. The economy is currently producing Q1. An economist who believes wages are
flexible in the downward direction would argue that
a. it is likely the economy will soon move to point B.
b. it is likely the economy will soon move to point A.
c. it is not likely the economy will move to point A on its own accord now or anytime soon.
d. Real GDP will soon take a downturn.
Exhibit 9-2
is in a(n)
a. inflationary gap.
b. recessionary gap.
c. unemployment gap.
d. high Real GDP gap.
ANS: A PTS: 1 DIF: Difficulty: Moderate
is experiencing
a. a shortage in the labor market.
b. a surplus in the labor market.
c. neither a shortage nor a surplus in the labor market.
d. all of the above are equally likely
Exhibit 9-3
25. Refer to Exhibit 9-3. The economy is in long-run equilibrium at point
a. A.
b. B.
c. C.
d. D.
e. E.
26. Refer to Exhibit 9-3. The economy is in short-run equilibrium and has an inflationary gap at point
a. A.
b. B.
c. C.
d. D.
e. E.
27. Refer to Exhibit 9-3. The economy is in short-run equilibrium and has a recessionary gap at point
a. A.
b. B.
c. C.
d. D.
e. E.
28. Refer to Exhibit 9-3. If the economy is in short-run equilibrium at point A,

a. the (actual) unemployment rate is less than the natural unemployment rate.
b. the (actual) unemployment rate is equal to the natural unemployment rate.
c. the (actual) unemployment rate is greater than the natural unemployment rate.
d. the relationship between the (actual) unemployment rate and the natural unemployment
rate cannot be determined from the available information.
29. Refer to Exhibit 9-3. If the economy is in short-run equilibrium at point C,

30. Refer to Exhibit 9-3. If the economy is in equilibrium at point B,

ANS: B PTS: 1 DIF: Difficulty: Challenging
31. A recessionary gap exists if (actual) Real GDP is __________ Natural Real GDP.
a. less than
b. greater than
c. equal to
d. b and c
32. When there is a recessionary gap, (actual) Real GDP is __________ Natural Real GDP, and the
(actual) unemployment rate is __________ the natural rate of unemployment.
a. greater than; less than
b. greater than; greater than
c. greater than; equal to
d. less than; greater than
e. less than; less than
33. When there is an inflationary gap, (actual) Real GDP is __________ Natural Real GDP, and the
(actual) unemployment rate is __________ the natural rate of unemployment.
a. greater than; less than
b. greater than; greater than
c. less than; greater than
d. less than; less than
e. less than; equal to
34. In a "self-regulating" economy, inflationary and recessionary gaps

a. never occur.
b. are eliminated by forces internal to the economy, without government intervention.
c. are eliminated by timely actions of economic policymakers.
d. are the desirable results of microeconomic price adjustments.
35. In a self-regulating economy, inflationary and recessionary gaps produce shifts of the
a. AD curve that maintain the short-run equilibrium point.
b. AD curve that move the economy to a long-run equilibrium point.
c. SRAS curve that maintain the short-run equilibrium point.
d. SRAS curve that move the economy to a long-run equilibrium point.
36. The physical production possibilities frontier illustrates the different combinations of goods that
society can produce given
a. the constraints of finite resources and the current state of technology.
b. the price level.
c. its institutional constraints.
d. the natural rate of unemployment.
e. the constraints of finite resources and the current state of technology and institutional
constraints.
37. The economy can operate

a. beyond its institutional PPF but not beyond its physical PPF.
b. on both its institutional PPF and its physical PPF, but not at the same time.
c. under its physical PPF but not under its institutional PPF.
d. a and b
e. a, b, and c
38. The institutional production possibilities frontier illustrates the different combinations of goods that
society can obtain given
a. the constraints of finite resources and the current state of technology.
b. the price level.
c. its institutional constraints.
d. the natural rate of unemployment.
e. the constraints of finite resources and the current state of technology and institutional
constraints.
ANS: E PTS: 1 DIF: Difficulty: Challenging
39. The more institutional constraints that exist in a particular society,

a. the closer the institutional PPF will lie to the physical PPF.
b. the farther out from the origin the institutional PPF will lie.
c. the closer to the origin the institutional PPF will lie.
d. the closer to the origin the institutional PPF will lie and the farther out from the origin the
physical PPF will lie.
40. The natural rate of unemployment exists at

a. some point within the interior of the PPF but outside the limits of the institutional PPF.
b. some point within the interior of the physical PPF, but we cannot locate it with more
accuracy.
c. some point within the interior of the institutional PPF, but we cannot locate it with more
accuracy.
d. every point on the institutional PPF.
e. every point on the physical PPF.
41. Suppose the economy is self-regulating and the (actual) unemployment rate is less than the natural
unemployment rate. This means that the economy is producing a level of output
a. above its natural level and will eventually cut back on output.
b. below its natural level and will eventually increase output.
c. below its natural level but no forces exist to automatically increase output.
d. above its natural level and institutional constraints will automatically be reduced so as to
allow the economy to continue producing this level.
42. Which of the following statements is true?
a. The economy can operate outside (or beyond) its institutional PPF and its physical PPF,
but only for a short while.
b. The economy can operate outside its physical PPF, if only for a short while, but can never
operate outside its institutional PPF.
c. The economy can operate outside its institutional PPF, if only for a short while, but can
never operate outside its physical PPF.
d. The economy can never operate outside its institutional PPF or its physical PPF, even for a
short while.
43. If an economy is operating __________ its institutional production possibilities frontier, it is

producing __________ output than it would be at full employment.
a. below; less
b. below; more
c. above; less
d. above; more
e. a and d
ANS: E PTS: 1 DIF: Difficulty: Moderate
44. Classical economics refers to an era in the history of economic thought that stretched from about
a. 1750 to the early 1900s.
b. 1935 to the 1970s.
c. 1800 to the mid 1900s.
d. 1600 to the mid 1800s.
Exhibit 9-4
45. Refer to Exhibit 9-4. Which of the following is true at the Real GDP level of Q 3?
a. The unemployment rate is equal to its natural level.
b. The cyclical unemployment rate is zero.
d. all of the above
46. Refer to Exhibit 9-4. Assume the economy is currently in long-run equilibrium with the price level
equal to P3. If foreigners begin to buy more U.S. goods, the economy will, in the short run, move to
which of the following equilibrium combinations of price level and Real GDP?
a. P2, Q4.
b. P3, Q3.
c. P4, Q2.
d. P4, Q4.
e. P5, Q3.
47. Refer to Exhibit 9-4. Assume the economy is self-regulating and currently is in long-run equilibrium
with the price level equal to P3. After an initial increase in U.S. exports, the long-run equilibrium will
be brought about by a shift from
a. AD3 to AD1.
b. SRAS1 to SRAS2.
c. SRAS2 to SRAS1.
d. AD3 to AD2.
48. Refer to Exhibit 9-4. Assume the economy is self-regulating and currently is in long-run equilibrium
with the price level equal to P5. If something happens that shifts the AD curve to the AD1 position, the
economy will eventually settle down at a long-run equilibrium point of __________.
a. P5, Q3.
b. P4, Q4.
c. P3, Q3.
d. P3, Q5.
e. P4, Q2.
49. Refer to Exhibit 9-4. When AD and SRAS cross at point (P1, Q3), the economy is in
a. a recessionary gap.
b. an inflationary gap.
c. long-run equilibrium.
d. a and c
e. b and c
50. Refer to Exhibit 9-4. Assuming the economy is in an inflationary gap at a short-run equilibrium point
with the price level at P2, the movement toward long-run equilibrium will be
a. down and along AD1.
b. up and along AD2.
c. down and along SRAS1.
d. up and along SRAS2.
e. down and along SRAS2.
Exhibit 9-5
51. Refer to Exhibit 9-5. Picture an AD curve and an SRAS curve intersecting at Point I 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
52. Refer to Exhibit 9-5. Point C on graph (2) corresponds to which point(s) on graph (1)?
a. I or J
b. K
c. L or M
d. I or L
e. J or M
53. Refer to Exhibit 9-5. Point B on graph (2) corresponds to which point(s) on graph (1)?
a. I or J
b. K
c. L or M
d. I or L
e. J or M
54. Refer to Exhibit 9-5. Point A on graph (2) corresponds to which point(s) on graph (1)?
a. I or J
b. K
c. L or M
d. I or L
e. J or M
55. Refer to Exhibit 9-5. Point G on graph (2) corresponds to which point(s) on graph (1)?
a. I or J
b. K
c. L or M
d. I or L
e. J or M
56. Refer to Exhibit 9-5. Assume that the economy starts off at point A on graph (2) with an effective
minimum wage law in place. After inflation erodes the purchasing power of the minimum wage, the
economy is likely to move to a point such as
a. B.
b. G.
c. F.
d. C.
e. None of the above, because the minimum wage has no influence on the amount of goods
produced.
57. Refer to Exhibit 9-5. Picture an AD curve intersecting an SRAS curve at Point L 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
58. Refer to Exhibit 9-5. Picture an AD curve intersecting an SRAS curve at Point J on graph (1). Which
a. A or B
b. C
c. E or F
d. F
e. G
59. Refer to Exhibit 9-5. Picture an AD curve intersecting an SRAS curve at Point M on graph (1). Which
a. A or B
b. C
c. E or F
d. F
e. G
60. Refer to Exhibit 9-5. Picture an AD curve intersecting an SRAS curve at Point K on graph (1). Which
a. A or B
b. C
c. D or E
d. F
e. G
61. Suppose AD and SRAS intersect to the right of LRAS. 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.
62. Suppose AD and SRAS intersect to the left of LRAS. 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.
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
64. If the natural unemployment rate is 5.5 percent, then the economy is at full employment 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.
ANS: D PTS: 1 DIF: Difficulty: Easy
65. If the current Real GDP is less than Natural Real GDP, then the economy is
a. in long-run equilibrium.
d. possibly in short-run equilibrium.
e. b and d
ANS: E PTS: 1 DIF: Difficulty: Easy
66. If the current unemployment rate is less than the natural unemployment rate, then the economy is
b. in an inflationary gap.
c. in a recessionary gap.
d. producing at full employment.
e. b and d
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
ANS: E PTS: 1 DIF: Difficulty: Easy
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
69. The frictional unemployment rate is 2.5 percent, the structural unemployment rate is 3.1 percent, and
the current unemployment rate (in the economy) is 5.6. The economy is in
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 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.
d. an inflationary gap producing Natural Real GDP.
e. a recessionary gap producing more than Natural Real GDP.
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.
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.
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.
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
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.
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.
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.
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
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
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
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; that is, 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.
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.
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.

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.
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.
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.
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.

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
90. If the economy is currently operating below its institutional production possibilities frontier
(institutional PPF), it is
d. definitely not self-regulating.
e. b and d
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.
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
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.
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.
95. Say's law says

a. demand creates its own supply.
b. the more supply there is, the lower prices are.
c. supply creates supply.
d. supply creates its own demand.
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.
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.
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.
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.
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.
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
102. According to classical economists,

a. spending equals saving.
b. saving equals income.
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
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.
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.
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.
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.
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.
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.
110. Which of the following is consistent with the classical position on wages and prices?
a. Wages and prices are sticky in the downward direction.
b. Wages are sticky in the downward direction, but prices are flexible.
c. Wages and prices are flexible.
d. Prices are sticky in the downward direction, but wages are flexible.
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.
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
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.
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.
Exhibit 9-6
115. Refer to Exhibit 9-6. If the economy is self-regulating and currently at point 1, it follows that
a. there is a surplus of labor in the labor market.
b. the economy is currently on its institutional PPF.
c. the economy is currently in an inflationary gap.
d. the labor market is in equilibrium.
e. the actual unemployment rate is below the natural unemployment rate.
116. Refer to Exhibit 9-6. If the economy is self-regulating and currently at point 1, it follows that
a. the AD curve will shift to the right and pass through point 4.
b. the SRAS curve will shift to the left and pass through point 2.
c. the economy is currently operating below its physical PPF and above its institutional PPF.
d. the SRAS curve will shift to the right and pass through point 3.
117. Refer to Exhibit 9-6. If the economy is self-regulating and currently at point 1, the real balance effect
is operational and relevant between points
a. 3 and 4.
b. 1 and 2.
c. 1 and 4.
d. 1 and 3.
e. 2 and 3.
ANS: D PTS: 1 DIF: Difficulty: Challenging
118. Refer to Exhibit 9-6. If the economy is self-regulating and currently at point 1, what is going to
happen?
a. Wages rise, the SRAS curve shifts to the right until it passes through point 3; in long-run
equilibrium the price level is lower and Real GDP is higher than at point 1.
b. Wages fall, the SRAS curve shifts to the left until it passes through point 2; in long-run
equilibrium the price level is higher and Real GDP is lower that at point 1.
c. Wages fall, the SRAS curve shifts to the right until it passes through point 3; in long-run
equilibrium the price level is lower and Real GDP is higher than at point 1.
d. Wages rise, the AD curve shifts to the right until it passes through point 4; in long-run
equilibrium the price level and Real GDP are higher than at point 1.
e. Prices rise, the AD curve shifts to the right until it passes through point 4; in long-run
equilibrium the price level and Real GDP are higher than at point 1.
Exhibit 9-7
D
E
B
All Other Goods C
Institutional PPF Physical PPF

Good X
119. Refer to Exhibit 9-7. Which point is representative of the economy in a recessionary gap?
a. A
b. B
c. C
d. D
e. E
120. Refer to Exhibit 9-7. Which point is representative of the economy in an inflationary gap?
a. A
b. B
c. C
d. E
121. Refer to Exhibit 9-7. Which point is representative of the economy on its LRAS curve?
a. A
b. B
c. C
d. D
e. E
122. Refer to Exhibit 9-7. Which point is representative of the economy with an unemployment rate that is
less than the natural unemployment rate?
a. A
b. B
c. C
d. E
123. Refer to Exhibit 9-7. Which point is representative of the economy with an unemployment rate that is
greater than the natural unemployment rate?
a. A
b. B
c. C
d. D
e. E
124. Refer to Exhibit 9-7. Which point is representative of the economy experiencing labor market
surpluses?
a. A
b. B
c. C
d. D
e. E
125. Refer to Exhibit 9-7. Which point is representative of the economy experiencing labor market
shortages?
a. A
b. B
c. C
d. E
126. If the natural unemployment rate is 5.5 percent, then the economy is in a recessionary gap when the
b. between 0 and 5.5 percent.
c. 0 percent.
d. 5.5 percent.
127. If the natural unemployment rate is 5.5 percent, then the economy is in an inflationary gap when the
b. less than 5.5 percent.
c. 0 percent.
d. 5.5 percent.
129. Which of the following equations is correct?

a. Saving = Disposable income + Consumption
b. Saving = Disposable income x Consumption
c. Disposable income = Consumption - Saving
d. Saving = Disposable income - Consumption
130. Suppose the economy is self-regulating, the price level is 120, the quantity demanded of Real GDP
and the quantity supplied of Real GDP in the short run both equal $5.7 trillion, and the quantity
supplied of Real GDP in the long run is $5.2 trillion. Given all of this information, we can conclude
that the economy ____________ in short run equilibrium, and that the price level in long run
equilibrium will be _____________ than 120.
a. is not; less
b. is; more
c. is; less
d. is not; more
131. Suppose the economy is self-regulating, the price level is 150, the quantity demanded of Real GDP
and the quantity supplied of Real GDP in the short run both equal $4.3 trillion, and the quantity
supplied of Real GDP in the long run is $4.1 trillion. Given all of this information, we can conclude
that the economy ____________ in short run equilibrium, and that the price level in long run
equilibrium will be _____________ than 150.
a. is not; less
b. is; more
c. is; less
d. is not; more
Exhibit 9-8
Suppose that at a given price level the following values exist in a hypothetical economy:
Consumption = $7,000 billion

Investment = $1,900 billion
Government Purchases = $1,700 billion
Exports = $300 billion
Imports = $300 billion
Assume that the level of total expenditures is equal to the value of goods and services that suppliers
want to sell.
132. Refer to Exhibit 9-8. The level of total expenditures (TE) in this economy is currently
______________ billion.
a. $10,600
b. $10,900
c. $11,200
d. $8,900
NOT: New
133. Refer to Exhibit 9-8. If saving increases by $500 billion, the new level of consumption will equal
______________. According to classical economists investment would _______________ and total
expenditures would ________________________.
a. $6,500 billion; then decrease by $500 billion; fall by $500 billion
b. $6,500 billion; then increase by $500 billion; fall by $500 billion
c. $7,500 billion; remain constant; fall by $500 billion
d. $6,500 billion; then increase by $500 billion; remain constant
134. Business-cycle macroeconomics involves changes in Real GDP around a ____________ LRAS curve,
while economic-growth macroeconomics deals with increases in Real GDP resulting from a
______________ LRAS curve.
a. rightward-shifting; fixed
b. fixed; leftward shifting
c. leftward shifting; fixed
d. fixed; rightward-shifting
135. When the current state of the economy is such that Real GDP is less than Natural Real GDP, the
economy is in a(n) ____________________ gap. In this situation, the (actual) unemployment rate is
___________ than the natural unemployment rate, and there is a ________________ in the labor
market.
a. recessionary; greater; shortage
b. inflationary; less; shortage
c. inflationary; greater; surplus
d. recessionary; greater; surplus
e. recessionary; less; shortage
NOT: New
136. When the current state of the economy is such that Real GDP is greater than Natural Real GDP, the
economy is in a(n) ____________________ gap. In this situation, the (actual) unemployment rate is
___________ than the natural unemployment rate, and there is a ________________ in the labor
market.
a. recessionary; greater; shortage
b. inflationary; less; shortage
c. inflationary; greater; surplus
d. recessionary; greater; surplus
e. recessionary; less; shortage
NOT: New
137. When the economy is in a recessionary gap, the labor market is experiencing a _____________. In a
self-regulating economy, wage rates will then ___________ and the ______________ curve will shift
__________________.
a. shortage; rise; AD; rightward
b. shortage; fall; SRAS; leftward
c. surplus; rise; AD; rightward
d. shortage; fall; SRAS; rightward
e. surplus; fall; SRAS; rightward
NOT: New
138. When the economy is in an inflationary gap, the labor market is experiencing a _____________. In a
self-regulating economy, wage rates will then ___________ and the ______________ curve will shift
__________________.
a. shortage; rise; SRAS; leftward
b. shortage; fall; SRAS; leftward
c. surplus; rise; AD; rightward
d. shortage; fall; AD; rightward
e. surplus; fall; SRAS; rightward
NOT: New
139. When the current state of the economy is such that Real GDP is equal to Natural Real GDP, the
economy is in ____________________ . In this situation, the (actual) unemployment rate is
___________ the natural unemployment rate, and there is ________________ in the labor market.
a. long-run equilibrium; equal to; equilibrium
b. inflationary; less than; a shortage
c. long-run equilibrium; greater than; equilibrium
d. recessionary; greater than; a surplus
e. recessionary; less than; equilibrium
NOT: New
140. A natural disaster, such as the 2011 Japanese earthquake and tsunami, shifts the ___________ curve
_____________________. According to economists who believe that the economy is self-regulating,
the result will be that the economy _____________be able to find its way back to Natural Real GDP
without government intervention.
a. SRAS; rightward; will
b. SRAS; leftward; will not
c. AD; leftward; will not
d. SRAS; leftward; will
e. AD; leftward; will
MSC: Economics 24/7 NOT: New
141. When consumers start to spend less and save more, classical macroeconomists believe that interest
rates will then ______________ resulting in a(n) ________________ in investment.
a. rise; increase
b. fall; increase
c. fall; decrease
d. rise; decrease
TRUE/FALSE
1. If the economy is in long-run equilibrium, the actual unemployment rate is less than the natural
unemployment rate.
ANS: F PTS: 1 DIF: Difficulty: Moderate

2. It is possible for the economy to be producing at a point that lies beyond its institutional production
possibilities frontier (PPF), but not its physical PPF.
ANS: T PTS: 1 DIF: Difficulty: Moderate

3. If the economy is currently in a recessionary gap, the SRAS curve intersects the AD curve to the left of
Natural Real GDP.
ANS: T PTS: 1 DIF: Difficulty: Easy

4. In a self-regulating economy, wages will fall and prices will rise when there is an inflationary gap.

5. Say's law states “demand creates its own supply”.
ANS: F PTS: 1 DIF: Difficulty: Easy

6. The classical economists thought that wages, prices, and interest rates were flexible in both the upward
and the downward direction.

7. All economists agree that the economy is self-regulating.

8. Classical economics refers to an era in the history of economic thought that stretched from the late
1600s to the mid-1800s.

9. Due to their belief in interest rate flexibility, the classical economists argued that saving is matched by
an equal amount of investment.

10. In a self-regulating economy, a recessionary gap will be eliminated by falling wages which will shift
the SRAS curve to the right.

11. In the long run, changes in aggregate demand will affect the level of Real GDP (but not the price level)
in a self-regulating economy.

12. According to classical economists, Say's law applies to a barter economy, but it does not apply to a
money economy.

13. For saving to increase, consumption must decrease, ceteris paribus.

14. When the actual unemployment rate is less than the natural unemployment rate, the economy is in a
recessionary gap.

15. If the structural unemployment rate is 3 percent, the frictional unemployment rate is 2 percent, and the
current unemployment rate is 6 percent, then the economy is in a recessionary gap.
ANS: T PTS: 1 DIF: Difficulty: Challenging

16. If the structural unemployment rate is 3 percent, the frictional unemployment rate is 3 percent, and the
current unemployment rate is 5 percent, then the economy is in a recessionary gap.
ANS: F PTS: 1 DIF: Difficulty: Challenging

17. Natural disasters (such as the 2011 earthquake and tsunami in Japan) are examples of an adverse
supply shock, which result in the SRAS curve shifting leftward.
ANS: T PTS: 1 DIF: Difficulty: Challenging

18. Business-cycle macroeconomics involves increases in Real GDP that result from a rightward-shifting
LRAS curve.

19. When the economy is in a recessionary gap, the labor market is experiencing a surplus.

NOT: New
20. Classical macroeconomists assert that “saving” is the same as “not spending at all”.

ESSAY
1. If the economy is self-regulating, explain the correct sequence of events that occurs once the economy
is in a recessionary gap to move the economy to long-run equilibrium.
ANS:
The actual unemployment rate is greater than the natural unemployment rate and actual Real GDP is
less than Natural Real GDP. Labor market surpluses will push wages down and the SRAS curve will
shift to the right. This shift will cause the price level to fall, so the real balance, interest rate and
international trade effects will make the quantity demanded of Real GDP increase and the economy
will move down the AD curve. Ultimately, the economy will move to long-run equilibrium and
produce its Natural Real GDP.
PTS: 1 DIF: Difficulty: Challenging NAT: BUSPROG: Analytic
2. Explain how it is possible for the economy to produce at a point beyond its institutional production
possibilities frontier (PPF), but not beyond its physical PPF.
ANS:
The physical PPF represents the maximum combinations of goods that can be produced with a fixed
amount of resources and technology, so it is currently impossible for production to occur beyond this
level. The institutional PPF represents the maximum combinations of goods that can be produced with
fixed resources and technology, plus the institutional constraints of that society. When forces within
the economy cause people to relax their customary social constraints, it is possible for that economy to
produce beyond its institutional PPF.

3. Describe how Say's law can hold in a money economy, according to the classical economists.
ANS:
In order for Say's law to hold in a money economy, any money that is saved must be spent through
investment. Interest rate flexibility is the key to the classical economists' argument. If households save
more and spend less, the increased dollars saved push down market interest rates. Lower interest rates
will stimulate investment and make up for the lack of spending by households so that no
overproduction will occur.

4. Explain the policy implications of the classical economists' beliefs.
ANS:
The classical economists believed that the economy was self-regulating. Their view was that any
recessionary or inflationary gaps would be eliminated through changes in the markets. They believed
that wages, prices, and interest rates would adjust to clear any overproduction, or underproduction, of
goods and services. Given that they believed that the economy could heal itself, they saw no need for
government intervention in the economy. These beliefs caused the classical economists to advocate a
macroeconomic policy of laissez faire.
PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic

5. Using the aggregate demand and aggregate supply (AD-SRAS) framework, explain how a large-scale
natural disaster would be expected to impact the economy. Discuss how an economist who believes
the economy is self-regulating would view the longer term impact of such a disaster, and whether they
would advocate the need for government intervention.
ANS:
A large-scale natural disaster represents an adverse supply shock, and thus the SRAS curve would shift
leftward as a result. A leftward shift in the SRAS curve causes a rise in the price level and a decline in
Real GDP, possibly pushing the economy into a recessionary gap. Economists who believe the
economy is self-regulating would contend that even if the economy were in a recessionary gap that it
would be a temporary situation. If Real GDP fell below its natural level, over time wages would fall,
the SRAS curve would shift rightward, and the recessionary gap would be eliminated without the need
for government intervention to resolve the problem.

MSC: Economics 24/7
6. Describe the difference between business-cycle macroeconomics and economic-growth

macroeconomics.
ANS:
Business-cycle macroeconomics involves changes in Real GDP (up and down) around a fixed LRAS
curve. Economic-growth macroeconomics deals with increases in Real GDP resulting from a
rightward-shifting LRAS curve. The rightward shifts in the LRAS represent economic growth.


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Chapter 9—Classical Macroeconomics and the Self-Regulating Economy

3. If Real GDP is less than Natural Real GDP, the economy is in

8. If the economy is currently in a recessionary gap,

11. The long-run aggregate supply (LRAS) curve is

12. If the economy is in a recessionary gap,

16. An inflationary gap exists when AD and SRAS

17. A recessionary gap exists when AD and SRAS

20. Refer to Exhibit 9-1. The unemployment rate is lower at

28. Refer to Exhibit 9-3. If the economy is in short-run equilibrium at point A,

29. Refer to Exhibit 9-3. If the economy is in short-run equilibrium at point C,

30. Refer to Exhibit 9-3. If the economy is in equilibrium at point B,

34. In a "self-regulating" economy, inflationary and recessionary gaps

37. The economy can operate

39. The more institutional constraints that exist in a particular society,

40. The natural rate of unemployment exists at

42. Which of the following statements is true?

43. If an economy is operating __________ its institutional production possibilities frontier, it is

68. If the economy is producing Natural Real GDP, then the

73. If the economy is self-regulating and in a recessionary gap, what happens?

74. A necessary condition for the economy to be self-regulating is that

75. If the economy is in long-run equilibrium,

76. If the economy is self-regulating and in an inflationary gap,

77. If the economy is self-regulating and in a recessionary gap,

78. A necessary condition for a money economy to be self-regulating is that

79. If the economy is self-regulating, then it follows that

82. Which of the following is not consistent with a self-regulating economy?

84. Which of the following statements is false?

85. Which of the following statements is true?

89. Which of the following statements is true?

94. According to classical economists, the economy

95. Say's law says

96. According to Say's law,

99. According to Say's law, there can be

101. In order for Say's law to hold in a money economy,

102. According to classical economists,

111. Which of the following statements is false?

113. According to the classical theorists, it is impossible to have a

114. According to Say's law,

All Other Goods C

Institutional PPF Physical PPF

129. Which of the following equations is correct?

Consumption = $7,000 billion

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Moderate

5. Say's law states “demand creates its own supply”.

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Moderate

7. All economists agree that the economy is self-regulating.

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Moderate

13. For saving to increase, consumption must decrease, ceteris paribus.

ANS: T PTS: 1 DIF: Difficulty: Moderate

ANS: F PTS: 1 DIF: Difficulty: Easy