Question 1

-Refer to the above diagram for a specific economy. The shape of this curve suggests that:

Accepted Answer

A)   the price level rises at a diminishing rate as the level of aggregate demand increases.
B)   full employment and price stability are compatible goals only when aggregate demand is falling.
C)   each successive unit of decline in the unemployment rate is accompanied by a smaller increase in the rate of inflation.
D)   each successive unit of decline in the unemployment rate is accompanied by a larger increase in the rate of inflation.E) C) and D)
F) A) and B)

Question 2

One policy dilemma posed by cost-push inflation is that:

Accepted Answer

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.E) B) and D)
F) B) and C)

Question 3

1 and the initial aggregate supply curve is AS1. If government offsets the decline in real output resulting from short-run cost-push inflation by increasing aggregate demand from AD1 to AD2: A)  real output will rise above Qf. B)  the price level will rise from P1 to P2. C)  it is possible that aggregate supply will shift rightward from AS2 because nominal wage demands will rise. D)  the price level will rise from P2 to P3." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. If government offsets the decline in real output resulting from short-run cost-push inflation by increasing aggregate demand from AD1 to AD2:

Accepted Answer

A)   real output will rise above Qf.
B)   the price level will rise from P1 to P2.
C)   it is possible that aggregate supply will shift rightward from AS2 because nominal wage demands will rise.
D)   the price level will rise from P2 to P3.E) None of the above
F) All of the above D

Question 4

Many economists doubt the proposition that supply-side tax cuts increase aggregate:

Accepted Answer

A)   demand more rapidly than aggregate supply.
B)   demand less rapidly than aggregate supply.
C)   supply more rapidly than aggregate demand.
D)   supply less rapidly than aggregate demand.E) C) and D)
F) A) and B)

Question 5

1 and the initial aggregate supply curve is AS1. Cost-push inflation in the short run is best represented as a: A)  leftward shift of the aggregate supply curve from AS1 to AS2. B)  rightward shift of the aggregate demand curve from AD1 to AD2. C)  move from d to b to a. D)  move from d directly to a." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. Cost-push inflation in the short run is best represented as a:

Accepted Answer

A)   leftward shift of the aggregate supply curve from AS1 to AS2.
B)   rightward shift of the aggregate demand curve from AD1 to AD2.
C)   move from d to b to a.
D)   move from d directly to a.E) B) and C)
F) A) and D)

Question 6

What will occur in the short run if there is cost-push inflation and if the government adopts a hands-off approach to it?

Accepted Answer

A)   an increase in long-run aggregate supply
B)   a decrease in long-run aggregate supply
C)   low unemployment and a loss of real output
D)   high unemployment and a loss of real outputE) None of the above
F) C) and D)

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

An adverse aggregate supply shock:

Accepted Answer

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.E) None of the above
F) All of the above D

Question 10

A major adverse aggregate supply shock:

Accepted Answer

A)   automatically shifts the aggregate demand curve rightward.
B)   causes the Phillips Curve to shift outward .
C)   can be caused by rising productivity.
D)   can be caused by falling wages.E) None of the above
F) A) and B)

Question 11

-Refer to the above diagram and assume that prices and wages are flexible both upward and downward in the economy. In the long run AD-AS model:

Accepted Answer

A)   demand-pull inflation would involve a shift of curve D to the right.
B)   cost-push inflation would involve a shift of curve B downward.
C)   recession would involve a leftward shift of curve A.
D)   frictional unemployment would be zero in the long run.E) A) and B)
F) C) and D)

Question 12

-Refer to the above diagram for a specific economy. Which of the following best describes the relationship shown by this curve?

Accepted Answer

A)   The demand for labor is large when the rate of inflation is small.
B)   When the rate of unemployment is high, the rate of inflation is high.
C)   The rate of inflation and the rate of unemployment are inversely related.
D)   The rate of inflation and the rate of unemployment are directly related.E) A) and D)
F) A) and C) C

Question 13

More inflation is likely to result when the government enacts policies to maintain full employment when there is cost-push inflation.

Accepted Answer

A) True 
 B)False

Question 14

Demand-pull inflation in the short run increases the price level and:

Accepted Answer

A)   real wages.
B)   real output.
C)   unemployment.
D)   nominal wages.E) C) and D)
F) A) and C)

Question 15

1 and AS1 curves intersect, demand-pull inflation in the short run can best be represented by a shift from: A)  AS1 to AS3. B)  AD1 to AD2. C)  AS1 to AS2. D)  AD2 to AD1." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above graph. Given that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect, demand-pull inflation in the short run can best be represented by a shift from:

Accepted Answer

A)   AS1 to AS3.
B)   AD1 to AD2.
C)   AS1 to AS2.
D)   AD2 to AD1.E) B) and D)
F) All of the above

Question 16

A basic criticism of supply-side economics is that:

Accepted Answer

A)   empirical research clearly shows that incentives to work and invest vary directly with marginal tax rates.
B)   lower taxes will increase aggregate supply much more than they will increase aggregate demand.
C)   lower taxes will increase aggregate demand much more than they will increase aggregate supply.
D)   higher taxes will reduce incentives to work, invest, and innovate.E) All of the above
F) A) and B)

Question 17

The Laffer Curve suggests that lower tax rates will decrease saving and increase consumption.

Accepted Answer

A) True 
 B)False

Question 18

2 would be explained by an: A)  increase in aggregate demand in the economy. B)  increase in aggregate supply in the economy. C)  actual rate of inflation that is less than the expected rate. D)  actual rate of inflation that exceeds the expected rate." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram. The move of the economy from c to e on short-run Phillips Curve PC2 would be explained by an:

Accepted Answer

A)   increase in aggregate demand in the economy.
B)   increase in aggregate supply in the economy.
C)   actual rate of inflation that is less than the expected rate.
D)   actual rate of inflation that exceeds the expected rate.E) All of the above
F) None of the above

Question 19

The long-run aggregate supply curve:

Accepted Answer

A)   is downward sloping.
B)   is vertical.
C)   is horizontal.
D)   is upward sloping.E) C) and D)
F) B) and C)

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 15: Long-Run Macroeconomic Adjustments

-Refer to the above diagram for a specific economy. The shape of this curve suggests that:

Correct AnswerverifiedShow Answer

One policy dilemma posed by cost-push inflation is that:

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-Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. If government offsets the decline in real output resulting from short-run cost-push inflation by increasing aggregate demand from AD1 to AD2:

Correct AnswerverifiedD

Many economists doubt the proposition that supply-side tax cuts increase aggregate:

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-Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. Cost-push inflation in the short run is best represented as a:

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What will occur in the short run if there is cost-push inflation and if the government adopts a hands-off approach to it?

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

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

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An adverse aggregate supply shock:

Correct AnswerverifiedD

A major adverse aggregate supply shock:

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-Refer to the above diagram and assume that prices and wages are flexible both upward and downward in the economy. In the long run AD-AS model:

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-Refer to the above diagram for a specific economy. Which of the following best describes the relationship shown by this curve?

Correct AnswerverifiedC

More inflation is likely to result when the government enacts policies to maintain full employment when there is cost-push inflation.

Correct AnswerverifiedShow Answer

Demand-pull inflation in the short run increases the price level and:

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-Refer to the above graph. Given that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect, demand-pull inflation in the short run can best be represented by a shift from:

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A basic criticism of supply-side economics is that:

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The Laffer Curve suggests that lower tax rates will decrease saving and increase consumption.

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-Refer to the above diagram. The move of the economy from c to e on short-run Phillips Curve PC2 would be explained by an:

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The long-run aggregate supply curve:

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

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-Refer to the above diagram. The initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁. If government offsets the decline in real output resulting from short-run cost-push inflation by increasing aggregate demand from AD₁ to AD₂:

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D

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-Refer to the above diagram. The initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁. Cost-push inflation in the short run is best represented as a:

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D

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C

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-Refer to the above graph. Given that the economy is at an initial equilibrium where the AD₁ and AS₁ curves intersect, demand-pull inflation in the short run can best be represented by a shift from:

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-Refer to the above diagram. The move of the economy from c to e on short-run Phillips Curve PC₂ would be explained by an:

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