HW Chapter 09: Classical Macroeconomics

A necessary condition for a money economy to be self-regulating is that

a. wages must be flexible in an upward direction, but not in a downward direction.
b. the economy must always be operating on its institutional production possibilities
frontier.
c. wages must be flexible in a downward direction, but not in an upward direction.
d. interest rates must be flexible in the credit market.
e. none of the above
According to Say's law,
a. the demand curve is negatively sloped.
b. the supply curve is positively sloped.
c. supply creates its own demand.
d. economic units should produce those goods for which they are low-opportunity-cost
producers.
The long-run aggregate supply (LRAS) curve is
a. horizontal.
b. vertical.
c. positively sloped.
d. negatively sloped.
Refer to Exhibit 9-5. Picture an AD curve intersecting an SRAS curve at Point M on graph (1).
Which point(s) would this correspond to on graph (2)?
a. A or B
b. C
c. E or F
d. F
e. G
Refer to Exhibit 9-8. If saving increases by $500 billion, the new level of consumption will
equal ______________. According to classical economists investment would _______________
and total expenditures would ________________________.
a. $6,500 billion; then decrease by $500 billion; fall by $500 billion
b. $6,500 billion; then increase by $500 billion; fall by $500 billion
c. $7,500 billion; remain constant; fall by $500 billion
d. $6,500 billion; then increase by $500 billion; remain constant
Classical economics refers to an era in the history of economic thought that stretched from the
late 1600s to the mid-1800s.
a. TRUE
b. FALSE
According to Say's law, there can be
a. neither a general overproduction nor a general underproduction of goods.

b. a general overproduction but not a general underproduction of goods.

c. a general underproduction but not a general overproduction of goods.
d. both a general overproduction and a general underproduction of goods.
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
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
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.
According to classical economists, if the amount of funds households save is greater than the
amount of funds firms 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
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.
c. greater than the natural unemployment rate.
d. equal to full employment.
e. b and d
When the economy is in a recessionary gap, the labor market is experiencing a _____________.
In a self-regulating economy, wage rates will then ___________ and the ______________ curve
will shift __________________.

a.
b.
c.
d.
e.

shortage; rise; AD; rightward

shortage; fall; SRAS; leftward
surplus; rise; AD; rightward
shortage; fall; SRAS; rightward
surplus; fall; SRAS; rightward

Refer to Exhibit 9-7. Which point is representative of the economy in an inflationary gap?
a. A
b. B
c. C
d. E
The economy can operate
a. beyond its institutional PPF but not beyond its physical PPF.
b. on both its institutional PPF and its physical PPF, but not at the same time.
c. under its physical PPF but not under its institutional PPF.
d. a and b
e. a, b, and c
When the economy is in an inflationary gap, the labor market is experiencing a _____________.
In a self-regulating economy, wage rates will then ___________ and the ______________ curve
will shift __________________.
a. shortage; rise; SRAS; leftward
b. shortage; fall; SRAS; leftward
c. surplus; rise; AD; rightward
d. shortage; fall; AD; rightward
e. surplus; fall; SRAS; rightward
Say's law says
a. demand creates its own supply.
b. the more supply there is, the lower prices are.
c. supply creates supply.
d. supply creates its own demand.
e. none of the above
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.
a. TRUE
b. FALSE
Due to their belief in interest rate flexibility, the classical economists argued that saving is
matched by an equal amount of investment.
a. TRUE
b. FALSE
In a barter economy, Say's law implies there

a.
b.
c.
d.

can be a general overproduction of goods.

can be a general underproduction of goods.
cannot be a general overproduction or underproduction of goods.
can be a general overproduction of goods but never a general underproduction of goods.

When the economy is in a recessionary gap, the labor market is experiencing a surplus.
a. TRUE
b. FALSE
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.
Refer to Exhibit 9-1. 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.
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
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
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
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.
Refer to Exhibit 9-8. The level of total expenditures (TE) in this economy is currently
______________ billion.
a. 10600
b. 10900
c. 11200
d. 8900
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.
Refer to Exhibit 9-4. 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