Principles Of Macroeconomics Multiple Choice and Solutions

1) Which of the following factors is not a contributor to potential GDP?

 A) the quantity of money available 

B) the amount of labor employed

 C) the amount of available capital and human capital

 D) the availability of entrepreneurial talent E) the quantity of land and natural resources 

2) ________ is a factor that leads to an increase in real GDP supplied and is illustrated by a movement along the AS curve. 

A) A decrease in the money supply

 B) A decrease in consumption spending

 C) A decrease in expected profit rates

 D) An increase in the price level 

E) An increase in potential GDP 

3) Potential GDP 

A) increases with an increase in the price level as firms supply more goods and services.

 B) decreases with an increase in the price level as people demand fewer goods and services. 

C) may either increase or decrease with an increase in the price level, depending on whether aggregate demand rises or falls. 

D) is not affected by the price level.

 E) remains constant.

4) What factors cause the aggregate supply curve to shift to the right? 

A) A decrease in potential GDP. 

B) A decrease in the money wage rate. 

C) An increase in income taxes.

 D) An increase in government spending. E) An increase in the money wage rate.

5) What is the outcome when the price level rises from 110 to 115? 

A) An increase in Real GDP supplied.

 B) A decrease in Real GDP supplied. 

C) A reduction in Potential GDP. D) An expansion in Real GDP demanded.

 E) A growth in Potential GDP.

6) Which statement accurately describes the relationship between aggregate supply and potential GDP?

A) Aggregate supply and potential GDP are synonymous.

 B) Rising price levels correspond to increasing potential GDP. 

C) At full employment, aggregate supply aligns with potential GDP. 

D) Higher price levels result in lower potential GDP. 

E) The potential GDP curve has a negative slope.

         SOLUTIONS TO THE MCQ

1) The factor that is not a contributor to potential GDP is A) the quantity of money available. Potential GDP refers to the maximum output an economy can produce without causing inflationary pressures when all resources are utilized efficiently. It depends on factors including the amount of labor employed, the amount of available capital and human capital, the availability of entrepreneurial talent, and the quantity of land and natural resources. The quantity of money available affects inflation and interest rates but is not directly related to potential GDP.

2) D) An increase in the price level is a factor that leads to an increase in real GDP supplied and is illustrated by a movement along the AS (Aggregate Supply) curve. When the price level rises, firms are more willing to supply goods and services since it leads to higher revenue and, potentially, higher profits. This results in a movement along the AS curve to a higher level of real GDP supplied.

3) D) Potential GDP is not affected by the price level. Potential GDP represents the maximum sustainable level of output an economy can produce using its resources efficiently. It depends primarily on factors such as labor, capital, technology, and productivity. The price level, on the other hand, is an outcome of supply and demand interactions in the economy and is associated with inflation or deflation, but it does not directly impact potential GDP.

4) The correct answer is B) A decrease in the money wage rate. When the money wage rate decreases, it effectively reduces the cost of production for businesses. This reduction in cost encourages firms to produce more goods and services since their profitability has increased. As a result, the aggregate supply curve shifts to the right, indicating a higher level of output at any given price level.

5) The correct answer is A) An increase in Real GDP supplied. When the price level rises from 110 to 115, it means that businesses can sell their goods and services at higher prices. Consequently, firms are incentivized to increase their production levels to take advantage of the higher prices and secure more profits. This leads to an increase in the Real GDP supplied.

6) The correct answer is C) At full employment, aggregate supply aligns with potential GDP. Potential GDP refers to the level of output that an economy can produce when all its resources, such as labor and capital, are utilized efficiently and are at full employment. Aggregate supply represents the total supply of goods and services produced in an economy at various price levels. When the economy achieves full employment, the aggregate supply aligns with the potential GDP since resources are efficiently utilized, and the economy is producing at its maximum capacity.