Macroeconomics C18

Lower unemployment

A higher than expected rate of inflation in the short run leads firms to increase production, resulting in which of the following?

only in the short run

A trade-off between inflation and unemployment exists ______.

The natural employment rate

According to economists, the inflation rate is consistent with which of the following in the long run?

Recession

According to one application of the extended AD-AS model, a decrease in aggregate demand causes which of the following?

Higher after-tax earnings Greater work effort

According to supply-side economics, which of the following are consequences of reducing marginal tax rates on income?

Increasing incentives to save and invest Creating conditions favorable to innovation Spurring businesses to take more risks

According to supply-side economists, lower tax rates cause an expansion of real output by doing which of the following?

Tax policy

According to supply-sider economists, the government can promote or impede rightward shifts of the short-run and long-run AS curves through changes in which of the following?

Higher after-tax income

According to supply-siders, which of the following will encourage more work effort?

Initially increase but eventually decrease

According to the Laffer Curve, as tax rates rise from 0% to 100%, tax revenues will do which of the following?

Real output expands resulting in a positive GDP gap.

According to the extended AD-AS model, what happens when aggregate demand increases in the short run?

Reduced output and rising prices

Adverse aggregate supply shocks tend to cause which of the following?

higher than the actual inflation rate, so firms produce less as a result of weakening aggregate demand

An economy may temporarily slide down along its short-run Phillips Curve if the expected inflation rate is ______.

Falling inflation and employment

An economy may travel down its short-run Phillips Curve as a result of which of the following?

higher than expected, causing firms to hire more labor

An economy will move up along the short-run Phillips Curve when the inflation rate is ______.

cost-push inflation

An increase in the costs of inputs, such as wages, leads to ______.

inflation

Central banks, such as the Federal Reserve, engineer increases in their economies' money supplies in order to create ongoing ______.

some people

Critics of supply-side economics point to evidence that shows decreases in wage-income tax rates result in which of the following?

of uncertain direction slow to emerge

Critics of the Laffer Curve and its supply-side implications say ample empirical evidence shows that the impact of a tax cut on incentives is ______.

Inflation and unemployment

Data plotted on the Phillips Curve demonstrates a correlation between which variables?

The AD curve shifting to the right

Demand-pull inflation is the result of which of the following?

An increase in personal tax rates will increase tax revenues.

Economists generally agree that the U.S. economy operates at a point on the Laffer Curve where which of the following is true?

A shift in the aggregate supply curve to the left A rise in the equilibrium price level

Higher costs of production result in which of the following?

They increase output prices to match the expected rate of inflation.

How do firms respond when production costs rise as a result of nominal wages being negotiated upward due to inflationary pressure?

They hire more workers and increase production.

How do firms typically respond in the short run when output prices rise as a result of shifting aggregate demand?

By controlling increases in the money supply

How does the U.S. central bank attempt to keep inflation at low levels?

Nominal wages falling as workers and firms lower their inflation expectations

If aggregate demand decreases and takes the economy away from its long-run Phillips Curve, what mechanism will allow the economy to self-adjust back to the long-run Phillips Curve?

shift left

If an economy is producing beyond its full employment output, nominal wages will start to increase, which causes the short-run aggregate supply curve to ______.

shift leftward

If the actual inflation rate is lower than expected, then expectations will be adjusted to match the actual rate, and this will cause the short-run Phillips curve to ______.

Inflation

If the aggregate demand increases faster than aggregate supply, the economy will experience which of the following?

aggregate supply and Phillips curves

If the price level rises higher than expected in the short run due to expanding aggregate demand, the economy moves up along the ______.

stay constant; rise

If the price level rises in the short run, nominal wages will ______, and firms' profits will therefore ______.

Firms' revenues and profits will increase.

If the price level rises in the short run, which of the following will result?

Blank 1: short Blank 2: run or term

In macroeconomics, input prices are assumed to be inflexible or even fixed in the .

inflexible; flexible

In macroeconomics, the short run assumes that input prices are ______ while output prices are ______.

The short-run aggregate supply curve shifts to the left.

In the extended AD-AS model, what eventually happens following an increase in price level associated with an economy exceeding the full employment level?

Falling nominal wages and prices

In the extended AD-AS model, which of the following is required to facilitate the economy's return to full employment in the long run after a drop in aggregate demand?

Nominal wages falling as workers and firms lower their inflation expectations

In the figure, a period of disinflation causes the economy to slide downward in the short run from point a3 to c3. In the long run, what causes the economy to shift back to the long-run Phillips Curve at point a2?

workers will begin to expect higher wages to adjust for inflation, which will reduce hiring and employment

In the figure, point b1 lying on the short-run Phillips Curve PC1 is not a stable equilibrium for the economy because ______.

Travel up along a vertical Phillips Curve

In the long run, rapid increases in aggregate demand causes the economy to do which of the following?

Stays at the natural rate of unemployment, even if the inflation rate changes

In the long run, when wages and inflation expectations adjust to match actual inflation, the economy does which of the following?

aggregate supply curve

In the short run, higher rates of unemployment and inflation occur simultaneously as a result of a sharp shift of the ______ to the left.

Saving and investing

In the view of supply-side economists, reducing marginal tax rates encourages which of the following?

higher investments in capital and technology

In the view supply-side economists, cutting marginal tax rates will shift long-run aggregate supply due to ______.

Phillips Curve

Increases in unemployment and inflation during the 1970s and early 1980s upended the notion of a stable ______.

Falling per-unit production costs

Lower inflation and unemployment rates in the period 1982-1989, compared with the 1970s and early 1980s, can be explained by which of the following?

the unemployment rate rises while the inflation rate falls

Many economists today agree that in the short run as aggregate demand weakens, ______.

A reduction in tax revenues proportionately smaller than the rate cuts

Most economists agree that, other things being equal, cuts in tax rates will result in which of the following?

A lower price level

Other things equal and assuming product and resource prices are downwardly flexible, an expansion of long-run aggregate supply results in which of the following?

right; rise

Over the long run, falling nominal wages will shift the short-run aggregate supply curve to the ______, which causes output to ______ back to the full employment level.

marginal tax rate

Regarding taxation, supply-siders focus their analysis on the economic effects of changes in the ______.

Rising unemployment and inflation rates

Stagflation is a period characterized by which of the following?

aggregate supply shocks

Sudden increases in the cost of resources that shift the short-run aggregate supply curve to the left are known as ______.

Blank 1: marginal

Supply-side economics focuses on the incentive effects of changes in the tax rates.

Tax avoidance

Supply-side economists contend that lower tax rates result in a decrease in which of the following?

Unemployment and inflation

The adverse supply shocks of the 1970s brought about higher rates of which of the following?

The economy to return to full employment without government intervention

The assumption that wages and prices are downwardly flexible in the long run allows for which of the following?

Blank 1: Laffer

The curve that depicts the relationship between tax rates and tax revenues is called the Curve.

natural

The full-employment rate that occurs when cyclical unemployment is zero is known as the ______ unemployment rate.

The inflation rate The unemployment rate

The misery index is a combination of which of the following?

the current price level will persist

The short-run aggregate supply curve is based on the assumption that firms and workers have established nominal wages, with the expectation that ______.

Nominal wages were established by firms and workers, with the belief that the price level will stay constant. The price level is flexible both upward and downward.

The short-run aggregate supply curve is based on which of the following assumptions?

When nominal wages and inflation expectations adjust to match actual inflation

The trade-off between output and unemployment vanishes under which conditions?

False

True or false: By themselves, expansions of long-run aggregate supply in the economy are inflationary.

Price stability and full employment are incompatible goals.

U.S. monetary policy in the 1960s was driven by which of the following assumptions, as demonstrated by the Phillips Curve?

Increases in nominal wages that are negotiated in response to expected increases in inflation rates

What causes short-run increases in the inflation rate to become persistent?

The price level rises, real output rises, and unemployment falls.

What happens in the short run when aggregate supply is held constant and aggregate demand increases?

It experiences mild inflation and economic growth.

What happens to an economy when its increases in long-run aggregate supply are less than increases in aggregate demand?

They remain unchanged.

What happens to nominal wages in the short run when the price level decreases?

The demand-side effects are more immediate and certain than the longer-term supply-side effects.

What is a major criticism that many economists have of the supply-side approach to tax cuts?

To create inflation

What is the goal of central banks when they foster an expansion of aggregate demand in the economy?

A lingering recession

What is the likely consequence of the government failing to intervene when cost-push inflation arises?

The recession will persist, with a large loss of output.

What is the likely outcome when a government handles a recession by remaining passive while the economy returns to full employment on its own?

disinflation

What is the term for a reduction in the inflation rate caused by a decline in aggregate demand that is greater than any decline in aggregate supply?

Do nothing and wait for long-run adjustments to return the economy to full employment Conduct active monetary or fiscal policy to shift aggregate demand to the right

When a recession occurs, policymakers have which of the following options?

Blank 1: disinflation

When an economy's rate of inflation falls, it experiences .

When the downward-sloping aggregate demand curve intersects the upward-sloping aggregate supply curve

When is equilibrium achieved in the short run?

Nominal wages will decrease. The demand for labor will decrease.

When output falls below the economy's full-employment output level, which of the following adjustments will occur?

Waits for wages and other input costs to fall in order to get back to full employment

When the government takes a hands-off approach to cost-push inflation, it does which of the following?

Demand-pull inflation

When the price level rises because the AD curve shifts rightward, the economy experiences which of the following?

Supply-side economics

Which branch of economic theory stresses the importance of aggregate supply in determining inflation and unemployment rates?

A decrease in investment spending

Which of the following actions could cause a recession?

Shifts in long-run aggregate supply Shifts in aggregate demand

Which of the following are responsible for economies having low, continuous positive inflation rates?

Increased competition from foreign suppliers Declining monopoly power of OPEC Deregulation of the airline and trucking industries

Which of the following factors helped to shift aggregate supply rightward between the years 1982 and 1989?

The Phillips Curve

Which of the following illustrates an inverse relationship between the rates of inflation and unemployment?

Government action is always needed to bring the economy to full employment.

Which of the following is not a generalization supported by the extended AD-AS model?

They remain fixed.

Which of the following is true of nominal wages when price levels rise in the short run?

Business profits fall. Unemployment rises.

Which of the following results from workers' negotiating higher wages in the face of rising inflation in the short run?

Increased labor demand Increased production costs

Which of the following shifts the short-run aggregate supply curve to the left?

There is usually a trade-off between inflation and unemployment in the short run. With a supply shock, there can be rising inflation and unemployment at the same time.

Which of the following statements are supported by the extended AD-AS model?

A positive GDP gap is possible. A negative GDP gap is possible.

Which of the following statements is true when the economy is at equilibrium in the short run?

An increase in aggregate demand

Which of the following would cause an economy to travel along a stable short-run Phillips Curve?

Wages and inflation expectations being adjusted downwards

Which of the following would cause the short-run Phillips curve to shift leftwards?

Where on the curve the economy is located

While economists agree with the logical proposition presented by the Laffer Curve, a major debate continues about which of the following?

Because they do not consider changes in inflation and unemployment to be equivalent

Why do economists find the misery index to be a poor representation of a nation's overall discomfort?

Phillips Curve

With a stable short-run aggregate supply curve and a shifting aggregate demand, we would see the relationship suggested by a ______.