HW Chapter 09: Classical Macroeconomics

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.
a. TRUE
b. FALSE
Which of the following statements is true?
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
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
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
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.
e. none of the above
Refer to Exhibit 9-4. Which of the following is true at the Real GDP level of Q3?
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

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.
Refer to Exhibit 9-2. 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
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
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.
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.
Refer to Exhibit 9-7. Which point is representative of the economy experiencing labor market
shortages?
a. A
b. B
c. C
d. E
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
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.
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
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.
A natural disaster, such as the 2011 Japanese earthquake and tsunami, shifts the ___________
curve _____________________. According to economists who believe that the economy is selfregulating, 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
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.
According to classical economists, Say's law applies to a barter economy, but it does not apply to
a money economy.
a. TRUE
b. FALSE
Refer to Exhibit 9-3. If the economy is in equilibrium at point B,
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.
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.
a. TRUE
b. FALSE
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.
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.
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.
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
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.

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.
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
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.
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