Macroeconomics Chapter 18 Learn Smart
The trade-off between output and unemployment vanishes under which conditions? A. When nominal wages and inflation expectations adjust to match actual inflation B. When the economy gets farther away from full employment C. When nominal wages and inflation expectations remain unchanged D. When the economy goes beyond full employment
A. When nominal wages and inflation expectations adjust to match actual inflation
Sudden increases in the cost of resources that shift the short-run aggregate supply curve to the left are known as ______. A. aggregate supply shocks B. demand-pull inflation C. Phillips Curves D. stagflation
A. aggregate supply shocks
Sudden increases in the cost of resources that shift the short-run aggregate supply curve to the left are known as ______. aggregate supply shocks demand-pull inflation Phillips Curves stagflation
Aggregate supply shocks
Most economists agree that, other things being equal, cuts in tax rates will result in which of the following? A. A reduction in revenues proportionately larger than the rate cuts B. A reduction in tax revenues proportionately smaller than the rate cuts C. A reduction in tax revenues directly in proportion to the rate cuts D. A modest increase in tax revenues
B. A reduction in tax revenues proportionately smaller than the rate cuts
Economists generally agree that the U.S. economy operates at a point on the Laffer Curve where which of the following is true? A. An increase in corporate tax rates will increase aggregate demand. B. An increase in personal tax rates will increase tax revenues. C. A decrease in marginal tax rates will slow economic growth. D. A decrease in personal tax rates will increase tax revenues.
B. An increase in personal tax rates will increase tax revenues.
What happens to an economy when its increases in long-run aggregate supply are less than increases in aggregate demand? A. It experiences mild deflation and economic growth. B. It experiences mild inflation and economic growth. C. It experiences high unemployment and economic stagnation D. It experiences a mild recession and high unemployment.
B. It experiences mild inflation and economic growth
The assumption that wages and prices are downwardly flexible in the long run allows for which of the following? A. The government and the private sector to affect aggregate demand B. The economy to return to full employment without government intervention C. The government to actively intervene during a recession D. The short-run aggregate supply curve to shift to the left
B. The economy to return to full employment without government intervention
What happens in the short run when aggregate supply is held constant and aggregate demand increases? A. The price level falls, real output rises, and unemployment rises. B. The price level rises, real output rises, and unemployment falls. C. The price level rises, real output rises, and unemployment rises. D. The price level falls, real output falls, and unemployment falls.
B. The price level rises, real output rises, and unemployment falls.
How do firms respond when production costs rise as a result of nominal wages being negotiated upward due to inflationary pressure? A. They decrease aggregate demand. B. They increase output prices to match the expected rate of inflation. C. They reduce input costs to offset wage increases. D. They increase hiring to expand production.
B. They increase output prices to match the expected rate of inflation.
Which of the following is true of nominal wages when price levels rise in the short run? A. They increase proportionally with prices B. They remain fixed C. They increase proportionally with aggregate demand. D. They decrease at first and then rise.
B. They remain fixed.
A trade-off between inflation and unemployment exists ______. A. as long as the Phillips Curve is vertical B. only in the short run C. only in the long run D. as long as the Phillips Curve is upward-sloping
B. only in the short run
What is the likely consequence of the government failing to intervene when cost-push inflation arises? Multiple choice question. A. Expanding aggregate demand B. Even higher inflation C. A lingering recession D. A positive GDP gap
C. A lingering recession
Which of the following would cause an economy to travel along a stable short-run Phillips Curve? A. An improvement in productivity B. An increase in aggregate supply C. An increase in aggregate demand D. An increase in resource costs
C. An increase in aggregate demand
Demand-pull inflation is the result of which of the following? A. The AS curve shifting to the left B. The AS curve shifting to the right. C. The AD curve shifting to the right. D. The AD curve shifting to the left.
C. The AD curve shifting to the right.
Which of the following illustrates an inverse relationship between the rates of inflation and unemployment? A. The aggregate supply curve B. The Laffer Curve C. The Phillips Curve D. The aggregate demand curve
C. The Phillips Curve
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? A. Expansion of the labor force B. Increased government spending C. Rising costs and prices D. Falling nominal wages and prices
D. Falling nominal wages and prices
Which of the following is not a generalization supported by the extended AD-AS model? A. Aggregate supply shocks can cause both unemployment and inflation rates to increase. B. Typically, there is a short-run trade-off between unemployment and inflation. C. There is no significant trade-off between unemployment and inflation in the long run. D. Government action is always needed to bring the economy to full employment.
D. Government action is always needed to bring the economy to full employment.
Data plotted on the Phillips Curve demonstrates a correlation between which variables? A. Inflation and aggregate demand B. Unemployment and aggregate supply C. Inflation and economic growth D. Inflation and unemployment
D. Inflation and unemployment
The full-employment rate that occurs when cyclical unemployment is zero is known as the ______ unemployment rate. A. Phillips Curve B. inflationary C. optimal D. natural
D. Natural
Critics of supply-side economics point to evidence that shows decreases in wage-income tax rates result in which of the following? A. No long-run change in how much labor employers need B. Most people putting in the same amount of work C. Most people choosing leisure over work D. Some people working more but others working less
D. Some people working more but others working less
In the long run, when wages and inflation expectations adjust to match actual inflation, the economy does which of the following? A. Will have a constant rate of inflation but varying rates of unemployment B. Enjoys falling unemployment as inflation rises C. Experiences rising output along with inflation D. Stays at the natural rate of unemployment, even if the inflation rate changes
D. Stays at the natural rate of unemployment, even if the inflation rate changes
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? A. Consumer spending B. Government spending C. Resource costs D. Tax policy
D. Tax policy
What happens to nominal wages in the short run when the price level decreases? A. They increase B. They decrease C. The decrease at an exponential rate. D. They remain unchanged.
D. They remain unchanged.
In the long run, rapid increases in aggregate demand causes the economy to do which of the following? A. Travel down along a vertical Phillips Curve B. Travel down along a downward-sloping Phillips Curve C. Decrease its inflation rate D. Travel up along a vertical Phillips Curve
D. Travel up along a vertical Phillips Curve
The adverse supply shocks of the 1970s brought about higher rates of which of the following? Multiple choice question. A. Production and employment B. Inflation and production C. Employment and inflation D. Unemployment and inflation
D. Unemployment and inflation
According to supply-siders, which of the following will encourage more work effort? Higher after-tax income Lower after-tax earnings Higher marginal tax rates Larger benefits from leisure
Higher after-tax income
Adverse aggregate supply shocks tend to cause which of the following? Reduced prices but falling output Falling prices and falling unemployment Falling unemployment and rising prices Reduced output and rising prices
Reduced output and rising prices
True or false: By themselves, expansions of long-run aggregate supply in the economy are inflationary.
False Reason: Taken alone, an expansion of long-run aggregate supply in the economy is deflationary.
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 ______. A. Become vertical B. Become horizontal C. Shift left D. Shift right
C. Shift left
If the price level rises in the short run, nominal wages will ______, and firms' profits will therefore ______. A. rise; stay constant B. decrease; increase C. stay constant; rise D. increase; increase
C. Stay constant; rise
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 deflation expansion equilibrium
Disinflation
In macroeconomics, the short run assumes that input prices are ______ while output prices are ______.
Inflexible; flexible
The curve that depicts the relationship between tax rates and tax revenues is called the ___________ Curve.
Laffer
Supply-side economics focuses on the incentive effects of changes in the ________ tax rates.
Marginal
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 ______. A. Shift left B. Shift right C. Become vertical D. Become horizontal
Shift left
Select all that apply Higher costs of production result in which of the following? Multiple select question. - A rise in the equilibrium price level - A decrease in the equilibrium price level - A shift in the aggregate supply curve to the right - A shift in the aggregate supply curve to the left
- A rise in the equilibrium price level - A shift in the aggregate supply curve to the left
Select all that apply When a recession occurs, policymakers have which of the following options? - Conduct active monetary or fiscal policy to shift aggregate demand to the left - Conduct active monetary or fiscal policy to shift aggregate demand to the right - Conduct active monetary or fiscal policy to shift aggregate supply to the left - 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 - Do nothing and wait for long-run adjustments to return the economy to full employment
Which of the following factors helped to shift aggregate supply rightward between the years 1982 and 1989? - Increased competition from foreign suppliers - Increased interest rates engineered by the Fed - Declining monopoly power of OPEC - Deregulation of the airline and trucking industries
- Increased competition from foreign suppliers - Declining monopoly power of OPEC - Deregulation of the airline and trucking industries
Select all that apply When output falls below the economy's full-employment output level, which of the following adjustments will occur? - Nominal wages will decrease. - The demand for labor will decrease. - Unemployment will fall below the natural rate. - Nominal wages will increase.
- Nominal wages will decrease. - The demand for labor will decrease.
Select all that apply Which of the following are responsible for economies having low, continuous positive inflation rates? - Full-employment output equilibrium - Periodic economic downturns - Shifts in aggregate demand - Shifts in long-run aggregate supply
- Shifts in aggregate demand - Shifts in long-run aggregate supply
Select all that apply The short-run aggregate supply curve is based on which of the following assumptions? - Product prices are inflexible and will remain constant even when input prices change. - The price level is flexible both upward and downward. - Nominal wages were established by firms and workers,with the belief that the price level will stay constant. -Nominal wages are flexible and will rise and fall along with the price level.
- The price level is flexible both upward and downward. - Nominal wages were established by firms 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? - Demand shocks typically cause unemployment and inflation to simultaneously increase. - In the long run, unemployment can only fall with an accompanying rise in inflation. - 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.
- 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.
According to economists, the inflation rate is consistent with which of the following in the long run? . A. The aggregate demand rate B. The natural employment rate C. The aggregate supply rate D. The national deflation rate
B. The natural employment rate
According to the Laffer Curve, as tax rates rise from 0% to 100%, tax revenues will do which of the following? A. Initially decrease but eventually increase B. Remain constant C. Initially increase but eventually decrease D. Steadily increase
C. Initially increase but eventually decrease
A higher than expected rate of inflation in the short run leads firms to increase production, resulting in which of the following? A. Falling interest rates B. Higher unemployment C. Lower unemployment D. Falling inflation
C. Lower unemployment
A higher than expected rate of inflation in the short run leads firms to increase production, resulting in which of the following? A. Higher unemployment B. Falling interest rates C. Lower unemployment D. Falling inflation
C. Lower unemployment
Increases in unemployment and inflation during the 1970s and early 1980s upended the notion of a stable ______. Multiple choice question. A. Laffer Curve B. long-run aggregate supply curve C. Phillips Curve D. aggregate demand curve
C. Phillips Curve
With a stable short-run aggregate supply curve and a shifting aggregate demand, we would see the relationship suggested by a ______. A. production possibilities curve B. Laffer Curve C. Phillips Curve D. long-run aggregate supply curve
C. Phillips Curve
Which of the following is true of nominal wages when price levels rise in the short run? A. They increase proportionally with aggregate demand. B. They increase proportionally with prices. C. They remain fixed. D. They decrease at first and then rise.
C. They remain fixed
Which of the following would cause the short-run Phillips curve to shift leftwards? A. The unemployment falling below the natural rate B. Wages and inflation expectations being adjusted upwards C. Wages and inflation expectations being adjusted downwards D. The inflation rate rising higher than the expected inflation
C. Wages and inflation expectations being adjusted downwards
When is equilibrium achieved in the short run? A. When the downward-sloping aggregate demand curve intersects the vertical aggregate supply curve B. When the full-employment level of output is reached C. When the downward-sloping aggregate demand curve intersects the upward-sloping aggregate supply curve D. When the GDP gap is neither negative nor positive
C. When the downward-sloping aggregate demand curve intersects the upward-sloping aggregate supply curve
Regarding taxation, supply-siders focus their analysis on the economic effects of changes in the ______. A. total tax paid B. total budget C. marginal tax rate D. average tax rate
C. marginal tax rate
An increase in the costs of inputs, such as wages, leads to ______. A. cost-push inflation B. a decrease in equilibrium price level C. demand-pull inflation D. an increase in real output
Cost-push inflation
Select all that apply According to supply-side economics, which of the following are consequences of reducing marginal tax rates on income? - Greater work effort - Higher after-tax earnings - Lower tax revenues - Higher budget deficits
Greater work effort Higher after-tax earnings
Select all that apply Which of the following shifts the short-run aggregate supply curve to the left? - Decreased labor demand - Increased labor demand - Increased production costs - Decreased production costs
Increased labor demand Increased production costs
Select all that apply Which of the following shifts the short-run aggregate supply curve to the left? Decreased production costs Increased production costs Increased labor demand Decreased labor demand
Increased production costs Increased labor demand
According to the extended AD-AS model, what happens when aggregate demand increases in the short run? Prices fall resulting in a decline in nominal wages. The full employment level reaches equilibrium. Real output contracts resulting in a negative GDP gap. Real output expands resulting in a positive GDP gap.
Real output expands resulting in a positive GDP gap.
In the extended AD-AS model, what eventually happens following an increase in price level associated with an economy exceeding the full employment level? A. Nominal wages remain fixed due to increased input prices. B. The short-run aggregate supply curve shifts to the left. C. Output falls below potential GDP. D. Net exports shrink and investment spending falls.
Real output expands resulting in a positive GDP gap.
According to one application of the extended AD-AS model, a decrease in aggregate demand causes which of the following? A. Budgetary surplus B. Inflation C. Rising employment D. Recession
Recession
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 ______. shift leftward become upward-sloping shift rightward become downward-sloping
Shift leftward
In macroeconomics, input prices are assumed to be inflexible or even fixed in the
Short;run
What is the likely outcome when a government handles a recession by remaining passive while the economy returns to full employment on its own? A. The price level will start rising, causing a similar rise in inflation. B. Aggregate demand will increase and inflation will fall. C. Unemployment will rise as wages increase. D. The recession will persist, with a large loss of output.
The recession will persist, with a large loss of output.
In the extended AD-AS model, what eventually happens following an increase in price level associated with an economy exceeding the full employment level?
The short-run aggregate supply curve shifts to the left.
Which of the following would cause the short-run Phillips curve to shift leftwards? The unemployment falling below the natural rate The inflation rate rising higher than the expected inflation Wages and inflation expectations being adjusted upwards Wages and inflation expectations being adjusted downwards
Wages and inflation expectations being adjusted downwards
Select all that apply Higher costs of production result in which of the following? -A shift in the aggregate supply curve to the left -A shift in the aggregate supply curve to the right -A rise in the equilibrium price level -A decrease in the equilibrium price level
- A shift in the aggregate supply curve to the left - A rise in the equilibrium price level
Which of the following actions could cause a recession? Multiple choice question. An increase in aggregate supply A decrease in investment spending An increase in aggregate demand An increase in government spending
A decrease in investment spending
What is the likely consequence of the government failing to intervene when cost-push inflation arises? Even higher inflation A positive GDP gap Expanding aggregate demand A lingering recession
A lingering recession
Select all that apply Which of the following statements is true when the economy is at equilibrium in the short run? - A positive GDP gap is possible. - Neither a negative nor a positive GDP gap is possible. - A negative GDP gap is possible. - A natural rate of unemployment
A positive GDP gap is possible. A negative GDP gap is possible.
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? A. A lower price level B. Economic expansion C. Inflation D. Low unemployment
A. A lower price level
Select all that apply 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 ______. of uncertain direction too strong and immediate only temporary slow to emerge
- of uncertain direction - Slow to emerge
Central banks, such as the Federal Reserve, engineer increases in their economies' money supplies in order to create ongoing ______. A. inflation B. stagflation C. recession D. deflation
A. Inflation
How does the U.S. central bank attempt to keep inflation at low levels? Multiple choice question. A. By engineering a mild recession B. By controlling increases in the money supply C. By taking a hands-off approach to cost-push inflation D. By creating a budget deficit
B. By controlling increases in the money supply
According to supply-siders, which of the following will encourage more work effort? A. Larger benefits from leisure B. Higher after-tax income C. Lower after-tax earnings D. Higher marginal tax rates
B. Higher after-tax income
If the aggregate demand increases faster than aggregate supply, the economy will experience which of the following? A. High unemployment B. Inflation C. A budget deficit D. Recession
B. Inflation
An economy may travel down its short-run Phillips Curve as a result of which of the following? A. Rising inflation and unemployment B. Rising inflation and output level C. Falling inflation and employment D. Falling inflation and unemployment rates
C. Falling inflation and employment
An economy will move up along the short-run Phillips Curve when the inflation rate is ______. A. causing wages to fall and unemployment to increase B. falling and unemployment is also falling C. lower than expected, causing firms to hire more workers D. higher than expected, causing firms to hire more labor
D. higher than expected, causing firms to hire more labor
When the price level rises because the AD curve shifts rightward, the economy experiences which of the following? Cost-push inflation Cost-caused recession Demand-pull inflation Demand-caused recession
Demand-pull inflation
When an economy's rate of inflation falls, it experiences ___________.
Disinflation
When the government takes a hands-off approach to cost-push inflation, it does which of the following? Multiple choice question. Waits for wages and other input costs to rise in order to get back to full employment Waits for wages and other input costs to fall in order to get back to full employment Causes shifts in aggregate supply to the right, not aggregate demand Causes both shifts in aggregate supply and aggregate demand to the right
Waits for wages and other input costs to fall in order to get back to full employment
In the short run, higher rates of unemployment and inflation occur simultaneously as a result of a sharp shift of the ______ to the left. A. aggregate demand curve B. Laffer Curve C. aggregate supply curve D. Phillips Curve
aggregate supply curve
What causes short-run increases in the inflation rate to become persistent? A. Increases in nominal wages that are negotiated in response to expected increases in inflation rates B. Decreases in input prices that result from a shift in aggregate supply C. Decreases in output prices as a result of increases in nominal wages D. Increases in aggregate supply that push the unemployment rate below its natural rate
A. Increases in nominal wages that are negotiated in response to expected increases in inflation rates
Stagflation is a period characterized by which of the following? A. Rising unemployment and inflation rates B. Falling production, output, and inflation rates C. Rising unemployment rates but falling inflation rates D. Rising inflation rates but falling unemployment rates
A. Rising unemployment and inflation rates
Which branch of economic theory stresses the importance of aggregate supply in determining inflation and unemployment rates? A. Supply-side economics B. Keynesian economics C. Demand-side economics D. Deflationary economics
A. Supply-side economics
The short-run aggregate supply curve is based on the assumption that firms and workers have established nominal wages, with the expectation that ______. A. The current price level will persist. B. The price level will fall. C. The price level is irrelevant to workers. D. The price level rise.
A. 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 ______. A. The current price level will persist B. The price level is irrelevant to workers C. The price level will fall. D. The price level will rise.
A. The current price level will persist.
What is the goal of central banks when they foster an expansion of aggregate demand in the economy? A. To create inflation B. To encourage a recession C. To increase deficit spending D. To create deflation
A. To create inflation
An economy may temporarily slide down along its short-run Phillips Curve if the expected inflation rate is ______. A. higher than the actual inflation rate, so firms produce less as a result of weakening aggregate demand B. equal to actual inflation, so firms are producing more output C. increasing as a result of rising actual inflation D. lower than actual inflation, so firms produce less due to weakening aggregate demand
A. higher than the actual inflation rate, so firms produce less as a result of weakening aggregate demand
When an economy is moving along its short-run, downward-sloping Phillips Curve, which of the following is assumed to remain constant? A. Output and employment levels B. Inflation expectations C. The price level D. The unemployment rate
B. Inflation expectations
Adverse aggregate supply shocks tend to cause which of the following? A. Falling prices and falling unemployment B. Reduced output and rising prices C. Reduced prices but falling output D. Falling unemployment and rising prices
B. Reduced output and rising prices
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. A. Left; fall B. Right; rise C. Left;rise D. Right; fally
B. Right; rise
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? A. Falling aggregate supply B. Falling production and competition C. Falling per-unit production costs D. Falling aggregate demand
C. Falling per-unit production costs
If the price level rises in the short run, which of the following will result? A. Firms' total output will not be affected. B. Firms will want to produce less output. C. Firms' revenues and profits will increase. D. Wages and other input prices also rise.
C. Firms' revenues and profits will increase.
