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HW Chapter 09: Classical Macroeconomics

The classical economists thought that wages, prices, and interest rates were flexible in both the
upward and the downward direction.
a. TRUE
b. FALSE
Refer to Exhibit 9-2. 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
Refer to Exhibit 9-5. Picture an AD curve intersecting an SRAS curve at Point K 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
Refer to Exhibit 9-3. The economy is in long-run equilibrium at point
a. A.
b. B.
c. C.
d. D.
e. E.
If the economy is producing Natural Real GDP, then the
a. current unemployment rate is greater than the natural unemployment rate.
b. current unemployment rate is less than the natural unemployment rate.
c. economy is at full employment.
d. economy is operating at the natural unemployment rate.
e. c and d
If the economy is currently in a recessionary gap,
a. all economists will argue that the economy can remove the gap itself.
b. some economists will argue that the economy can remove the gap itself.
c. no economist will argue that the economy can remove the gap itself.
d. all economists will argue that over time the recessionary gap will worsen.
Refer to Exhibit 9-5. Picture an AD curve intersecting an SRAS curve at Point J on graph (1).
Which point(s) would this correspond to on graph (2)?
a. A or B

b.
c.
d.
e.

C
E or F
F
G

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.
Business-cycle macroeconomics involves changes in Real GDP around a ____________ LRAS
curve, while economic-growth macroeconomics deals with increases in Real GDP resulting from
a ______________ LRAS curve.
a. rightward-shifting; fixed
b. fixed; leftward shifting
c. leftward shifting; fixed
d. fixed; rightward-shifting
If Real GDP is less than Natural Real GDP, the economy is in
a. an inflationary gap.
b. a recessionary gap.
c. an unemployment gap.
d. a real gap.
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
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
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


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
If the economy is self-regulating and in a recessionary gap,
a. wages and prices will fall.
b. wages will fall, but prices will rise.
c. neither wages nor prices will change.
d. wages will rise, but prices will fall.
e. wages and prices will rise.
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.
a. TRUE
b. FALSE
The natural rate of unemployment exists at
a. some point within the interior of the PPF but outside the limits of the institutional PPF.
b. some point within the interior of the physical PPF, but we cannot locate it with more
accuracy.
c. some point within the interior of the institutional PPF, but we cannot locate it with more
accuracy.
d. every point on the institutional PPF.
e. every point on the physical PPF.
When the current state of the economy is such that Real GDP is greater than Natural Real GDP,
the economy is in a(n) ____________________ gap. In this situation, the (actual)
unemployment rate is ___________ than the natural unemployment rate, and there is a
________________ in the labor market.
a. recessionary; greater; shortage
b. inflationary; less; shortage
c. inflationary; greater; surplus
d. recessionary; greater; surplus
e. recessionary; less; shortage
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.
When consumers start to spend less and save more, classical macroeconomists believe that
interest rates will then ______________ resulting in a(n) ________________ in investment.
a. rise; increase
b. fall; increase
c. fall; decrease
d. rise; decrease
Refer to Exhibit 9-6. If the economy is self-regulating and currently at point 1, it follows that
a. there is a surplus of labor in the labor market.
b. the economy is currently on its institutional PPF.
c. the economy is currently in an inflationary gap.
d. the labor market is in equilibrium.
e. the actual unemployment rate is below the natural unemployment rate.
In a self-regulating economy, a recessionary gap will be eliminated by falling wages which will
shift the SRAS curve to the right.
a. TRUE
b. FALSE
Say's law states demand creates its own supply.
a. TRUE
b. FALSE
If the economy is in long-run equilibrium, the actual unemployment rate is less than the natural
unemployment rate.
a. TRUE
b. FALSE
Refer to Exhibit 9-3. The economy is in short-run equilibrium and has a recessionary gap at point
a. A.
b. B.
c. C.
d. D.
e. E.
Refer to Exhibit 9-4. Assume the economy is currently in long-run equilibrium with the price
level equal to P3. If foreigners begin to buy more U.S. goods, the economy will, in the short run,
move to which of the following equilibrium combinations of price level and Real GDP?
a. P2, Q4.
b. P3, Q3.
c. P4, Q2.
d. P4, Q4.
e. P5, Q3.

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
According to classical economists, if interest rates are flexible,
a. saving will equal investment.
b. saving may be greater than investment.
c. saving may be less than investment.
d. any of the above
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
Refer to Exhibit 9-6. If the economy is self-regulating and currently at point 1, the real balance
effect is operational and relevant between points
a. 3 and 4.
b. 1 and 2.
c. 1 and 4.
d. 1 and 3.
e. 2 and 3.

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