Chapter 8-The Self-Regulating Economy: Multiple Choice
Chapter 8-The Self-Regulating Economy: Multiple Choice
Chapter 8-The Self-Regulating Economy: Multiple Choice
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: Easy NAT: Analytic
LOC: Understanding and applying economic models
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: Easy NAT: Analytic
LOC: Understanding and applying economic models
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: Easy NAT: Analytic
LOC: Understanding and applying economic models
5. If the SRAS curve intersects the AD curve to the right 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: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
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.
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c. greater than the natural unemployment rate.
d. equal to full employment.
e. b and d
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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: Moderate NAT: Anaytic
LOC: Understanding and applying economic models
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: Difficult NAT: Analytic
LOC: Understanding and applying economic models
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: Difficult NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
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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
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
13. When the economy is producing Real GDP at a level at which the LRAS curve intersects the AD curve
the economy is
a. in a recessionary gap.
b. in long-run equilibrium.
c. in an inflationary gap.
d. operating at less than full-employment output.
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
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.
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
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.
c. The economy is in long-run equilibrium.
d. This situation is actually impossible.
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
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LOC: Understanding and applying economic models
Exhibit 8-1
18. Refer to Exhibit 8-1. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
19. Refer to Exhibit 8-1. The economy is currently producing Q1. If an economist believes the economy
(itself) can move 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.
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
22. Refer to Exhibit 8-1. 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.
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
Exhibit 8-2
23. Refer to Exhibit 8-2. 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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
24. Refer to Exhibit 8-2. The economy is currently producing Q1. At this level of Real GDP, the economy
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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
Exhibit 8-3
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25. Refer to Exhibit 8-3. The economy is in long-run equilibrium at point
a. A.
b. B.
c. C.
d. D.
e. E.
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
26. Refer to Exhibit 8-3. The economy is in short-run equilibrium and has an inflationary gap at point
a. A.
b. B.
c. C.
d. D.
e. E.
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
27. Refer to Exhibit 8-3. The economy is in short-run equilibrium and has a recessionary gap at point
a. A.
b. B.
c. C.
d. D.
e. E.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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29. Refer to Exhibit 8-3. If the economy is in short-run equilibrium at point C,
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.
ANS: A PTS: 1 DIF: Difficult NAT: Analytic
LOC: Understanding and applying economic models
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
e. none of the above
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
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
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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c. are eliminated by timely actions of economic policymakers.
d. are the desirable results of microeconomic price adjustments.
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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.
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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: Difficult NAT: Analytic
LOC: Understanding and applying economic models
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ANS: C PTS: 1 DIF: Difficult NAT: Analytic
LOC: Understanding and applying economic models
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.
e. none of the above
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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 1973
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c. 1800 to the mid 1900s.
d. 1600 to the mid 1800s.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
Exhibit 8-4
45. Refer to Exhibit 8-4. 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.
c. The economy is in long-run equilibrium.
d. all of the above
e. none of the above
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
46. Refer to Exhibit 8-4. 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.
ANS: A PTS: 1 DIF: Difficult NAT: Analytic
LOC: Understanding and applying economic models
47. Refer to Exhibit 8-4. 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.
e. none of the above
ANS: C PTS: 1 DIF: Difficult NAT: Analytic
LOC: Understanding and applying economic models
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48. Refer to Exhibit 8-4. 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 AD 1 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.
ANS: C PTS: 1 DIF: Difficult NAT: Analytic
LOC: Understanding and applying economic models
49. Refer to Exhibit 8-4. 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
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
50. Refer to Exhibit 8-4. 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.
ANS: B PTS: 1 DIF: Difficult NAT: Analytic
LOC: Understanding and applying economic models
Exhibit 8-5
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51. Refer to Exhibit 8-5. Point I on graph (1) corresponds to which point or points on graph (2)?
a. A or B
b. C
c. D or E
d. F
e. G
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
52. Refer to Exhibit 8-5. Point C on graph (2) corresponds to which point or points on graph (1)?
a. I or J
b. K
c. L or M
d. I or L
e. J or M
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
53. Refer to Exhibit 8-5. Point B on graph (2) corresponds to which point or points on graph (1)?
a. I or J
b. K
c. L or M
d. I or L
e. J or M
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
54. Refer to Exhibit 8-5. Point A on graph (2) corresponds to which point or points on graph (1)?
a. I or J
b. K
c. L or M
d. I or L
e. J or M
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
55. Refer to Exhibit 8-5. Point G on graph (2) corresponds to which point or points on graph (1)?
a. I or J
b. K
c. L or M
d. I or L
e. J or M
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
56. Refer to Exhibit 8-5. 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.
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b. G.
c. F.
d. C.
e. None of the above, because the minimum wage has no influence on the amount of goods
produced.
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
57. Refer to Exhibit 8-5. Point L on graph (1) corresponds to which point or points on graph (2)?
a. A or B
b. C
c. D or E
d. F
e. G
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
58. Refer to Exhibit 8-5. Point J on graph (1) corresponds to which point or points on graph (2)?
a. A or B
b. C
c. E or F
d. F
e. G
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
59. Refer to Exhibit 8-5. Point M on graph (1) corresponds to which point or points on graph (2)?
a. A or B
b. C
c. E or F
d. F
e. G
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
60. Refer to Exhibit 8-5. Point K on graph (1) corresponds to which point or points on graph (2)?
a. A or B
b. C
c. D or E
d. F
e. G
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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LOC: Understanding and applying economic models
62. 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.
d. This situation is actually impossible.
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
63. 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.
d. This situation is actually impossible.
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
64. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
65. 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.
e. none of the above
ANS: D PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
66. If the current Real GDP is less than Natural Real GDP, then the economy is
a. in long-run equilibrium.
b. in a recessionary gap.
c. in an inflationary gap.
d. possibly in short-run equilibrium.
e. b and d
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
67. 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.
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d. producing at full employment.
e. b and d
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
68. 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: Easy NAT: Analytic
LOC: Understanding and applying economic models
70. 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.
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
71. 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.
c. long-run equilibrium.
d. an inflationary gap producing Natural Real GDP.
e. a recessionary gap producing more than Natural Real GDP.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
72. The structural unemployment rate is 2.3 percent, the frictional unemployment rate is 2.4 percent, and
the 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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ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
73. 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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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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.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
81. 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
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
82. 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
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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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.
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
84. 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.
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
87. 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
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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88. 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.
ANS: B PTS: 1 DIF: Difficult NAT: Analytic
LOC: Understanding and applying economic models
89. 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.
ANS: C PTS: 1 DIF: Difficult NAT: Analytic
LOC: Understanding and applying economic models
91. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
92. 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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ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
93. 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
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
94. 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.
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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d. can be a general overproduction of goods but never a general underproduction of goods.
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
99. 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.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
101. 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.
ANS: D PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
104. 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
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ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
105. 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.
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
106. The classical economists felt that planned saving would be equal to planned investment because
a. wages are flexible.
b. prices of domestic goods are flexible.
c. interest rates are flexible.
d. prices of imports are flexible.
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
107. According to the classical economists, which of the following statements is false?
a. There is a direct relationship between the amount individuals plan to save and the interest
rate.
b. There is a direct relationship between the amount business firms plan to 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 planned saving is equal to planned investment.
ANS: B PTS: 1 DIF: Difficult NAT: Analytic
LOC: Understanding and applying economic models
108. According to classical economists, the relationship between the amount of funds firms plan to invest
and the interest rate is
a. direct.
b. inverse.
c. indirect.
d. independent.
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
109. According to classical economists, if the amount of funds households plan to save is greater than the
amount of funds firms plan to 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
ANS: A PTS: 1 DIF: Difficult NAT: Analytic
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LOC: Understanding and applying economic models
110. 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.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
111. 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.
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
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LOC: Understanding and applying economic models
Exhibit 8-6
116. Refer to Exhibit 8-6. 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.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
117. Refer to Exhibit 8-6. 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.
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
118. Refer to Exhibit 8-6. 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: Difficult NAT: Analytic
LOC: Understanding and applying economic models
119. Refer to Exhibit 8-6. 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
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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.
ANS: C PTS: 1 DIF: Difficult NAT: Analytic
LOC: Understanding and applying economic models
Exhibit 8-7
D
E
B
All Other Goods
120. Refer to Exhibit 8-7. Which point is representative of the economy in a recessionary gap?
a. A
b. B
c. C
d. D
e. E
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
121. Refer to Exhibit 8-7. Which point is representative of the economy in an inflationary gap?
a. A
b. B
c. C
d. E
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
122. Refer to Exhibit 8-7. Which point is representative of the economy on its LRAS curve?
a. A
b. B
c. C
d. D
e. E
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
243
LOC: Understanding and applying economic models
123. Refer to Exhibit 8-7. 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
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
124. Refer to Exhibit 8-7. 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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
125. Refer to Exhibit 8-7. Which point is representative of the economy experiencing labor market
surpluses?
a. A
b. B
c. C
d. D
e. E
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
126. Refer to Exhibit 8-7. Which point is representative of the economy experiencing labor market
shortages?
a. A
b. B
c. C
d. E
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
127. If the natural unemployment rate is 5.5 percent, then the economy is in a recessionary gap 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: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
244
128. If the natural unemployment rate is 5.5 percent, then the economy is in an inflationary gap when the
actual unemployment rate is
a. more than 5.5 percent.
b. less than 5.5 percent.
c. 0 percent.
d. 5.5 percent.
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: Understanding and applying economic models
129. The structural unemployment rate is 3.1 percent, the frictional unemployment rate is 2.1 percent, and
the current unemployment rate is 6.0 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.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models
131. 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 equilibrum, 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
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
132. 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 equilibrum, 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
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Exhibit 8-8
Suppose that at a given price level the following values exist in a hypothetical economy:
Assume that the level of total expenditures is equal to the value of goods and services that
suppliers want to sell.
133. Refer to Exhibit 8-8. The level of total expenditures (TE) in this economy is currently
______________ billion.
a. $3,500
b. $4,100
c. $3,600
d. $4,500.
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
134. Refer to Exhibit 8-8. If saving increases by $300 billion the new level of consumption will equal
______________. According to classical economists investment would _______________ and total
expenditures would ________________________.
a. $2,300 billion; then decrease by $300 billion; fall by $300 billion.
b. $2,300 billion; then increase by $300 billion; fall by $300 billion.
c. $1,700 billion; remain constant; fall by $300 billion.
d. $1,700 billion; then increase by $300 billion; remain constant
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models NOT: NEW
135. As discussed in the text, Philips Electronics manufactures _______________ of its light bulbs in
China, and tariffs imposed by the European Union on imported light bulbs _________________ the
company’s profitability.
a. few; help to enhance
b. few; significantly reduces
c. many; significantly reduces
d. many; help to enhance
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models MSC: Economics 24/7
NOT: NEW
136. As discussed in the text, Osram manufactures _______________ of its light bulbs in China, and tariffs
imposed by the European Union on imported light bulbs _________________ the company’s
profitability.
a. few; help to enhance
b. few; significantly reduces
c. many; significantly reduces
d. many; help to enhance
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ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: Understanding and applying economic models MSC: Economics 24/7
NOT: NEW
TRUE/FALSE
1. If the economy is in long-run equilibrium the actual unemployment rate is less than the natural
unemployment rate.
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.
3. If the economy is currently in a recessionary gap then the SRAS curve intersects the AD curve to the
left of Natural Real GDP.
4. In a self-regulating economy, wages will fall and prices will rise when there is an inflationary gap.
6. The classical economists thought that wages, prices, and interest rates were flexible in both the upward
and the downward direction.
8. Classical economics refers to an era in the history of economic thought that stretched from the late
1600s to the mid-1900s.
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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.
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.
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.
17. Natural disasters, such as Hurricane Katrina, are an example of an adverse supply shock, thus shifting
the SRAS curve leftward.
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18. Osram is a German company that manufactures light bulbs, and in 2007 they were benefiting from
tariffs on imported light bulbs imposed by the European Union.
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.
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.
ANS:
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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.
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.
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