Question 1

The short-run Phillips Curve assumes an unchanging
A)actual rate of inflation.
B)expected rate of inflation.
C)unemployment rate.
D)fiscal or monetary policy.

Accepted Answer

The short-run Phillips Curve assumes an unchanging expected rate of inflation, meaning that people's expectations about inflation do not change in the short run, even if actual inflation does.

Question 2

In the short run, if the actual rate of inflation falls lower than the expected rate, then
A)profits will temporarily fall and unemployment will temporarily rise.
B)profits will temporarily rise and unemployment will temporarily fall.
C)nominal wages will rise, profits will rise, and unemployment will fall.
D)nominal wages will fall, profits will fall, and unemployment will rise.

Accepted Answer

When the actual rate of inflation is lower than expected, firms face higher real wages than anticipated, leading to reduced profits and potentially higher unemployment.

Question 3

The long-run Phillips Curve is vertical at
A)a price level of 100.
B)the natural rate of unemployment.
C)the natural rate of inflation.
D)potential GDP.

Accepted Answer

The long-run Phillips Curve is vertical at the natural rate of unemployment because at this point, there is no trade-off between inflation and unemployment.

Question 4

The analysis of the short-run and long-run Phillips Curve suggests that an increase in aggregate demand
A)influences real output and employment in the long run, but not in the short run.
B)influences real output and employment in the short run, but not in the long run.
C)does not influence the price level in the short run or the long run but only real output and employment.
D)does not influence real output and employment in the short run or the long run but only the price level.

Accepted Answer

In the short run, an increase in aggregate demand can lead to higher real output and employment due to price and wage stickiness. However, in the long run, the economy adjusts, and output returns to its natural level, leaving only higher price levels.

Question 5

A Congressional representative who calls for a decrease in tax rates in order to increase saving, work effort, and economic growth would most likely be advocating
A)an easy money policy.
B)a tight money policy.
C)a supply-side fiscal policy.
D)a contractionary fiscal policy.Test Bank: II Topic: Taxation and Aggregate Supply

Accepted Answer

Supply-side fiscal policy focuses on reducing taxes to incentivize saving, work, and investment, thereby promoting economic growth.

Question 6

Disinflation can be explained by the Phillips Curve analysis as resulting from a situation where the actual rate of inflation is initially less than the expected rate, causing the unemployment rate to
A)rise temporarily.However, consequent decreases in nominal wages will eventually bring the actual and expected rates of inflation into balance.
B)rise temporarily.However, consequent increases in nominal wages will eventually bring the actual and expected rates of inflation into balance.
C)fall temporarily.However, consequent increases in nominal wages will eventually bring the actual and expected rates of inflation into balance.
D)fall temporarily.However, consequent decreases in nominal wages will eventually bring the actual and expected rates of inflation into balance.

Accepted Answer

Disinflation occurs when the actual rate of inflation is less than the expected rate, leading to a temporary rise in unemployment. As nominal wages decrease, the actual and expected rates of inflation eventually align.

Question 7

Assume that a person saves $50,000 and earns 7 percent annual interest.If the marginal tax rate is 36 percent, then the after-tax interest earnings will be
A)$2,000.
B)$2,240.
C)$2,760.
D)$3,500.

Accepted Answer

The after-tax interest earnings are $50,000 * 0.07 * (1 - 0.36) = $2,240.

Question 8

One central idea in supply-side economics concerning budget deficits is illustrated by the
A)production possibilities curve.
B)aggregate supply curve.
C)Laffer Curve.
D)Phillips Curve.

Accepted Answer

The Laffer Curve illustrates the idea in supply-side economics that reducing tax rates could potentially increase tax revenue by boosting economic activity, which can impact budget deficits.

Question 9

The short-run Phillips Curve intersects the long-run Phillips Curve at the
A)nominal rate of interest.
B)current rate of inflation.
C)real interest rate.
D)natural rate of unemployment.

Accepted Answer

The short-run Phillips Curve intersects the long-run Phillips Curve at the natural rate of unemployment, where inflation expectations are fully realized and there is no trade-off between inflation and unemployment.

Question 10

In an aggregate demand-aggregate supply framework, fiscal policy that emphasizes cutting taxes as a means of improving incentives to work, save, and invest would be characterized primarily as a
A)rightward shift of the aggregate demand curve.
B)leftward shift of the aggregate demand curve.
C)rightward shift of the long-run aggregate supply curve.
D)leftward shift of the long-run aggregate supply curve.

Accepted Answer

Cutting taxes to improve incentives to work, save, and invest is likely to increase the productive capacity of the economy, leading to a rightward shift of the long-run aggregate supply curve.

Question 11

Assume that a person earns $600 per day at a certain job.If the marginal tax rate is cut from 40 percent to 30 percent, then this person's after-tax daily earnings will
A)decrease from $240 to $180.
B)increase from $480 to $540.
C)decrease from $540 to $480.
D)increase from $360 to $420.

Accepted Answer

The after-tax earnings increase because the tax rate is reduced. Initially, the person pays 40% of $600, which is $240, leaving $360 after tax. With a 30% tax rate, they pay $180, leaving $420 after tax.

Question 12

Assume contracts between workers and employers that call for an increase in the wage rate of 5 percent are based on an expected inflation rate of 3 percent.Should inflation actually be 6 percent, then
A)nominal wages fall by 5 percent.
B)real wages fall by 6 percent.
C)nominal wages fall by 1 percent.
D)real wages fall by 1 percent.

Accepted Answer

Real wages fall by 1 percent because the actual inflation rate (6%) is 3% higher than the expected rate (3%), reducing the purchasing power of the 5% nominal wage increase by 1%.

Question 13

If the expected rate of inflation rises, then the short-run Phillips Curve will
A)shift to the right.
B)shift to the left.
C)become vertical.
D)become flat.

Accepted Answer

When the expected rate of inflation rises, the short-run Phillips Curve shifts to the right, indicating a higher rate of inflation for any given level of unemployment.

Question 14

The automatic adjustment mechanism that makes the economy move toward the long-run Phillips Curve is
A)expansionary fiscal or monetary policy.
B)inflation expectations and wage adjustments.
C)contractionary fiscal or monetary policy.
D)increases in productivity over time.

Accepted Answer

Inflation expectations and wage adjustments are key components of the automatic adjustment mechanism that guides the economy back to the long-run Phillips Curve, as they influence the natural rate of unemployment and inflation.

Question 15

Which is a basic proposition of supply-side economics?
A)The Federal Reserve should target the federal funds rate rather than the money supply.
B)Tax-hikes on business reduce productivity and output and reduce aggregate supply.
C)Low marginal tax rates reduce incentives to work, saving, and investment.
D)Transfer payments increase incentives to work.

Accepted Answer

The basic proposition of supply-side economics is that tax-hikes on businesses reduce productivity and output and reduce aggregate supply. This theory suggests that by cutting taxes on businesses, they will have more money to invest in their production process, leading to an increase in supply, which in turn will stimulate economic growth.

Question 16

Which action will tend to decrease aggregate supply, according to supply-side economists?
A)a decrease in government spending
B)an increase in the stock of capital
C)a decrease in the money supply
D)an increase in marginal tax rates

Accepted Answer

According to supply-side economists, an increase in marginal tax rates will tend to decrease aggregate supply because it reduces incentives for businesses and individuals to invest and work. Lower investment and productivity lead to lower output and higher prices, which result in a decrease in aggregate supply. A decrease in government spending, an increase in the stock of capital, and a decrease in the money supply may also affect aggregate supply, but their impact is not as strong or clear-cut as that of taxes on incentives.

Question 17

Supply-side policies can be described in terms of the aggregate demand and aggregate supply model as an attempt to shift
A)the aggregate demand curve to the right.
B)the aggregate supply curve to the right.
C)both the aggregate supply curve and the aggregate demand curve to the right.
D)the aggregate supply curve to the right and the aggregate demand curve to the left.

Accepted Answer

Supply-side policies aim to increase the productive capacity of the economy, which shifts the aggregate supply (AS) curve to the right. This results in an increase in real GDP and a decrease in price level, which can improve economic growth and reduce inflation. Conversely, demand-side policies aim to increase aggregate demand (AD) through government spending or tax cuts, which shifts the AD curve to the right.

Question 18

Based on the Phillips Curve, when the actual rate of inflation is greater than the expected rate, the unemployment rate will
A)rise temporarily, but decreases in nominal wages will bring the expected and actual rates of inflation into balance.
B)rise temporarily, but increases in nominal wages will bring the expected and actual rates of inflation into balance.
C)fall temporarily, but increases in nominal wages will bring the expected and actual rates of inflation into balance.
D)fall temporarily, but decreases in nominal wages will bring the actual and expected rates of inflation into balance.

Accepted Answer

When actual inflation exceeds expected inflation, unemployment temporarily falls as firms hire more due to higher-than-expected profits. This leads to increased nominal wages, aligning expected and actual inflation rates.

Question 19

Supply-side economists contend that the system of taxation in the United States
A)creates incentives to save and invest.
B)creates disincentives to work.
C)generates maximum tax revenue.
D)reduces the effects of cost-push inflation.

Accepted Answer

Supply-side economists argue that high taxes can discourage people from working more because they receive less of their income after taxes, thus creating disincentives to work.

Question 20

When the rate of inflation is decreasing, this economic condition is called
A)disinflation.
B)depreciation.
C)stagflation.
D)deflation.

Accepted Answer

Disinflation refers to a slowdown in the rate of inflation, meaning that prices are still rising but at a slower pace than before.

Quiz 38: Extending the Analysis of Aggregate Supply

The short-run Phillips Curve assumes an unchanging

In the short run, if the actual rate of inflation falls lower than the expected rate, then

The long-run Phillips Curve is vertical at

The analysis of the short-run and long-run Phillips Curve suggests that an increase in aggregate demand

A Congressional representative who calls for a decrease in tax rates in order to increase saving, work effort, and economic growth would most likely be advocating

Disinflation can be explained by the Phillips Curve analysis as resulting from a situation where the actual rate of inflation is initially less than the expected rate, causing the unemployment rate to

Assume that a person saves $50,000 and earns 7 percent annual interest.If the marginal tax rate is 36 percent, then the after-tax interest earnings will be

One central idea in supply-side economics concerning budget deficits is illustrated by the

The short-run Phillips Curve intersects the long-run Phillips Curve at the

In an aggregate demand-aggregate supply framework, fiscal policy that emphasizes cutting taxes as a means of improving incentives to work, save, and invest would be characterized primarily as a

Assume that a person earns $600 per day at a certain job.If the marginal tax rate is cut from 40 percent to 30 percent, then this person's after-tax daily earnings will

Assume contracts between workers and employers that call for an increase in the wage rate of 5 percent are based on an expected inflation rate of 3 percent.Should inflation actually be 6 percent, then

If the expected rate of inflation rises, then the short-run Phillips Curve will

The automatic adjustment mechanism that makes the economy move toward the long-run Phillips Curve is

Which is a basic proposition of supply-side economics?

Which action will tend to decrease aggregate supply, according to supply-side economists?

Supply-side policies can be described in terms of the aggregate demand and aggregate supply model as an attempt to shift

Based on the Phillips Curve, when the actual rate of inflation is greater than the expected rate, the unemployment rate will

Supply-side economists contend that the system of taxation in the United States

When the rate of inflation is decreasing, this economic condition is called