Macroeconomics ch 18

Which of the following actions could cause a recession?

A decrease in investment spending

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

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

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

A reduction in tax revenues proportionately smaller than the rate cuts

Higher costs of production result in which of the following?

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

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

An increase in personal tax rates will increase tax revenues

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

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

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

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

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

Initially increase but eventually decrease

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

It experiences mild inflation and economic growth.

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

Laffer Curve

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

Phillips curve

Stagflation is a period characterized by which of the following?

Rising unemployment and inflation rates

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

Shifts in aggregate demand Shifts in long-run aggregate supply

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

Some people working more but others working less

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

The AD curve shifting to the right

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

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

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

The natural employment rate

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

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

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

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.

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

They increase output prices to match the expected rate of inflation

When is equilibrium achieved in the short run?

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

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

cost push inflation

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

demand pull inflation

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?

disinflation

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

disinflation

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

higher than expected, causing firms to hire more labor

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

inflation and unemployment

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

inflexible; flexible

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

lower unemployment

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

marginal

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

marginal tax rate

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

natural

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

recession

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.

right; rise

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

short run

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 ______.

slow to emerge of uncertain direction

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

supply-side economics

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?

tax policy

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

the Phillips Curve

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

the current price level will persist