Question 1

When the actual GDP equals the full-employment level of GDP, the
A) economy is in long-run equilibrium.
B) price level must be rising.
C) expected inflation must be zero.
D) aggregate supply curve is not constrained by the scarcity of resources.

Accepted Answer

When the actual GDP equals the full-employment level of GDP, all available resources in the economy are being fully utilized, resulting in a long-run equilibrium. This does not necessarily mean that the price level must be rising or that expected inflation is zero. The aggregate supply curve is also not necessarily unconstrained by the scarcity of resources.

Question 2

Within the framework of the AD/AS model, if a long-run equilibrium is present in the goods and services market,
A) decision makers will have accurately forecast the current price level when they arrived at resource price and loanable funds agreements.
B) the profit rates of the firms will generally exceed the competitive level.
C) the actual rate of unemployment will fall below the natural rate of unemployment.
D) the current rate of output will be sustainable in the future.
E) both a and d are correct.

Accepted Answer

If a long-run equilibrium is present in the goods and services market, it means that output is at its potential level and the economy is operating at full employment without any inflationary pressures. This implies that decision makers had accurately forecasted the current price level when they arrived at resource price and loanable funds agreements, hence option A is correct. Moreover, in the long-run equilibrium, the rate of output will be sustainable in the future, implying that option D is also correct. Therefore, both options A and D are correct, hence the answer is E. Option B is incorrect because profit rates in the long-run equilibrium will be at the competitive level. Option C is also incorrect because in the long-run equilibrium, the actual rate of unemployment will be equal to the natural rate of unemployment.

Question 3

Within the framework of the AD/AS model, if a long-run equilibrium is present in the goods and services market,
A) decision makers will have accurately forecast the current price level when they arrived at resource price and loanable funds agreements.
B) the profit rates of the firms will generally exceed the competitive level.
C) the actual rate of unemployment will be less than the natural rate of unemployment.
D) output will exceed the economy's long-run sustainable output.

Accepted Answer

A long-run equilibrium in the goods and services market implies that the actual price level is equal to the expected price level, which means decision makers have accurately forecasted the current price level when they arrived at resource price and loanable funds agreements. Option B is incorrect as in the long run, firms' profit rates will be equal to the competitive level. Option C is incorrect as the actual rate of unemployment will be equal to the natural rate of unemployment in the long run, not less than the natural rate of unemployment. Option D is incorrect as output in the long run will be at the economy's long-run sustainable output.

Question 4

From 1994 to 1999, inflation in the United States was relatively constant at approximately 2.5 percent. When inflation is constant for an extended period, which of the following is most likely?
A) People will correctly anticipate the actual inflation rate, and the actual rate of unemployment will approach the natural rate of unemployment.
B) People will correctly anticipate the actual inflation rate, and the actual rate of unemployment will exceed the natural rate of unemployment.
C) The actual inflation rate will be greater than the anticipated rate, leading to an actual rate of unemployment that exceeds the natural rate of unemployment.
D) Actual inflation will be less than the anticipated rate, leading to an actual rate of unemployment that exceeds the natural rate of unemployment.

Accepted Answer

When inflation is constant for an extended period, people will be able to correctly anticipate the actual inflation rate. This will lead to a situation where the actual rate of unemployment will approach the natural rate of unemployment. The reason behind this is that when people accurately predict the rate of inflation, they will demand higher wages, which will eventually lead to an increase in the cost of goods and services. As a result, businesses may need to increase their prices to maintain their profit margins, leading to an increase in the overall price level. This increase in price will continue until the real wage rate (the nominal wage rate adjusted for inflation) returns to its equilibrium level. This equilibrium level corresponds to the natural rate of unemployment, that is, the rate of unemployment that exists when the economy is in a steady-state, and the labor market is in equilibrium.

Question 5

In the aggregate demand and aggregate supply model,
A) the factors that cause the individual demand curve to slope downward are the same as the factors that cause the aggregate demand curve to slope downward.
B) the factors that cause the individual supply curve to slope upward are the same as the factors that cause the short-run aggregate supply curve to slope upward.
C) the upward-sloping aggregate demand curve intersects the downward-sloping short-run aggregate supply curve to determine the economy's price level and GDP.
D) the upward-sloping short-run aggregate supply curve intersects the downward-sloping aggregate demand curve to determine the economy's price level and GDP.

Accepted Answer

The factors that cause the individual supply curve to slope upward are different from the factors that cause the short-run aggregate supply curve to slope upward, so option B is incorrect. The upward-sloping short-run aggregate supply curve intersects the downward-sloping aggregate demand curve to determine the economy's price level and GDP in the short run, which makes option D correct. Option A is incorrect because the factors that cause the individual demand curve to slope downward are different from the factors that cause the aggregate demand curve to slope downward. Option C is also incorrect because the intersection of the upward-sloping aggregate demand curve with the downward-sloping short-run aggregate supply curve does not determine the economy's price level and GDP, but rather the intersection of the short-run aggregate supply curve with the aggregate demand curve does.

Question 6

When prices in the goods and services market are below the level anticipated,
A) output will temporarily exceed the economy's long-run potential.
B) output will temporarily fall short of the economy's long-run potential.
C) output will be equal to the economy's long-run potential.
D) the actual rate of unemployment will be less than the natural rate of unemployment.

Accepted Answer

If prices in the goods and services market are below the level anticipated, it indicates that there is an excess supply of goods and services in the market. This will lead to a fall in output and production, which will cause output to temporarily fall short of the economy's long-run potential. This will happen until the excess supply is exhausted and equilibrium is reestablished in the market.

Question 7

As prices rise, consumers and businesses will want to hold larger money balances. This will lead to
A) a reduction in the demand for resources and reduced resource prices.
B) an increase in the amount of goods and services demanded due to the real balance effect.
C) an increase in exports due to the international substitution effect.
D) a reduction in the supply of loanable funds and an increase in the interest rate.

Accepted Answer

As prices rise, people need more money for transactions, reducing the supply of loanable funds, which leads to higher interest rates.

Question 8

Output in the goods and services market will be sustained into the future
A) if aggregate demand and short-run aggregate supply are in balance.
B) only when the prior choices of decision makers were based on a correct anticipation of prices.
C) only when prices are rising.
D) only when wage rates are declining.

Accepted Answer

Output in the goods and services market will be sustained into the future only when the prior choices of decision makers were based on a correct anticipation of prices, as this ensures that production and consumption decisions are aligned with actual market conditions.

Question 9

If the actual price level is lower than the expected price level reflected in long-term contracts,
A) the actual rate of unemployment will be less than the natural rate of unemployment.
B) the actual rate of unemployment will exceed the natural rate of unemployment.
C) the natural rate of unemployment will rise.
D) the natural rate of unemployment will fall.

Accepted Answer

When the actual price level is lower than expected, firms may reduce production due to lower profitability, leading to layoffs and higher unemployment, causing the actual unemployment rate to exceed the natural rate.

Question 10

When an economy is in long run equilibrium,
A) it will be impossible to sustain the current rate of output in the future.
B) the interest rate will decline.
C) the foreign exchange value of the dollar will tend to appreciate.
D) the actual and natural rates of unemployment will be equal.

Accepted Answer

In long run equilibrium, the economy will be producing at its potential output level, which means that there will be no cyclical unemployment. The actual and natural rates of unemployment will be equal, and there will be no systematic pressure for prices or wages to change. Therefore, option D is the correct choice. The other options (A, B, and C) are not necessarily true in the long-run equilibrium.

Question 11

Long-run equilibrium in the goods and services market requires that decision makers who agreed to long-term contracts must have
A) incorrectly anticipated the level of prices when they made the agreements.
B) correctly anticipated the level of prices when they made the agreements.
C) correctly anticipated the natural rate of unemployment when they made the agreements.
D) correctly anticipated actual GDP when they made the agreements.

Accepted Answer

Long-run equilibrium in the goods and services market occurs when the aggregate quantity demanded equals the aggregate quantity supplied at the full-employment level of real output. This means that decision makers who agreed to long-term contracts must have correctly anticipated the level of prices when they made the agreements, as the actual level of prices will be the same as that which was anticipated in the contracts.

Question 12

The potential output of an economy is the level of output produced when the
A) real wage equals the nominal wage.
B) price level is constant.
C) expected real wage equals the inflation rate.
D) expected price level equals the unemployment rate.
E) expected price level equals the actual price level.

Accepted Answer

The potential output of an economy is achieved when the expected price level equals the actual price level, as this indicates that the economy is operating at full capacity without unexpected inflationary or deflationary pressures.

Question 13

When an economy operates at its long-run potential output level,
A) aggregate demand will exceed aggregate supply in the goods and services market.
B) unemployment will decline to an abnormally low rate that cannot be sustained in the long run.
C) the actual rate of unemployment will exceed the natural rate of unemployment.
D) the natural and actual rates of unemployment will be equal.

Accepted Answer

When an economy operates at its long-run potential output level, the natural rate of unemployment is achieved. This means that the labor market is in equilibrium, with no cyclical unemployment. Therefore, the actual rate of unemployment will match the natural rate, and there will be no excess demand or supply in the goods and services market.

Question 14

When the actual rate of unemployment is less than the natural rate of unemployment, the economy
A) operates at an output greater than its long-run potential.
B) operates at its maximum sustainable output.
C) must also be experiencing stable prices (zero inflation).
D) operates at an output less than its long-run potential.

Accepted Answer

When the actual rate of unemployment is less than the natural rate of unemployment, there is a shortage of available workers and businesses must compete to hire them, leading to wage increases and higher prices. This increases the overall level of economic activity, but also leads to inflationary pressure and a potential overheating of the economy. As a result, the economy is operating at an output greater than its long-run potential, as it cannot sustain this level of activity without causing inflation.

Question 15

As the real interest rate in the domestic loanable funds market increases,
A) the cost of purchasing goods and services during the current period will decrease.
B) the net inflow of capital from abroad will increase.
C) the inflationary premium will rise and the money rate of interest will decline.
D) a trade surplus will occur.

Accepted Answer

An increase in the real interest rate in the domestic loanable funds market will make domestic assets more attractive to foreign investors, which will result in a net inflow of capital from abroad. This will increase the supply of loanable funds in the domestic market, which will cause the interest rate to decrease. Choice A is incorrect because an increase in real interest rate would make borrowing more expensive, causing a decrease in spending, leading to a decrease in demand for goods and services. Choice C is incorrect because an increase in inflationary premium would lead to an increase in the money rate of interest, not a decline. Choice D is incorrect because there is no direct relationship between a real interest rate increase and a trade surplus.

Question 16

In the short run, if prices were below equilibrium,
A) excess aggregate demand for goods and services would place downward pressure on prices.
B) excess aggregate supply of goods and services would place downward pressure on prices.
C) excess aggregate demand for goods and services would place upward pressure on prices.
D) excess aggregate supply of goods and services would place upward pressure on prices.

Accepted Answer

If prices were below equilibrium, it would indicate that there is excess aggregate demand for goods and services. This means that consumers would be willing to buy more goods and services at the given price level, leading to a shortage. As a result, suppliers would be able to charge higher prices to maximize their profits, leading to an increase in prices. Thus, excess aggregate demand would place upward pressure on prices.

Question 17

The actual rate of unemployment will be greater than the natural rate of unemployment when
A) the actual output is less than the economy's potential output.
B) the actual output is greater than the economy's potential output.
C) the actual output is equal to the economy's potential output.
D) the inflation rate has been relatively constant for several years.

Accepted Answer

The natural rate of unemployment is the rate that exists when the economy is producing at its potential level of output and there is no cyclical unemployment. When the actual output is less than the economy's potential output, there is a recessionary gap, which means the economy is producing below its potential. This leads to an increase in cyclical unemployment, which causes the actual rate of unemployment to be greater than the natural rate of unemployment.

Question 18

When equilibrium is present, if market conditions do not change,
A) the current price will tend to rise in the future, and the current quantity will tend to fall.
B) the current price will tend to fall in the future, and the current quantity will tend to rise.
C) the current price and quantity will tend to persist in the future.
D) the current price will tend to persist in the future, but the current quantity will tend to rise.

Accepted Answer

When equilibrium is present, it means that the market is in a state of balance between supply and demand. In this situation, there is no pressure for the price or quantity to change, so the current price and quantity will tend to persist in the future if market conditions do not change. Option A and B suggest that there will be a tendency for one of the variables to change in the future, which is not necessarily true in equilibrium. Option D suggests that only the quantity will tend to rise, which is also incorrect as both price and quantity are expected to persist in equilibrium. Therefore, option C is the best choice.

Question 19

Which of the following will always be true when an economy is in long-run equilibrium?
A) The level of prices will be constant (that is, inflation will be zero).
B) Actual output will exceed the potential output.
C) The actual rate of unemployment will be less than the natural rate of unemployment.
D) The output of the economy will correspond with the full-employment output.

Accepted Answer

In long-run equilibrium, the economy is producing at the full-employment output level, which is the level of output at which all available resources are being utilized and there is no cyclical unemployment. This means that the economy is producing at its potential output, which is the level of output that can be sustained in the long-run without causing inflation. Therefore, choice D is the correct answer.

Question 20

Which of the following is necessarily true when an economy is in long-run equilibrium?
A) Prices will be constant (that is, inflation will be zero).
B) The actual output will be less than the full-employment (or potential) output.
C) The actual rate of unemployment equals the natural rate of unemployment.
D) The output of the economy will be greater than the full-employment output.

Accepted Answer

In long-run equilibrium, the economy has reached its potential output and there is no cyclical unemployment. Therefore, the actual rate of unemployment equals the natural rate of unemployment. Prices may not necessarily be constant (option A), and the output of the economy may not necessarily be greater than the full-employment output (option D). Option B is incorrect because full-employment output has been attained in long-run equilibrium.

Quiz 9: An Introduction to Basic Macroeconomic Markets

When the actual GDP equals the full-employment level of GDP, the

Within the framework of the AD/AS model, if a long-run equilibrium is present in the goods and services market,

Within the framework of the AD/AS model, if a long-run equilibrium is present in the goods and services market,

From 1994 to 1999, inflation in the United States was relatively constant at approximately 2.5 percent. When inflation is constant for an extended period, which of the following is most likely?

In the aggregate demand and aggregate supply model,

When prices in the goods and services market are below the level anticipated,

As prices rise, consumers and businesses will want to hold larger money balances. This will lead to

Output in the goods and services market will be sustained into the future

If the actual price level is lower than the expected price level reflected in long-term contracts,

When an economy is in long run equilibrium,

Long-run equilibrium in the goods and services market requires that decision makers who agreed to long-term contracts must have

The potential output of an economy is the level of output produced when the

When an economy operates at its long-run potential output level,

When the actual rate of unemployment is less than the natural rate of unemployment, the economy

As the real interest rate in the domestic loanable funds market increases,

In the short run, if prices were below equilibrium,

The actual rate of unemployment will be greater than the natural rate of unemployment when

When equilibrium is present, if market conditions do not change,

Which of the following will always be true when an economy is in long-run equilibrium?

Which of the following is necessarily true when an economy is in long-run equilibrium?