Question 1

The implication of the long-run Phillips Curve is that there is no trade-off between inflation and unemployment in the long-run.

Accepted Answer

The long-run Phillips Curve suggests that in the long-run, there is no relationship between inflation and unemployment, and thus there is no trade-off between the two variables. This implies that any attempt to reduce unemployment by increasing aggregate demand through expansionary monetary or fiscal policies will only result in a temporary decrease in unemployment, but eventually lead to higher inflation. Therefore, policymakers need to focus on supply-side policies that can increase the natural rate of unemployment and shift the long-run Phillips Curve to the left.

Question 2

The policy implication of the long-run Phillips Curve is that, while stimulative policies may work to reduce unemployment in the short run, the only effect of such policies in the long run is to raise inflation.

Accepted Answer

The long-run Phillips Curve suggests that there is no trade-off between inflation and unemployment in the long run. In the long run, changes in aggregate demand only affect the price level, not the level of employment. Therefore, stimulative policies designed to reduce unemployment in the short run will increase aggregate demand and raise prices, leading to higher inflation in the long run.

Question 3

A stable Phillips curve does not allow for the possibility of stagflation.

Accepted Answer

The answer of A stable Phillips curve does not allow...

Question 4

Supply-side economists recommend higher marginal tax rates to increase aggregate supply and real output.

Accepted Answer

Supply-side economists generally advocate for lower marginal tax rates as a means of increasing incentives for businesses and individuals to produce and invest, which in turn increases aggregate supply and real output.

Question 5

Based on the long-run Phillips Curve, any rate of inflation is compatible in the long run with the natural rate of unemployment.

Accepted Answer

The long-run Phillips Curve suggests that there is a natural rate of unemployment, which is the level below which inflation will rise, and above which inflation will fall. In the long run, the rate of inflation is compatible with the natural rate of unemployment. Therefore, any increase in inflation must be matched by an increase in expected inflation, leading to a shift in the short-run Phillips Curve but not in the long-run Phillips Curve.

Question 6

One implication of the Laffer Curve in supply-side arguments is that cutting taxes may actually reduce the budget deficit, contrary to what traditional economics teaches.

Accepted Answer

The Laffer Curve suggests that at a certain point, cutting taxes can actually increase government revenue by stimulating economic growth. Therefore, reducing taxes can potentially reduce the budget deficit as increased economic activity generates more revenue.

Question 7

The Laffer Curve suggests that within a certain range, lower tax rates will increase tax revenues.

Accepted Answer

The Laffer Curve postulates that there is a point where lowering tax rates will lead to an increase in tax revenues due to increased economic growth and activity, but beyond that point, further lowering of taxes will decrease revenue as economic activity decreases.

Question 8

The experience of the U.S. with supply-side policies is that tax cuts affect the economy more on the demand side rather than the supply side.

Accepted Answer

While supply-side policies aim to increase production and supply by incentivizing investment and entrepreneurial activity, the evidence suggests that tax cuts typically stimulate spending and consumption in the short-term, which has a greater impact on demand than supply. This is based on empirical data from the implementation of supply-side policies in the U.S., such as the Reagan administration's tax cuts in the 1980s and the George W. Bush administration's tax cuts in the early 2000s.

Question 9

The adjustment mechanism that brings the economy to its long-run aggregate supply has to do with inflation-expectations, whereas the adjustment to the long-run Phillips curve has to do with wage flexibility.

Accepted Answer

The answer of The adjustment mechanism that brings the economy...

Question 10

Supply-side economists contend that aggregate supply is the relevant policy factor in influencing the price level and real output in an economy.

Accepted Answer

Supply-side economists believe that policies aimed at increasing the production of goods and services, such as deregulation, tax cuts for businesses, and incentives for investment, will increase aggregate supply and cause a decrease in the price level and an increase in real output.

Question 11

The Laffer Curve indicates that lower tax rates will increase output.

Accepted Answer

The answer of The Laffer Curve indicates that lower tax...

Question 12

The long-run Phillips Curve is essentially a horizontal line at the economy's natural rate of inflation.

Accepted Answer

The answer of The long-run Phillips Curve is essentially a...

Question 13

A rightward shift of the Phillips Curve suggests that a lower rate of unemployment is associated with each inflation rate.

Accepted Answer

The answer of A rightward shift of the Phillips Curve...

Question 14

The Phillips Curve shows a positive relationship between the rate of inflation and the unemployment rate.

Accepted Answer

The answer of The Phillips Curve shows a positive relationship...

Question 15

In the context of the Phillips curve, stagflation can only be understood as a rightward shift of the curve.

Accepted Answer

The answer of In the context of the Phillips curve,...

Quiz 18: Extending the Analysis of Aggregate Supply