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1)An economic contraction can cause the unemployment rate to and the inflation rate to

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1)An economic contraction can cause the unemployment rate to ________ and the inflation rate to ________.

Answers:	fall; rise
	rise; fall or rise.
	fall; fall
	fall or rise; rise

On the 45° line diagram, the 45° line shows points such that:

Answers:	real aggregate output equals the quantity produced.
	real income equals real GDP.
	real aggregate expenditure equals C + I.
	real aggregate expenditure equals real GDP.

On the 45° line diagram, for points that lie above the 45° line:

Answers:	planned aggregate expenditure is less than GDP.
	planned aggregate expenditure is less than aggregate income.
	planned aggregate expenditure is equal to GDP.
	planned aggregate expenditure is greater than GDP.

4 Which of the following will shift the aggregate demand curve to the left, ceteris paribus?

Answers:	An increase in net exports.
	An increase in disposable income.
	An increase in expected profits for firms.
	An increase in interest rates.

Stagflation occurs when:

Answers:	inflation rises and GDP rises.
	inflation falls and GDP falls.
	inflation falls and GDP rises.
	inflation rises and GDP falls.

Refer to Figure 14.1 for the following question(s).

Suppose the economy is at point C in Figure 14.1. If government spending decreases in the economy, where will the eventual long-run equilibrium be?

Answers:	A
	B
	C
	D

7 Suppose the economy is at point A in Figure 14.1. If consumer spending increases in the economy, where will the eventual long-run equilibrium be?

Answers:	A
	B
	C
	D

8 In Figure 14.1, which of the points are possible long-run equilibriums?

Answers:	A and B
	A and C
	A and D
	B and D

9 Which of the points in Figure 14.1 are possible short-run equilibriums but not long-run equilibriums?

Answers:	A and B
	A and C
	C and D
	B and D

As the economy nears the end of an expansion, interest rates usually ________ and wages rise more ________ than prices.

Answers:	rise; slowly
	fall; slowly
	rise; rapidly
	fall; rapidly

If aggregate planned expenditures are less than total production:

Answers:	GDP will increase.
	the economy is in equilibrium.
	firms will experience unplanned increase in inventories.
	actual inventories will equal planned inventories.

The following question(s) refer(s) to Figure 14A2.1.

How does a decrease in government spending affect the aggregate expenditure line in Figure 14A2.1?

Answers:	It increases the slope of the aggregate expenditure line.
	It decreases the slope of the aggregate expenditure line.
	It shifts the aggregate expenditure line upward.
	It shifts the aggregate expenditure line downward.

13In Figure 14A2.1, if the economy is at point L, what will happen?

Answers:	Inventories have risen above their desired level, and firms increase production.
	Inventories have fallen below their desired level, and firms decrease production.
	Inventories have risen above their desired level, and firms decrease production.
	Inventories have fallen below their desired level, and firms increase production.

Along a short-run aggregate supply curve, a decrease in the price level causes:

Answers:	firms to increase their production levels, as the lower prices will increase consumer demand.
	firms to reduce their production levels.
	production levels to rise as the price of inputs become cheaper.
	no change in output to occur, as at the macroeconomic level, the price level does not affect supply.

Just as real GDP ________ potential GDP in the long run, the unemployment rate ________ the natural rate of unemployment in the long run.

Answers:	equals; equals
	is not related to; is not related to
	is less than; is less than
	is greater than; is greater than

· 16

Spending on the national defence force is categorised as government purchases. How do increases in spending on defence affect the aggregate demand curve?

Answers:	This will shift the aggregate demand curve to the right.
	This will move the economy up along a stationary aggregate demand curve.
	This will move the economy down along a stationary aggregate demand curve.
	This will shift the aggregate demand curve to the left.

If Australia's economic growth rate is slower relative to other countries' economic growth rates, this will:

Answers:	move the economy up along a stationary aggregate demand curve.
	shift the aggregate demand curve to the left.
	move the economy down along a stationary aggregate demand curve.
	shift the aggregate demand curve to the right.

A decrease in the price level results in a(n) ________ in the quantity of real GDP demanded because a lower price level ________ consumption, investment, and net exports.

Answers:	increase; increases
	decrease; increases
	decrease; decreases
	increase; decreases

The wealth effect occurs when the price level falls causing the:

Answers:	nominal value of household wealth to fall.
	real value of household wealth to fall.
	nominal value of household wealth to rise.
	real value of household wealth to rise.

Spending on the national defence force is categorised as government purchases. How do increases in spending on defence affect the aggregate demand curve?

Answers:	This will shift the aggregate demand curve to the left.
	This will move the economy up along a stationary aggregate demand curve.
	This will shift the aggregate demand curve to the right.
	This will move the economy down along a stationary aggregate demand curve.

Which of the following explains why the rate of unemployment continues to rise once a recession is over?

Answers:	Firms are operating below capacity for some time after the recession is finished.
	Discouraged workers leave the labour force.
	Wages rise faster than productivity increases so firms are reluctant to hire workers.
	The unemployment rate does not continue to rise after a recession is over.

Policy-makers in the 1960s believed that there was a structural relationship between unemployment and inflation. This meant that the cost of lower unemployment was a:

Answers:	permanently lower inflation rate.
	temporarily lower inflation rate.
	temporarily higher inflation rate.
	permanently higher inflation rate.

After an unexpected increase in the price of oil, the long-run adjustment ________ the price level and ________ the unemployment rate as they return to their original levels.

Answers:	increases; decreases
	decreases; increases
	increases; increases
	decreases; decreases

Suppose that the nominal wage, the expected and actual price levels, and the expected and actual inflation rates for a hypothetical economy in 2013 are presented in the following table.

National Wage	Expected Price Level, Inflation	Actual Price Level, Inflation
$25	Expected P₂₀₁₃ = 106	Actual P₂₀₁₃ = 102
	Expected Inflation = 6%	Actual Inflation = 2%

Given the data, the economy is at an unemployment rate:

Answers:	that is less than the natural rate of unemployment.
	such that there is no cyclical unemployment.
	that is greater than the natural rate of unemployment.
	that is equal to the natural rate of unemployment.

Suppose that the nominal wage, the expected and actual price levels, and the expected and actual inflation rates for a hypothetical economy in 2014 are presented in the following table.

National Wage	Expected Price Level, Inflation	Actual Price Level, Inflation
$25	Expected P₂₀₁₄ = 106	Actual P₂₀₁₄ = 102
	Expected Inflation = 6%	Actual Inflation = 2%

Given the data, we know that:

Answers:	the unemployment rate will fall.
	firms will hire fewer workers than they planned.
	the unemployment rate will not change.
	the actual real wage is less than the expected real wage.

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

Answers:	lowers; expansion; lowers; recession
	raises; expansion; raises; recession
	lowers; recession; raises; expansion
	raises; recession; lowers; expansion

	Refer to Figure 14.2 for the following question(s).

27In Figure 14.2, given the economy is at point A in year 1 and point B in year 2, what is the rate of increase in the price level (the inflation rate) between those two years?

Answers:	0.9%
	3.0%
	2.7%
	1.8%

If the Australian dollar increases in value relative to other currencies, how does this affect the aggregate demand curve, ceteris paribus?

Answers:	This will move the economy down along a stationary aggregate demand curve.
	This will shift the aggregate demand curve to the right.
	This will shift the aggregate demand curve to the left.
	This will move the economy up along a stationary aggregate demand curve.

When the price level in Australia rises relative to the price level of other countries, ceteris paribus, ________ will rise, ________ will fall, and ________ will fall.

Answers:	imports; exports; net exports
	net exports; imports; exports
	exports; imports; net exports
	net exports; exports; imports

Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run?

Answers:	Output will decline.
	Aggregate demand will shift to the left.
	Unemployment will decline.
	Prices will decline.

An increase in the price level will:

Answers:	shift the short-run aggregate supply curve to the right.
	shift the short-run aggregate supply curve to the left.
	move the economy down along a stationary short-run aggregate supply curve.
	move the economy up along a stationary short-run aggregate supply curve.

If workers fail to believe that rising inflation will eventually result in comparable increases in wages, but firms do understand this, then there is a:

Answers:	positive relationship between unemployment and inflation in the long run.
	negative relationship between unemployment and inflation in the long run.
	negative relationship between unemployment and inflation in the short run.
	positive relationship between unemployment and inflation in the short run.

Why might the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?

Answers:	Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices.
	Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices.
	Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.
	Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices.

If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP?

Answers:	An increase in interest rates.
	A decrease in business confidence.
	An increase in wealth.
	An increase in the value of the dollar relative to other currencies.

Workers expect the rate of inflation to fall from 4% to 1% next year. As a result, this should:

Answers:	shift the short-run aggregate supply curve to the left.
	move the economy down along a stationary short-run aggregate supply curve.
	move the economy up along a stationary short-run aggregate supply curve.
	shift the short-run aggregate supply curve to the right.

If planned aggregate expenditures are below potential GDP, and planned aggregate expenditures equal GDP then:

Answers:	actual inventory investment will be less than planned inventory investment.
	actual inventory investment will be greater than planned inventory investment.
	the economy is at full employment.
	the economy is in equilibrium at less than full employment.

	The following question(s) refer(s) to Figure 14A2.2.

37If the economy is currently at point K in Figure 14A2.2, which of the following could cause it to move to point N?

Answers:	The price level rises relative to the price level in other countries.
	Household wealth declines.
	The interest rate rises.
	The government introduces investment tax incentives.

If the economy receives an influx of new workers from immigration the:

Answers:	long-run aggregate supply curve will shift to the left.
	long-run aggregate supply curve will shift to the right.
	economy will move up along the long-run aggregate supply curve.
	economy will move down along the long-run aggregate supply curve.

If technological change occurs in the economy the:

Answers:	long-run aggregate supply curve will shift to the right.
	economy will move down along the long-run aggregate supply curve.
	long-run aggregate supply curve will shift to the left.
	economy will move up along the long-run aggregate supply curve.

Because of a supply shock, in the short run:

Answers:	unemployment falls.
	the price level falls.
	the aggregate supply curve shifts to the left.
	equilibrium real GDP rises.

During an expansion, how do inflation and unemployment typically change?

Answers:	Inflation rises and unemployment falls.
	Inflation and unemployment both fall.
	Inflation falls and unemployment rises.
	Inflation and unemployment both rise.

Milton Friedman argued that there is a ________ trade-off between unemployment and inflation, and this trade-off comes from ________ inflation.

Answers:	temporary; unanticipated
	temporary; actual
	permanent; unanticipated
	permanent; actual

The experience of recessions in Australia has shown that:

Answers:	unemployment rises, on average, about 5 percentage points 12 months after a recession begins.
	unemployment continues to rise after a recession ends.
	cyclical unemployment has been non-existent.
	unemployment falls about 12 months after a recession begins.

In the dynamic aggregate demand and aggregate supply model, the rate of inflation will increase if:

Answers:	AS shifts faster than AD.
	AD shifts faster than AS.
	the price level rises.
	AD shifts slower than AS.

According to Friedman and Phelps, if actual inflation is greater than expected inflation:

Answers:	the actual real wage equals the expected real wage.
	the actual real wage is greater than the expected real wage.
	the unemployment rate falls.
	firms will hire fewer workers than they planned.

How do changes in income tax policies affect aggregate demand?

Answers:	Higher taxes increase aggregate supply and thus increase aggregate demand as well.
	Higher taxes reduce disposable income, consumption, and aggregate demand.
	Higher taxes increase corporate investment and aggregate demand.
	Higher taxes increase disposable income, consumption, and aggregate demand.

The long-run adjustment to a supply shock results in:

Answers:	unemployment rising.
	the price level rising.
	the short-run aggregate supply curve shifting to the right.
	workers being willing to accept higher wages.

Which of the following is not a reason why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services?

Answers:	Menu costs make some prices sticky.
	Firms are often slow to adjust wages.
	Unions are successful in pushing up wages.
	Contracts make prices and wages 'sticky'.

Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium?

Answers:	The leftward shift in short-run aggregate supply that occurs after a recession.
	The rightward shift in short-run aggregate supply that occurs after a recession.
	The leftward shift in aggregate demand that occurs after a recession.
	The rightward shift in aggregate demand that occurs after a recession.

A recession is often defined as:

Answers:	two consecutive quarters experiencing a decline in the economic growth rate.
	a significant decline in activity visible in industrial production, employment, real income, and wholesale/retail trade lasting more than a few months.
	a significant decline in inflation and unemployment lasting more than a few months.
	two consecutive quarters of declining nominal GDP.

Changes in the price level:

Answers:	increase the level of aggregate supply in the long run.
	increase the level of aggregate supply in the long run only at very high levels of output.
	do not affect the level of aggregate supply in the long run.
	decrease the level of aggregate supply in the long run.

	Refer to Figure 14A1.1 for the following question(s).

52Suppose that the economy is at point A on the Phillips curve in Figure 14A1.1. If the aggregate demand curve shifts to the right by more than the long-run aggregate supply curve does, then the economy will:

Answers:	remain at point A on the Phillips curve.
	move to point B on the Phillips curve.
	move to point C on the Phillips curve.
	move to point D on the Phillips curve.

53Suppose that the economy is at point A on the Phillips curve in Figure 14A1.1. If the aggregate demand curve shifts to the right by less than the long-run aggregate supply, then the economy will:

Answers:	remain at point A on the Phillips curve.
	move to point B on the Phillips curve
	move to point C on the Phillips curve.
	move to point D on the Phillips curve.

Both Milton Friedman and Edmund Phelps argued:

Answers:	permanently higher unemployment was the cost of permanently lower inflation in the long run.
	the Phillips curve represented a menu of policy choices in the long run.
	permanently higher inflation was the cost of permanently lower unemployment in the long run.
	there was no trade-off between inflation and unemployment in the long run.

________ of unemployment during ________ make it easier for workers to ________ wages.

Answers:	High levels; an expansion; negotiate higher
	Low levels; an expansion; accept lower
	Low levels; a recession; negotiate higher
	High levels; a recession; accept lower

When a recession ends:

Answers:	households decrease spending on durable goods.
	firms increase the amount of borrowing.
	interest rates decrease.
	the household sector decreases spending substantially.

Which of the following will not shift the short-run aggregate supply curve?

Answers:	A change in the wage rate.
	A change in the price level.
	Technological change.
	A reduction in the price of raw materials.

Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?

Answers:	Aggregate supply shifts to the right except during periods when workers and firms expect higher wages.
	Potential GDP increases continuously.
	Aggregate demand shifts to the right during most periods.
	Aggregate demand and potential GDP decrease continuously.

When the price of oil rises unexpectedly, the price level ________ and the unemployment rate ________ in the short run.

Answers:	falls; rises
	rises; rises
	rises; falls
	falls; falls

If aggregate planned expenditures are greater than total production:

Answers:	firms will experience unplanned increase in inventories.
	the economy is in equilibrium.
	actual inventories will equal planned inventories.
	GDP will increase.

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Answers:	Output will increase.
	Aggregate supply will shift to the left.
	Unemployment will decline.
	Prices will decline.

The interest-rate effect is described as an increase in the price level which:

Answers:	lowers the interest rate, thereby reducing investment and consumption spending.
	raises the interest rate, thereby reducing government spending.
	lowers the interest rate, thereby reducing government spending.
	raises the interest rate, thereby reducing investment and consumption spending.

The recessions experienced by many countries between 2007-2009 caused a reduction in German exports and reduction in net exports for Germany, shifting the German aggregate demand curve. Which of the following factors would also cause a reduction in Germany's net exports and shift Germany's aggregate demand curve?

Answers:	A decrease in the price level in Germany.
	Real GDP in Germany increasing faster than real GDP in other countries.
	An increase in the price level in Germany.
	A decrease in the exchange rate of the Euro relative to other currencies.

An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run.

Answers:	real GDP; the price level
	the price level; the price level
	the price level; real GDP
	real GDP; real GDP

The impact of a natural disaster on consumers in the economy can make them very pessimistic about their future incomes. How would an increase in pessimism affect the aggregate demand curve?

Answers:	This will shift the aggregate demand curve to the right.
	This will move the economy down along a stationary aggregate demand curve.
	This will shift the aggregate demand curve to the left.
	This will move the economy up along a stationary aggregate demand curve.

Total motor vehicle sales in Australia:

Answers:	decline by a greater percentage than does GDP during an economic contraction.
	decline by a smaller percentage than does GDP during an economic contraction.
	remain constant during business cycles.
	have slowly decreased over time.

The consumption function describes the relationship between:

Answers:	consumption spending and aggregate income.
	consumption spending and GDP.
	consumption spending and disposable income.
	consumption spending and national income.

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