Question 1

On an aggregate demand and aggregate supply graph, how can the stagflation of the 1970s be represented?  
A) as a leftward shift of the aggregate supply curve 
B) as a rightward shift of the aggregate supply curve 
C) as a rise in the price level that caused an excess demand for output 
D) as a rightward shift of the aggregate demand curve

Accepted Answer

Stagflation of the 1970s was characterized by both inflation and stagnation in the economy. This combination is unusual because inflation normally occurs when there is excess demand for goods or services, while stagnation happens when there is insufficient demand. In the case of the 1970s, the oil crisis caused a rise in the price of oil, which led to a leftward shift of the aggregate supply curve. This caused a rise in the price level and a fall in real output, or stagnation, which is consistent with the phenomenon of stagflation. Therefore, the correct representation of stagflation of the 1970s is a leftward shift of the aggregate supply curve.

Question 2

Which of the following occurs simultaneously with a higher price level to create stagflation?  
A) higher employment 
B) economic growth 
C) lower aggregate output 
D) federal budget deficits

Accepted Answer

Stagflation occurs when there is a combination of high inflation and low economic growth or even a decline in aggregate output. Therefore, the correct answer is C, which states that there is a lower aggregate output. The other options - higher employment, economic growth, and federal budget deficits are not necessarily associated with stagflation. In fact, higher employment and economic growth usually lead to lower unemployment and increased output, respectively, which would not cause stagflation. Similarly, federal budget deficits may affect inflation, but they are not directly related to stagflation.

Question 3

What does stagflation refer to?  
A) a simultaneous reduction in output and the price level 
B) a simultaneous increase in output and the price level 
C) a decline in the price level accompanied by increases in real output and employment 
D) an increase in the price level accompanied by decreases in real output and employment

Accepted Answer

Stagflation refers to a situation where there is an increase in the price level (inflation) accompanied by a decrease in real output (recession) and employment. It is a combination of stagnation and inflation. Thus option D is correct.

Question 4

What will an increase in aggregate supply result in, all things equal?  
A) lower levels of employment 
B) a rightward shift of the aggregate demand curve 
C) a leftward shift of the aggregate demand curve 
D) an economic expansion

Accepted Answer

An increase in aggregate supply means that businesses are producing more goods and services. This can lead to lower prices and increased output, which can stimulate economic growth and expansion. Therefore, an increase in aggregate supply is likely to result in an economic expansion.

Question 5

Suppose an economy experiences stagflation.All things equal, which of the following remedies would be the most effective?  
A) increased aggregate demand for goods and services 
B) decreased aggregate demand for goods and services 
C) increased aggregate supply of goods and services 
D) decreased aggregate supply of goods and services

Accepted Answer

Stagflation is a combination of stagnant economic growth and inflation. This condition arises when the aggregate supply of goods and services fails to meet the demand. Hence, increasing the aggregate supply of goods and services would be the best remedy to tackle stagflation. This can be achieved through policies that promote investments, technological advancements, education and training programs, and deregulation of markets. Increasing aggregate demand (option A) could lead to higher prices and worsen inflation, while decreased aggregate demand (option B) could worsen economic stagnation. Decreasing the aggregate supply of goods and services (option D) could result in even higher prices and worsen inflation.

Question 6

In combating stagflation, how may an increase in government spending affect inflation and unemployment?  
A) It may increase aggregate demand, which may help reduce inflation but aggravate unemployment. 
B) It may increase aggregate demand, which may increase unemployment and inflation. 
C) It may increase aggregate demand, which may help reduce unemployment but aggravate inflation. 
D) It may increase aggregate demand, which may help reduce unemployment and inflation.

Accepted Answer

An increase in government spending will increase aggregate demand which can potentially reduce unemployment but aggravate inflation - this is due to increased demand causing prices to rise. Therefore, the best answer is C.

Question 7

Which of the following occurs simultaneously with a higher price level and leads to stagflation?  
A) lower employment 
B) higher aggregate output 
C) federal budget deficits 
D) federal budget surpluses

Accepted Answer

When there is a higher price level and lower employment, it means that companies are producing less due to the increased costs of production, but they still have to charge more for their goods and services to maintain profitability. This leads to stagflation, as there is both high inflation and low economic growth. The other choices are not directly related to stagflation.

Question 8

What is the aim of supply-side economics?  
A) to increase government spending in order to stimulate aggregate supply 
B) to stimulate exports in order to increase the balance of payments 
C) to decrease wages in order to make production cheaper 
D) to lower taxes in order to increase the supply of resources

Accepted Answer

The aim of supply-side economics is to increase the supply of resources by lowering taxes. This is based on the belief that lower taxes encourage people to work more and invest in businesses, which in turn increases production and economic growth. This is also known as Reaganomics, named after President Ronald Reagan who implemented these policies in the 1980s.

Question 9

Who wrote The General Theory of Employment, Interest, and Money?  
A) Adam Smith 
B) Jean Baptiste Say 
C) François Quesnay 
D) John Maynard Keynes

Accepted Answer

John Maynard Keynes wrote The General Theory of Employment, Interest, and Money.

Question 10

In terms of budget deficits, which is a flow variable and which is a stock variable?  
A) A budget deficit is a flow variable; debt is a stock variable. 
B) A budget deficit is a stock variable; debt is a flow variable. 
C) A budget deficit and the debt are both stock variables. 
D) A budget deficit and the debt are both flow variables.

Accepted Answer

A budget deficit is a flow variable because it represents the amount by which government expenditures exceed revenues within a given time period (usually a year). In contrast, debt is a stock variable because it represents the total amount of money owed by the government at a particular point in time, which includes accumulated deficits from past years.

Question 11

What does stagflation refer to?  
A) a combination of rising unemployment and rising trade deficits 
B) a combination of high unemployment and rising prices 
C) high, rapidly increasing inflation 
D) a combination of rising trade deficits and rising federal government budget deficits

Accepted Answer

Stagflation refers to a combination of high unemployment and rising prices. It is a situation where the economy experiences a stagnant or slow growth rate (leading to high unemployment) along with inflationary pressures (leading to rising prices).

Question 12

Which of the following best describes stagflation?  
A) increasing output and decreasing prices 
B) increasing output and increasing prices 
C) decreasing output and decreasing prices 
D) decreasing output and increasing prices

Accepted Answer

Stagflation refers to a situation where there is a combination of low economic growth (or decreasing output) and high inflation (or increasing prices). This is a contradictory phenomenon as typically low economic growth is accompanied by low inflation and high economic growth is accompanied by higher inflation.

Question 13

What is the outcome if spending by the federal government exceeds revenue?  
A) The price level tends to fall. 
B) The aggregate demand curve shifts leftward. 
C) The aggregate supply curve shifts rightward. 
D) A federal budget deficit occurs.

Accepted Answer

If spending by the federal government exceeds revenue, it means that there is a shortfall in the government's finances. This results in a federal budget deficit, which is the amount by which spending exceeds revenue in a given year. This deficit can have various impacts on the economy, such as increasing the national debt, reducing investment, and crowding out private investment.

Question 14

Why are Keynesian policies ineffective at combating stagflation?  
A) because stagflation is caused by budget surpluses 
B) because stagflation is caused by decreases in aggregate supply 
C) because stagflation is caused by trade deficits 
D) because stagflation is caused by trade surpluses

Accepted Answer

Stagflation is typically characterized by both high inflation and high unemployment, a phenomenon that is thought to arise from a simultaneous decrease in aggregate supply and aggregate demand. Keynesian policies, which aim to increase aggregate demand through government spending and monetary intervention, may be effective in combating high unemployment during normal economic downturns but are less effective at combating stagflation because they do not directly address the underlying supply-side problem. In fact, policies aimed at increasing aggregate demand during periods of high inflation may actually exacerbate the problem by further driving up prices without addressing the root cause of the issue.

Question 15

Which of the following best explains what inflation is?  
A) a rise in the value of money 
B) a decline in nominal income 
C) a sustained increase in the price level 
D) a general reduction in prices

Accepted Answer

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

Question 16

When did confidence in Keynesian economics diminish?  
A) in the 1960s, as the unemployment rate fell 
B) in the 1970s, as inflation increased and unemployment decreased 
C) in the 1960s, as unemployment increased 
D) in the 1970s, as inflation occurred simultaneously with unemployment

Accepted Answer

Confidence in Keynesian economics diminished in the 1970s when the phenomenon of stagflation occurred, which is characterized by high inflation and high unemployment happening at the same time, challenging the Keynesian view that these two issues could not occur simultaneously.

Question 17

Suppose the government owes $3,500 billion and then borrows $300 billion more this year.What is the debt and the deficit?  
A) The debt is $3,800 billion, and the deficit is $3,500 billion. 
B) The debt is $3,800 billion, and the deficit is $300 billion. 
C) The debt is $300 billion, and the deficit is $3,800 billion. 
D) The debt is $300 billion, and the deficit is $3,200 billion.

Accepted Answer

The debt is the total amount the government owes, which is $3,500 billion plus the additional borrowing of $300 billion, giving a total debt of $3,800 billion.

The deficit is the difference between the government's expenses and its revenues in a given year. In this case, we don't know what the government's revenues and expenses are, so we can only say that the additional borrowing of $300 billion contributes to an increase in the deficit. Therefore, the deficit is $300 billion.

Question 18

Suppose the economy is initially in equilibrium, and then an energy shock occurs, such as when OPEC raised oil prices in the 1970s.In terms of inflation and unemployment, which of the following is likely to result?  
A) Prices and unemployment will likely rise. 
B) Prices and unemployment will likely fall. 
C) Prices will rise and unemployment will likely fall. 
D) Prices will fall and unemployment will likely rise.

Accepted Answer

The answer of Suppose the economy is initially in equilibrium,...

Question 19

Which of the following was a central argument of Keynes's General Theory?  
A) Competition does NOT allocate resources efficiently in a modern industrial economy. 
B) Full employment can be maintained even during a major recession if wage rates are lowered far enough. 
C) Modern industrial economies do NOT tend automatically toward full employment rates of output. 
D) Government can best stabilize the economy by letting the market system automatically adjust toward full employment.

Accepted Answer

Keynes argued that modern industrial economies do not tend automatically toward full employment rates of output and that government intervention is required to stabilize the economy. He advocated for the use of fiscal and monetary policies to encourage spending during economic downturns and increase employment. This was a central argument of his General Theory.

Question 20

Which of the following events did NOT occur in the 1970s?  
A) crop failures in major grain-producing countries 
B) substantial increases in oil prices 
C) growing confidence that Keynesian policies could stabilize the economy 
D) stagflation

Accepted Answer

Growing confidence in Keynesian policies occurred in the 1960s, not the 1970s.

Quiz 6: Introduction to Macroeconomics

On an aggregate demand and aggregate supply graph, how can the stagflation of the 1970s be represented?

Which of the following occurs simultaneously with a higher price level to create stagflation?

What does stagflation refer to?

What will an increase in aggregate supply result in, all things equal?

Suppose an economy experiences stagflation.All things equal, which of the following remedies would be the most effective?

In combating stagflation, how may an increase in government spending affect inflation and unemployment?

Which of the following occurs simultaneously with a higher price level and leads to stagflation?

What is the aim of supply-side economics?

Who wrote The General Theory of Employment, Interest, and Money?

In terms of budget deficits, which is a flow variable and which is a stock variable?

What does stagflation refer to?

Which of the following best describes stagflation?

What is the outcome if spending by the federal government exceeds revenue?

Why are Keynesian policies ineffective at combating stagflation?

Which of the following best explains what inflation is?

When did confidence in Keynesian economics diminish?

Suppose the government owes $3,500 billion and then borrows $300 billion more this year.What is the debt and the deficit?

Suppose the economy is initially in equilibrium, and then an energy shock occurs, such as when OPEC raised oil prices in the 1970s.In terms of inflation and unemployment, which of the following is likely to result?

Which of the following was a central argument of Keynes's General Theory?

Which of the following events did NOT occur in the 1970s?