HW Chapter 09: Classical Macroeconomics

The structural unemployment rate is 2.3 percent, the frictional unemployment rate is 2.4 percent,
and the current unemployment rate is 4.1 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.
The economy is currently operating at a point on its physical production possibilities frontier
(physical PPF). It is
a. producing Natural Real GDP and operating below the natural unemployment rate.
b. producing more than Natural Real GDP and operating above the natural unemployment
rate.
c. producing more than Natural Real GDP and operating below the natural unemployment
rate.
d. in long-run equilibrium.
According to the classical theorists, it is impossible to have a
a. surplus of a particular product.
b. shortage of a particular product.
c. decrease in the demand for a product.
d. decrease in the supply of a product.
e. general overproduction of products.
According to classical economists, the relationship between the amount of funds firms invest and
the interest rate is
a. direct.
b. inverse.
c. indirect.
d. independent.
If the current unemployment rate is equal to the natural unemployment rate, then current Real
GDP is
a. greater than Natural Real GDP.
b. equal to Natural Real GDP.
c. equal to the Real GDP produced at full employment.
d. less than Natural Real GDP.
e. b and c
Refer to Exhibit 9-5. Picture an AD curve intersecting an SRAS curve at Point L 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
In order for Say's law to hold in a money economy,
a. there must be more than four goods.
b. funds saved must give rise to an equal amount of funds earned.
c. funds saved must give rise to an equal amount of funds invested.
d. none of the above
Refer to Exhibit 9-1. The economy is currently producing Q1. If an economist believes the
economy can move itself without government intervention to QN, then he believes that the
a. LRAS curve will shift leftward until it intersects the SRAS and AD curves at Q1.
b. AD curve will shift rightward and intersect the SRAS curve at point B.
c. SRAS curve will shift rightward and intersect the AD curve at point A.
d. economy will likely stay "stuck" in short-run equilibrium.
When the actual unemployment rate is less than the natural unemployment rate, the economy is
in a recessionary gap.
a. TRUE
b. FALSE
Classical economics refers to an era in the history of economic thought that stretched from about
a. 1750 to the early 1900s.
b. 1935 to the 1970s.
c. 1800 to the mid 1900s.
d. 1600 to the mid 1800s.
The classical economists felt that there would be no general overproduction of goods because of
a. wage-price flexibility.
b. the law of diminishing utility.
c. the law of comparative advantage.
d. contestable markets.
Which of the following is most nearly consistent with Say's law?
a. When a person produces one good, he or she plans to demand other goods.
b. When a person produces a good, he or she plans to sell it.
c. When a person buys a good, he or she plans to pay for it with money.
d. When a person goes to work, he or she plans to produce.
Suppose the economy is self-regulating, the price level is 150, the quantity demanded of Real
GDP and the quantity supplied of Real GDP in the short run both equal $4.3 trillion, and the
quantity supplied of Real GDP in the long run is $4.1 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 150.
a. is not; less
b. is; more

c. is; less
d. is not; more
Which of the following statements is true?
a. The economy can operate outside (or beyond) its institutional PPF and its physical PPF,
but only for a short while.
b. The economy can operate outside its physical PPF, if only for a short while, but can never
operate outside its institutional PPF.
c. The economy can operate outside its institutional PPF, if only for a short while, but can
never operate outside its physical PPF.
d. The economy can never operate outside its institutional PPF or its physical PPF, even for
a short while.
e. none of the above
Refer to Exhibit 9-5. Point G on graph (2) corresponds to which point(s) on graph (1)?
a. I or J
b. K
c. L or M
d. I or L
e. J or M
A recessionary gap exists when AD and SRAS
a. fail to intersect.
b. intersect to the right of Natural Real GDP.
c. intersect to the left of Natural Real GDP.
d. both have a positive slope.
Refer to Exhibit 9-7. Which point is representative of the economy experiencing labor market
surpluses?
a. A
b. B
c. C
d. D
e. E
If the current unemployment rate is less than the natural unemployment rate, then the economy is
a. in long-run equilibrium.
b. in an inflationary gap.
c. in a recessionary gap.
d. producing at full employment.
e. b and d
Business-cycle macroeconomics involves increases in Real GDP that result from a rightwardshifting LRAS curve.
a. TRUE
b. FALSE

Refer to Exhibit 9-3. If the economy is in short-run equilibrium at point A,

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.
According to classical economists, the economy
a. always operates at a point below its institutional production possibilities frontier (PPF).
b. always operates close to or on its institutional PPF.
c. seldom operates close to or on its institutional PPF.
d. never operates close to or on its institutional PPF.
Refer to Exhibit 9-5. Point A on graph (2) corresponds to which point(s) on graph (1)?
a. I or J
b. K
c. L or M
d. I or L
e. J or M
The more institutional constraints that exist in a particular society,
a. the closer the institutional PPF will lie to the physical PPF.
b. the farther out from the origin the institutional PPF will lie.
c. the closer to the origin the institutional PPF will lie.
d. the closer to the origin the institutional PPF will lie and the farther out from the origin the
physical PPF will lie.
According to classical economists,
a. spending equals saving.
b. saving equals income.
c. income equals wealth.
d. none of the above
When there is a recessionary gap, (actual) Real GDP is __________ Natural Real GDP, and the
(actual) unemployment rate is __________ the natural rate of unemployment.
a. greater than; less than
b. greater than; greater than
c. greater than; equal to
d. less than; greater than
e. less than; less than
Refer to Exhibit 9-3. The economy is in short-run equilibrium and has an inflationary gap at
point
a. A.
b. B.

c. C.
d. D.
e. E.
Refer to Exhibit 9-7. Which point is representative of the economy in a recessionary gap?
a. A
b. B
c. C
d. D
e. E
If the economy is self-regulating and current Real GDP is less than Natural Real GDP, the
economy is operating __________ the natural unemployment rate and wages will __________.
a. below; soon rise
b. above; soon rise
c. below; soon fall
d. above; remain unchanged
e. none of the above
If the economy is currently in a recessionary gap, the SRAS curve intersects the AD curve to the
left of Natural Real GDP.
a. TRUE
b. FALSE
If the economy is self-regulating and in an inflationary gap,
a. wages and prices will fall.
b. wages will rise, but prices will fall.
c. wages and prices will rise.
d. wages will fall, but prices will rise.
e. neither wages nor prices will change.