When the output of an economy exceeds the economy's full-employment capacity, then
Answer(s): D
Higher than full employment output will cause resource prices to rise (i.e. the price of labor and other prices in the economy) which will result in decreased demand for labor and a contraction of aggregate supply. The economy will toward its long run equilibrium output.
Under adaptive expectations, a shift to a more expansionary macroeconomic policy will
Answer(s): C
The effects of a more expansionary macroeconomic policy under adaptive expectations are to reduce unemployment only in the short run. This is because the inflationary effects of the demand-stimulus policy will be underestimated and thus the real wage would be eroded. The consequence of this erosion is an increase in employment. However, in the long run, unemployment is unchanged since the higher rate of inflation is anticipated.
Which of the following is true?
Under full employment, the rate of unemployment will be equal to the natural rate of unemployment given the economy's frictional and structural characteristics. Potential GDP is defined as the amount of output that could be expected at full employment. Therefore, at potential GDP, the rate of unemployment is equal to the natural rate of unemployment.
The unemployment rate equals the number of persons
Answer(s): B
The rate of unemployment is the percent of persons in the labor force who are unemployed. It is calculated as:number of persons unemployed divided by the number of persons in the labor force.
Within the simple Keynesian model, when an economy operates below its long-run, full-employment outputconstraint, an increase in aggregate demand will lead to an increase in
Answer(s): A
Keynes considered aggregate supply to be accommodative of aggregate demand. Thus, an increase in aggregate demand will stimulate aggregate output. The equivalence between output and income also suggests that real income will rise. Below the full employment capacity of the economy, increases in aggregate supply have little effect on the price level. This is the result of the Keynesian assumption that at less than full employment output levels, prices and wages are fixed since they are inflexible in a downward direction.
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