AP Macroeconomics chapter practice15 questions

11 Macroeconomic Equilibrium, Gaps, and Self-Correction

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

In the aggregate demand and aggregate supply model, short-run equilibrium occurs where

The intersection with the upward-sloping short-run curve fixes both the price level and real output for the period. Choices A and B state the long-run condition instead, C borrows a condition from two other markets at once, and D imposes a balanced budget that equilibrium never requires.
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E. aggregate demand meets short-run aggregate supply

The intersection with the upward-sloping short-run curve fixes both the price level and real output for the period. Choices A and B state the long-run condition instead, C borrows a condition from two other markets at once, and D imposes a balanced budget that equilibrium never requires.

Question 2

Question 2 of 15

Actual real output in Country X lies below potential output for several quarters. What does that condition indicate?

Producing under capacity for a sustained stretch is exactly what a recessionary gap names. Choice B reverses the direction of the gap, C describes production at capacity, and D and E name outcomes that may or may not accompany a gap without defining one.
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A. A recessionary gap

Producing under capacity for a sustained stretch is exactly what a recessionary gap names. Choice B reverses the direction of the gap, C describes production at capacity, and D and E name outcomes that may or may not accompany a gap without defining one.

Question 3

Question 3 of 15

An economy is operating in a recessionary gap. Which of the following describes cyclical unemployment in that situation?

Weak demand leaves resources idle, so unemployment sits above the natural rate and the cyclical piece is positive. Choice A reverses the sign, C describes production at potential, D mistakes the cyclical component for the whole rate, and E swaps it for search unemployment.
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B. It is positive.

Weak demand leaves resources idle, so unemployment sits above the natural rate and the cyclical piece is positive. Choice A reverses the sign, C describes production at potential, D mistakes the cyclical component for the whole rate, and E swaps it for search unemployment.

Question 4

Question 4 of 15

During long-run self-correction from a recessionary gap, what do nominal wages and other input prices tend to do?

Slack labor markets eventually pull nominal wages down, production costs follow, and short-run supply slides right until output is back at potential. Choice A describes correction from the opposite gap, B and D move curves that wage adjustment does not touch, and E denies that any adjustment happens.
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C. Fall, shifting short-run supply right

Slack labor markets eventually pull nominal wages down, production costs follow, and short-run supply slides right until output is back at potential. Choice A describes correction from the opposite gap, B and D move curves that wage adjustment does not touch, and E denies that any adjustment happens.

Question 5

Question 5 of 15

An economy produces above its potential output for several quarters. What does the resulting inflationary gap produce?

Producing beyond capacity tightens resource markets, and employers bidding for scarce labor push nominal wages up. Choices A, B, and C each describe a recessionary gap, and E treats a temporary position as though it could last.
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D. Upward pressure on nominal wages

Producing beyond capacity tightens resource markets, and employers bidding for scarce labor push nominal wages up. Choices A, B, and C each describe a recessionary gap, and E treats a temporary position as though it could last.

Question 6

Question 6 of 15

An economy begins at long-run equilibrium, and aggregate demand then falls. Which of the following describes the short-run result?

A leftward demand shift slides the economy down the existing short-run supply curve, lowering output and the price level together. Choices A and C move one of the two the wrong way, D denies any short-run response, and E confuses a fall in spending with a loss of capacity.
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B. Output and the price level both fall.

A leftward demand shift slides the economy down the existing short-run supply curve, lowering output and the price level together. Choices A and C move one of the two the wrong way, D denies any short-run response, and E confuses a fall in spending with a loss of capacity.

Question 7

Question 7 of 15

An economy absorbs a purely negative aggregate demand shock and then completes its long-run adjustment. Real output ends

Once nominal wages and prices finish adjusting, output settles at the level resources and technology support. Choices A and C treat a temporary gap as permanent, and B and D let a nominal variable decide real capacity.
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E. back at potential output

Once nominal wages and prices finish adjusting, output settles at the level resources and technology support. Choices A and C treat a temporary gap as permanent, and B and D let a nominal variable decide real capacity.

Question 8

Question 8 of 15

Which of the following shifts occurs as an economy self-corrects from an inflationary gap without policy action?

Production above capacity bids up wages and other input costs, and the rising costs push short-run supply left until output falls back to potential. Choices A and B move the demand side, C treats a nominal adjustment as a capacity gain, and E names a money-market change with no role here.
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D. Short-run aggregate supply shifts left.

Production above capacity bids up wages and other input costs, and the rising costs push short-run supply left until output falls back to potential. Choices A and B move the demand side, C treats a nominal adjustment as a capacity gain, and E names a money-market change with no role here.

Question 9

Question 9 of 15

A positive output gap is reported for an economy. That measurement means that

The gap is actual output minus potential output, so a positive value puts production above capacity. Choice B reverses the sign, C makes the gap zero by definition, D borrows the nominal-real distinction the gap does not use, and E pairs the gap with the labor-market condition belonging to the opposite case.
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A. actual real GDP exceeds potential output

The gap is actual output minus potential output, so a positive value puts production above capacity. Choice B reverses the sign, C makes the gap zero by definition, D borrows the nominal-real distinction the gap does not use, and E pairs the gap with the labor-market condition belonging to the opposite case.

Question 10

Question 10 of 15

Why do policy makers often act rather than wait for the economy to correct itself?

Wage and price adjustment can run for years, and the unemployment or inflation borne in the meantime is itself a cost. Choice A gets the direction of self-correction backward, B invents an offsetting demand shift, D misidentifies what wage adjustment changes, and E claims an escape from lags that acting does not provide.
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C. The adjustment can take years of high unemployment.

Wage and price adjustment can run for years, and the unemployment or inflation borne in the meantime is itself a cost. Choice A gets the direction of self-correction backward, B invents an offsetting demand shift, D misidentifies what wage adjustment changes, and E claims an escape from lags that acting does not provide.

Question 11

Question 11 of 15

Business-cycle turning points are named for the direction of the change that follows. Which of the following describes a trough?

A trough is the turning point at the bottom of a contraction, the moment after which activity starts to expand. Choice A describes a peak, and B, D, and E each mark a stage on the way down rather than the bottom itself.
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C. The low point of a contraction, before recovery

A trough is the turning point at the bottom of a contraction, the moment after which activity starts to expand. Choice A describes a peak, and B, D, and E each mark a stage on the way down rather than the bottom itself.

Question 12

Question 12 of 15

An economy at long-run equilibrium meets a temporary favorable supply shock. At first,

Cheaper production lets firms turn out more at a lower price level, so the two variables move apart. Choice A reverses both, C keeps prices rising as though the shock were adverse, D moves the demand side, and E reverses the direction of the shock and puts it on the wrong curve.
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B. output rises and the price level falls

Cheaper production lets firms turn out more at a lower price level, so the two variables move apart. Choice A reverses both, C keeps prices rising as though the shock were adverse, D moves the demand side, and E reverses the direction of the shock and puts it on the wrong curve.

Question 13

Question 13 of 15

Actual unemployment in Country X is below the natural rate. The economy

Unemployment under the natural rate signals production above potential, which is an inflationary gap. Choice B reverses the gap, C and D describe production at potential, and E treats an ordinary cyclical position as if the economy had stepped outside the cycle.
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A. has an inflationary gap

Unemployment under the natural rate signals production above potential, which is an inflationary gap. Choice B reverses the gap, C and D describe production at potential, and E treats an ordinary cyclical position as if the economy had stepped outside the cycle.

Question 14

Question 14 of 15

In the basic long-run model, a purely demand-driven expansion permanently changes which of the following variables?

Once adjustment is complete, capacity fixes real output, so all a demand expansion leaves behind is a higher price level. Choices A and B return to where they started, and C and E are set by resources, technology, and labor-market structure rather than by spending.
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D. The overall price level

Once adjustment is complete, capacity fixes real output, so all a demand expansion leaves behind is a higher price level. Choices A and B return to where they started, and C and E are set by resources, technology, and labor-market structure rather than by spending.

Question 15

Question 15 of 15

Which of the following relationships does Okun's law describe?

Okun's law ties the gap between actual and potential output to the gap between actual and natural unemployment, and the two gaps carry opposite signs, so producing above capacity comes with unusually low unemployment. Choice A states the short-run Phillips relationship and B the quantity theory's long-run channel. C is the consumption function and D the Fisher equation; none of those four links output to unemployment at all.
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E. Output above potential accompanies unemployment below the natural rate

Okun's law ties the gap between actual and potential output to the gap between actual and natural unemployment, and the two gaps carry opposite signs, so producing above capacity comes with unusually low unemployment. Choice A states the short-run Phillips relationship and B the quantity theory's long-run channel. C is the consumption function and D the Fisher equation; none of those four links output to unemployment at all.

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