Deck 38: Extending the Analysis of Aggregate Supply

Question 1

In the absence of unexpected shocks, the economy will tend to experience

A)positive, noninflationary growth.
B)no changes in output or prices.
C)positive growth with mild amounts of deflation.
D)positive growth with mild amounts of inflation.

Answer 1

positive growth with mild amounts of inflation.

Question 2

The long-run aggregate supply curve is vertical

A)because the rate of inflation is steady in the long run.
B)because resource prices eventually rise and fall with product prices.
C)because product prices tend to increase at a faster rate than resource prices.
D)only when the money supply increases at the same rate as real GDP.

Answer 2

because resource prices eventually rise and fall with product prices.

Question 3

In terms of aggregate supply, the short run is a period in which

A)the price level is constant.
B)employment is constant.
C)real output is constant.
D)nominal wages and other resource prices are unresponsive to price-level changes.

Answer 3

nominal wages and other resource prices are unresponsive to price-level changes.

Question 4

In terms of aggregate supply, a period in which nominal wages and other resource prices are fully responsive to price-level changes is called the

A)long run.
B)short run.
C)immediate market period.
D)very long run.

Question 5

If government uses fiscal policy to restrain cost-push inflation, we can expect

A)the unemployment rate to rise.
B)the unemployment rate to fall.
C)the aggregate demand curve to shift rightward.
D)tax-rate declines and increases in government spending.

Question 6

The level of potential output and location of the long-run aggregate supply curve are determined by

A)Federal Reserve policy.
B)the price level.
C)the intersection of aggregate demand and short-run aggregate supply.
D)the natural rate of unemployment.

Question 7

Other things equal, a decrease in the price level will

A)shift the aggregate supply curve to the left.
B)shift the aggregate demand curve to the left.
C)cause a movement up a short-run aggregate supply curve.
D)cause a movement down an aggregate supply curve.

Question 8

In the extended analysis of aggregate supply, the short-run aggregate supply curve is

A)vertical and the long-run aggregate supply curve is horizontal.
B)horizontal and the long-run aggregate supply curve is vertical.
C)upsloping and the long-run aggregate supply curve is vertical.
D)horizontal and the long-run aggregate supply curve is upsloping.

Question 9

The basic problem portrayed by the traditional Phillips Curve is

A)that a level of aggregate demand sufficiently high to result in full employment may also cause inflation.
B)that changes in the composition of total labor demand tend to be deflationary.
C)that unemployment rises at the same time the general price level is rising.
D)the possibility that automation will increase the level of noncyclical unemployment.

Question 10

The traditional Phillips Curve suggests a trade-off between

A)price stability and income equality.
B)the level of unemployment and inflation.
C)unemployment and income equality.
D)economic growth and full employment.

Question 11

Inflation in the U.S.economy tends to be

A)a finite, one-time event resulting from a shock.
B)ongoing, as increases in aggregate demand generally exceed the increases in aggregate supply.
C)a finite, one-time event, as the Fed actively works to eliminate all inflation.
D)ongoing, as aggregate supply is continually shifting to the left.

Question 12

Other things equal, the short-run aggregate supply curve shifts positions when

A)the price level changes.
B)the rate of inflation changes.
C)nominal wages and other input prices change.
D)aggregate demand changes.

Question 13

One policy dilemma posed by cost-push inflation is that

A)an increase in aggregate demand will increase inflation and the unemployment rate simultaneously.
B)tax rates can be reduced without lowering tax revenues.
C)the reduction of aggregate demand to restrain inflation will cause a further reduction in the real GDP.
D)the adjustment of aggregate demand can neither increase real GDP nor reduce inflation.

Question 14

In terms of aggregate supply, a period in which nominal wages and other resource prices are unresponsive to price-level changes is called the

A)long run.
B)short run.
C)immediate market period.
D)very long run.

Question 15

In the extended aggregate demand-aggregate supply model,

A)long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply curve.
B)the long-run aggregate supply curve is horizontal.
C)the price level is the same regardless of the location of the aggregate demand curve.
D)long-run equilibrium occurs at the intersection of the aggregate demand curve, the short-run aggregate supply curve, and the long-run aggregate supply curve.

Question 16

The short-run aggregate supply curve is upsloping because higher price levels

A)lower interest rates and encourage firms to invest and produce more.
B)create incentives to expand output when resource prices are unresponsive to price-level changes.
C)encourage importation of foreign goods.
D)create an expectation among producers of still higher price levels.

Question 17

In terms of aggregate supply, the difference between the long run and the short run is that in the long run,

A)the price level is variable.
B)employment is variable.
C)real output is variable.
D)nominal wages and other input prices are fully responsive to price-level changes.

Question 18

The natural rate of unemployment

A)can vary over time and defines the location of the long-run aggregate supply curve.
B)is constant over time and defines the location of the long-run aggregate supply curve.
C)varies over time in response to changes in aggregate demand.
D)is inversely related to the price level.

Question 19

If government uses its stabilization policies to maintain full employment under conditions of cost-push inflation,

A)a deflationary spiral is likely to occur.
B)an inflationary spiral is likely to occur.
C)stagflation is likely to occur.
D)the Phillips Curve is likely to shift inward.

Question 20

In the extended aggregate demand-aggregate supply model,

A)long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply curve.
B)the long-run aggregate supply curve is horizontal.
C)the level of real output is the same in the long run regardless of the location of the aggregate demand curve.
D)the short-run aggregate supply curve is downsloping.

Question 21

When the actual rate of inflation is less than the expected rate,

A)the unemployment rate will temporarily rise.
B)firms will increase their output to recoup their falling profits.
C)the unemployment rate will temporarily fall.
D)firms will experience rising profits and thus increase their employment.

Question 22

Statistical data for the 1970s and 1980s suggest that

A)the Phillips Curve was stable.
B)the Phillips Curve was unstable.
C)low levels of unemployment were consistently associated with high rates of inflation.
D)the inflation rate was highly stable.

Question 23

Since the Great Recession of 2007-2009

A)the misery index has increased.
B)the misery index has remained stable.
C)the movement of the unemployment rate and inflation rate has been inconsistent with a stable Phillips Curve.
D)the movement of the unemployment rate and inflation rate has been consistent with a stable Phillips Curve.

Question 24

An adverse aggregate supply shock could result from

A)a sharp rise in productivity.
B)a rapid rise in oil prices.
C)a decline in wages.
D)an appreciation of the dollar.

Question 25

Disinflation occurs when

A)the price level is falling.
B)investment plans exceed saving.
C)a speculative investment "bubble" is bursting.
D)the inflation rate is declining.

Question 26

The traditional Phillips Curve suggests that, if government uses an expansionary fiscal policy to stimulate output and employment,

A)unemployment may actually increase because of the crowding-out effect.
B)tax revenues may increase even though tax rates have been reduced.
C)the inflation rate will increase.
D)the natural rate of unemployment may fall.

Question 27

An adverse aggregate supply shock

A)automatically shifts the aggregate demand curve rightward.
B)causes the Phillips Curve to shift leftward and downward.
C)can be caused by a boost in the rate of growth of productivity.
D)can cause stagflation.

Question 28

Suppose that the Consumer Price Index for a particular economy rose from 110 to 120 in year 1, 120 to 130 in year 2, and 130 to 140 in year 3.We could conclude that this economy is experiencing

A)accelerating inflation.
B)deflation.
C)disinflation.
D)a constant rate of inflation.

Question 29

When the actual rate of inflation exceeds the expected rate

A)the unemployment rate will temporarily rise.
B)firms will experience rising profits and thus increase their employment.
C)the actual rate of inflation will fall.
D)nominal wages will decline.

Question 30

Which of the following allegedly contributed to the stagflation in the mid-1970s?

A)appreciation of the dollar
B)a sharp drop in the prices of farm products
C)a dramatic increase in oil prices
D)rising productivity in manufacturing

Question 31

Which of the following is a true statement?

A)There is a long-run trade-off between inflation and unemployment.
B)There is no trade-off between inflation and unemployment in the short-run.
C)The short-run Phillips Curve is horizontal.
D)The long-run Phillips Curve is vertical.

Question 32

Stagflation refers to

A)an increase in inflation accompanied by decreases in real output and employment.
B)a decline in the price level accompanied by increases in real output and employment.
C)a simultaneous increase in real output and the price level.
D)a simultaneous reduction in real output and the price level.

Question 33

The last few years of the 1990s in the United States were characterized by

A)low inflation and high unemployment.
B)stagflation.
C)low inflation and low unemployment.
D)a high misery index.

Question 34

In the last half of the 1990s, the usual short-run trade-off between inflation and unemployment did not arise because

A)the Fed held interest rates constant.
B)the federal government balanced its budget.
C)the U.S.personal savings rate rose.
D)productivity (and thus aggregate supply) grew faster than previously.

Question 35

Inflation accompanied by falling real output and employment is known as

A)Laffer's law.
B)Okun's law.
C)stagflation.
D)the Phillips Curve.

Question 36

A rightward shift of the traditional Phillips Curve would suggest that

A)the productivity of labor increased.
B)the rate of inflation is now higher at each rate of unemployment.
C)cost-push inflation decreased.
D)the rate of inflation is now lower at each rate of unemployment.

Question 37

As distinct from reductions in the price level, reductions in the rate of inflation are referred to as

A)dollar depreciation.
B)stagflation.
C)deflation.
D)disinflation.

Question 38

Rightward and upward shifts of the Phillips Curve in the 1970s and early 1980s were caused by

A)adverse shocks to aggregate supply.
B)adverse shocks to aggregate demand.
C)an increase in the misery index.
D)the Vietnam War.

Question 39

Which of the following is a true statement?

A)Under normal conditions, there is a short-run trade-off between inflation and unemployment.
B)There is a long-run trade-off between inflation and unemployment.
C)The short-run Phillips Curve is vertical.
D)The long-run Phillips Curve is horizontal.

Question 40

Which of the following is a true statement?

A)There is a long-run trade-off between inflation and unemployment.
B)There is no trade-off between inflation and unemployment in the long run.
C)The short-run Phillips Curve is horizontal.
D)The long-run Phillips Curve is horizontal.

Question 41

A shift in the Phillips Curve to the left will improve the short-run inflation-unemployment choices available to society.

Question 42

The short-run aggregate supply curve is vertical, and the long-run aggregate supply curve is horizontal.

Question 43

A rightward and upward shift of the Phillips Curve is consistent with the occurrence of stagflation.

Question 44

In 1993 the federal government boosted income tax rates.The change in tax revenue that occurred in the seven years that followed

A)supported the claims of supply-side economists and the Laffer Curve.
B)contradicted the claims of supply-side economists and the Laffer Curve.
C)caused productivity growth to slow.
D)significantly increased the size of the government's budget deficit.

Question 45

Which of the following is a tenet of supply-side economics?

A)High marginal tax rates severely discourage work, saving, and investment.
B)Increases in Social Security taxes and other business taxes shift the aggregate supply curve to the right.
C)The Federal Reserve should adhere to a monetary rule that limits increases in the money supply to a 5 percent annual rate.
D)Transfer payments increase incentives to work.

Question 46

Government can push the unemployment rate below the natural rate only by

A)instituting supply-side economic policies.
B)producing a higher rate of inflation than people expect.
C)balancing the federal budget.
D)achieving zero inflation.

Question 47

If graphed, the relationship shown would depict this economy's

A)Laffer Curve.
B)Lorenz Curve.
C)Tax Freedom Curve.
D)Phillips Curve.

Question 48

(Consider This) The ideas of economist Arthur Laffer became the centerpiece for tax policy during the

A)Ford administration.
B)Clinton administration.
C)Nixon administration.
D)Reagan administration.

Question 49

In 1993 the federal government boosted income tax rates.In the seven years that followed,

A)tax revenues fell slightly.
B)productivity growth slowed.
C)the unemployment rate increased.
D)tax revenues expanded rapidly.

Question 50

(Last Word) According to the research of Christina Romer and David Romer,

A)a tax reduction of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.
B)a tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.
C)a tax reduction of 2 to 3 percent raises real GDP by roughly 1 percent.
D)a tax increase of 2 to 3 percent lowers real GDP by roughly 1 percent.

Question 51

Demand-pull inflation and cost-push inflation are identical concepts because both involve lower unemployment rates and rising prices.

Question 52

The Phillips Curve suggests an inverse relationship between increases in the price level and the level of employment.

Question 53

The short-run aggregate supply curve shifts to the left when nominal wages rise in response to price level increases.

Question 54

(Consider This) Economist Arthur Laffer equated Robin Hood to

A)government and equated the people passing through Sherwood Forest to taxpayers.
B)charitable organizations and equated the people passing through Sherwood Forest to poor people.
C)businesses and equated the people passing through Sherwood Forest to consumers.
D)government and equated the people passing through Sherwood Forest to importers of goods and services.

Question 55

Refer to the table.If the current tax rate is 60 percent, supply-side economists would advocate

A)lowering tax rates to 20 percent, or lower if possible.
B)lowering tax rates to 40 percent.
C)keeping tax rates at 60 percent.
D)raising tax rates to 80 percent.

Question 56

The Laffer Curve is a central concept in

A)monetarism.
B)Keynesianism.
C)welfare economics.
D)supply-side economics.

Question 57

(Last Word) According to the research of Christina Romer and David Romer, tax increases implemented to reduce an inherited budget deficit

A)reduce real output by the same amount as any other tax increase.
B)reduce real output by more than other tax increases.
C)reduce real output by less than other tax increases.
D)increase real output, contrary to what occurs with other tax increases.

Question 58

Supply-side economist Arthur Laffer has argued that

A)there is no empirically proven relationship between tax rates and incentives.
B)large reductions in personal and corporate income taxes will increase aggregate supply much more than aggregate demand.
C)the only way to eliminate inflation is to increase taxes to induce a recession severe enough to eliminate inflationary expectations.
D)large cuts in income taxes will increase aggregate demand more than aggregate supply.

Question 59

In the long run,

A)attempts to "fine-tune" the economy cause the rate of unemployment to accelerate.
B)there is no inflation-unemployment trade-off.
C)there is an inflation-unemployment trade-off, and the terms of that trade-off have worsened in recent years.
D)there is an inflation-unemployment trade-off, but the terms of that trade-off have improved in recent years.

Question 60

In the extended AD-AS model, the long-run aggregate supply curve is vertical.

Question 61

The short-run aggregate supply curve illustrates the idea that if the price level falls, firms will experience

A)falling input costs, so they will increase their output level.
B)no change in input costs, so they will not change their output level.
C)falling inputs costs, so they will reduce their output level.
D)no change in input costs, so they will reduce their output level.

Question 62

The short-run aggregate supply curve intersects the long-run aggregate supply curve at

A)a constant price level.
B)the potential level of real output.
C)the equilibrium level of aggregate demand.
D)the point where real GDP equals nominal GDP.

Question 63

Inflation in the short run is most likely to result from a(n)

A)increase in aggregate demand or aggregate supply.
B)decrease in aggregate demand or aggregate supply.
C)increase in aggregate demand or a decrease in aggregate supply.
D)decrease in aggregate demand or an increase in aggregate supply.

Question 64

In the long run, if the price level decreases, then the economy's output level will

A)increase initially, but then fall back again.
B)increase.
C)decrease.
D)stay the same.

Question 65

With demand-pull inflation in the extended AD-AS model, there is

A)a decrease in aggregate demand and a decrease in unemployment that eventually increases nominal wages.
B)an increase in aggregate demand and a decrease in unemployment that eventually decreases nominal wages.
C)an increase in aggregate demand and an increase in unemployment that eventually decreases nominal wages.
D)an increase in aggregate demand and a decrease in unemployment that eventually increases nominal wages.

Question 66

In the cost-push model of inflation, increases in nominal-wage rates that exceed increases in the productivity of labor

A)increase aggregate supply and the price level in the economy.
B)increase aggregate supply and decrease the price level in the economy.
C)decrease aggregate supply and the price level in the economy.
D)decrease aggregate supply and increase the price level in the economy.

Question 67

In the short run, the price level is assumed to be

A)fixed, along with input prices.
B)flexible, but input prices are not.
C)flexible, along with input prices.
D)fixed, but input prices are flexible.

Question 68

Demand-pull inflation in the short run raises the price level and

A)real wages.
B)real output.
C)the unemployment rate.
D)nominal wages.

Question 69

The Laffer Curve shows the trade-off between the price level and tax rates.

Question 70

The economy enters the long-run once

A)nominal wages become equal to real wages.
B)real wages become equal to nominal wages.
C)sufficient time has elapsed for wage contracts to expire and nominal wages to adjust to output-price changes.
D)sufficient time has elapsed for real GDP to increase and unemployment to decrease as a consequence

Question 71

In the long run, if the price level increases, then nominal wages and other input prices will

A)also rise, so firms will reduce their output level.
B)also rise, so firms will not change their output level.
C)not change, so firms will not change their output level.
D)decrease, so firms will increase their output level.

Question 72

Assume that initially your nominal wage was $16 an hour and the price index was 100.If the price level increases to 105, then your

A)real wage has increased to $21.
B)real wage has decreased to $15.24.
C)nominal wage has increased to $21.
D)nominal wage has decreased to $15.24.

Question 73

In the long run, demand-pull inflation

A)starts out with a shift in the AS curve but no shift of the AD curve.
B)starts out with a rightward shift in the AD curve, followed by a resulting leftward shift of the short-run AS curve.
C)starts out with a leftward shift in the AD curve, followed by a resulting rightward shift of the short-run AS curve.
D)involves a shift of the AD curve only, with no shift of the AS curve.

Question 74

The short-run aggregate supply curve

A)is vertical, and the long-run aggregate supply curve is vertical.
B)slopes upward, and the long-run aggregate supply curve also slopes upward.
C)slopes upward, but the long-run aggregate supply curve is horizontal.
D)slopes upward, but the long-run aggregate supply curve is vertical.

Question 75

In the short run, if the price level increases, then nominal wages

A)stay fixed and the firms' revenues and profits will increase.
B)stay fixed and the firms' revenues and profits also stay the same.
C)increase, causing the firms' revenues and profits to fall.
D)decrease, causing the firms' revenues and profits to rise.

Question 76

In the long run, demand-pull inflation leads to

A)higher unemployment and a higher price level.
B)lower real wages and higher unemployment.
C)lower real output and no change in unemployment.
D)a higher price level and no change in real output.

Question 77

In the short-run, demand-pull inflation increases

A)real wages, but in the long-run only nominal wages.
B)nominal wages, but in the long-run only real wages.
C)real output and the price level, but in the long-run only real output.
D)real output and the price level, but in the long-run only the price level.

Question 78

In the short run, nominal wages and other input prices are assumed to be

A)unresponsive to product price-level changes, but in the long run they are assumed to be responsive.
B)unresponsive to product price-level changes, and in the long run they are assumed to be unresponsive also.
C)responsive to product price-level changes, but in the long run they are assumed to be unresponsive.
D)responsive to product price-level changes, and in the long run they are assumed to be responsive also.

Question 79

If the government uses expansionary monetary or fiscal policies to counter the output effects of cost-push inflation, then the economy is likely to experience

A)a decline in nominal wages.
B)an inflationary spiral.
C)a recession.
D)disinflation.

Question 80

Equilibrium in the long run occurs when

A)AD intersects the short-run AS, regardless of output level.
B)AD intersects the short-run AS, regardless of price level.
C)AD intersects the short-run and the long-run AS curves at the same point.
D)the short-run AS curve intersects the long-run AS curve.