Macroeconomics Chapter 18

Hire more workers to produce more

If the Fed causes aggregate demand and the price level to rise higher than expected, in the short run firms will:

Inflation

If the Fed expands AD faster than economic growth shifts AS, then the economy will experience:

Even more inflation will occur

If the government attempts to maintain full employment when there is cost-push inflation,

Will go back to its initial equilibrium

If the government does not intervene in a cost-push inflation situation, the price level in the long run:

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

If the government takes a hands-off approach to cost-push inflation, it:

The recession could linger too long

If the long-run adjustments to cost-pull inflation, as predicted by the extended AD-AS model, do not happen quickly enough,

Stay constant; rise

If the price level rises in the short run, nominal wages will____________, and firms' output will therefore ____________.

-The economy faces an unemployment problem -Total output is below potential GDP

If the unemployment rate is greater than the natural rate, which of the following statements are also true?

Employing otherwise naturally unemployed workers

A nation that operates beyond its full employment or potential output level is:

Firms and workers have not adjusted their inflation expectations to match actual inflation

A point on the short-run Phillips Curve but not on the long-run Phillips Curve is not a stable equilibrium because:

Only in the short-run

A trade-off between inflation and unemployment exists:

-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?

-Work and produce -Save and invest

According to supply-side economists, rising taxes in the U.S. have adversely affected incentives to:

Demand-pull inflation is the result of the

Ad curve shifting to the right.

-Changes in marginal tax rates affect people's incentives to work, save, and invest -Tax cuts tend eventually to raise tax revenues

Among the important elements of supply-side economics are the following ideas:

Cost-push inflation

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

Some people work more but others work less

Critics of supply-side economics point to evidence that shows decreases in wage-income tax rates make:

-Slow to emerge -Of uncertain direction -Small

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:

-By extending the work hours of current workers -By hiring and training the structurally employed -By enticing new workers into the labor force and hiring them

How might firms in an economy produce an output level that exceeds the potential GDP?

Nominal wages will fall 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?

Increase; Shift left

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

Flexible; also flexible

In analyzing aggregate supply, product prices are assumed to be ____________ in the short run and ____________ in the long run.

Short run

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

-Rising inflation expectations -An economy that travels up a vertical Phillips Curve -Continuing inflation -Continuing shifts of the short-run Phillips Curve up and to the right

In the long run, continued increases in aggregate demand will cause which of the following?

Decreases

In the short run, if the price level falls, then the economy's output level:

Reduce tax revenues in percentage terms by less than the tax-rate reductions

Most economists agree that, other things being equal, cuts in tax rates:

-Rising output -Falling unemployment -Falling inflation

Significant reductions in per-unit costs of production would lead to:

Taxes

Supply-side economics focuses on the policy effects of changes in ____________

True

T/F: If nominal wages are inflexible, an economy in recession will not be able to self-adjust to full employment.

The economy to self-adjust back to full employment

The assumption that wages and prices are fully flexible in the long run allows:

-Aggregate demand shifting due to ongoing increases in the money supply -Aggregate supply shifting due to productivity increases

The general US growth experience can be illustrated in the extended AD-AS model as the combined results of:

-As a result of shifts in AD, there is a trade-off between the price level and output in the short run -Short-run AS is upward-sloping, while short-run PC is downward-sloping

The implication of the aggregate supply and Phillips curves include the following:

Downward flexibility of wages and prices

The most controversial assumption of the extended AD-AS model, which analyzes a recession caused by falling aggregate demand, pertains to the:

-Attempting to maintain full-employment would cause more inflation -Taking a hands-off approach would allow the recession to linger

The policy dilemma faced by the government in a situation of cost-push inflation can be summarized as follows:

An increase in aggregate demand

What would cause an economy to travel along a stable short-run Phillips Curve?

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

When a recession occurs, policymakers have which two options?

Price level; Output

When aggregate supply shifts in the short run, ____________ and ____________ move in opposite directions.

Inflation expectations

When an economy is moving along its short-run, downward-sloping Phillips Curve, which of the following is assumed to remain constant?

Below

When an economy is operating beyond its potential GDP level, its unemployment rate is ____________ the natural rate.

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

When output falls below potential GDP, which of the following long-run adjustments will occur?

Price level and unemployment

Whenever aggregate demand shifts, there should be opposite movements between:

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

small, slow to emerge, of uncertain direction

Staflation is coined by the media by combining the words _______ and ________.

stagnation; inflation

The theory that stresses the manipulation of aggregate supply to influence inflation and unemployment is known as _________-___________ economics

supply-side

Higher rates of unemployment and inflation would result in the short run as a result of a shift of the aggregate __________ curve to the ________.

supply; left

Stagnation; inflation

"Stagflation" is coined by the media by combining the words ____________ and ____________.

The shape of the short-run Phillips Curve reflects

-The consequences of shifting aggregated demand along an upward-sloping aggregate supply curve -A trade-off between inflation and unemployment

The sequence of events resulting from an increase in aggregate demand beginning at point a2 is

1. The price level rises and firms will try to produce more output. 2. Unemployment falls while nominal wages remain fixed in the short run. 3. Workers and firms adjust their inflation expectations and negotiate for higher wages. 3. Employment declines and unemployment rises

b) Higher after-tax income

According to supply-siders, which of the following will encourage more work effort? a) Larger benefits from leisure b) Higher after-tax income c) Higher marginal tax rates d) Lower after-tax earnings

Output and rising prices

Adverse supply shocks tend to cause falling:

Which of the following descriptions are characteristics of an economy in its long-run equilibrium?

Aggregate demand intersects both short-run and long-run aggregate supply at the same point; There is no GDP gap.

Increases

Along the short-run aggregate supply curve (SRAS), output increases when the price level ____________.

Left; Unemployment; Increase

An adverse supply shock causes the short-run aggregate supply curve to shift to the ____________, in turn causing ____________ and the price level to ____________.

-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:

In the short run, which of the following shifts could cause a recession?

Decrease in aggregate supply; decrease in aggregate demand

AD curve shifting to the right

Demand-pull inflation is the result of the

1) Aggregate demand increases 2) The price level increases and a positive GDP gap occurs 3) Demand for labor rises and causes nominal wages to rise 4) The short-run AS curve shifts to the left 5) Output goes back to the full employment level

Demand-pull inflation occurs in response to a chain of events occurring in the following order:

Supply; left

Higher rates of unemployment and inflation would result in the short run as a result of a shift of the aggregate ____________ curve to the ____________.

Output; Decline; Supply; Slowly

If aggregate demand declines, then a recession occurs, which means ____________ decreases. In the extended AD-AS model, it causes wages to ____________, which shifts the aggregate ____________ until the economy reaches full employment again. This reasoning is controversial because the changes described could happen very ____________.

1) Firms will reduce their total output level 2) The unemployment rate rises above the natural rate 3) Nominal wages fall 4) The short-run aggregate supply curve shifts right 5) Real output goes back to the full employment level

If an economy is initially at full employment, and the price level falls, long-run adjustments would occur in the following order:

1) Output would increase beyond potential GDP 2) Nominal wages would increase 3) The short-run aggregate supply curve would shift left 4) Real output would go back to the full employment level

If an economy is initially at full employment, and the price level rises, long-run adjustments would occur in the following order:

Greater

If an economy is operating at an unemployment rate below its natural rate, then its output level must be ____________ than its potential GDP.

1) Output rises about potential GDP 2) Nominal wages are driven up as demand for labor increases 3) The short-run aggregate supply curve shifts left, causing the price level to rise

In the extended AD-AS model, if an economy at full employment experiences an increase in AD, in what order do the following events occur?

1) Demand for labor decreases 2) Wages fall 3) Aggregate supply increases 4) Real output rises

In the extended AD-AS model, the likely order of events resulting from a recession is as follows:

1) Firms will find their profits shrink because nominal wages stay constant and prices have not 2) Firms will produce less output 3) The unemployment rate will rise above the natural rate as demand for labor falls 4) Nominal wages and other input prices will begin to fall

In the long run, if the economy is initially at full employment and the price level decreases, adjustments will occur in the following order:

Travel up along a vertical Phillips Curve

In the long run, the effect of an increase in aggregate demand is to make the economy:

-May be a positive GDP gap -May be high unemployment

In the short run, when the economy is at equilibrium, there

Inflation

Modern economies tend to experience ongoing positive ____________ rates as a result of the actions of their central banks.

Supply; right; deflation

Ongoing productivity growth tends to shift aggregate ____________ to the ____________, which by itself (no change to aggregate demand) would lead to ongoing ____________.

In an economy, a positive GDP gap is possible ______.

Only in the short run

In the extended AD-AS model, if an economy at full employment experiences an increase in AD, in what order do the following events occur?

Output rises above potential GDP; Nominal wages are driven up as demand for labor increases; The short-run aggregate supply curve shifts left, causing the price level to rise.

Upward-sloping short-run

Short-run equilibrium in an economy occurs where the aggregate demand curve intersects the ____________ aggregate supply curve

Marginal

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

1) Government cuts marginal tax rates on interest income and income from capital 2) People have more incentive to save 3) As savings increase, more funds are made available for investments 4) Investment spending increases giving workers more capital with which to work 5) Productivity increases and expands long-run aggregate supply

Supply-siders' view of policy pertaining to saving and investment assumes the following order of events:

False

T/F: Economists generally agree that increases in tax rates will also raise tax revenues by the same percentage.

Misery Index

The ____________ ____________ is a measure of national economic discomfort.

Which of the following are short-run effects of demand-pull inflation?

The price level rises; Real output rises.

-The consequences of shifting aggregated demand along an upward-sloping aggregate supply curve -A trade-off between inflation and unemployment

The shape of the short-run Phillips Curve reflects:

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

The short-run aggregate supply curve assumes that

Aggregate supply and a shifting aggregate demand

The underlying rationale for the Phillips Curve is an understanding of the short-run effects of a stable:

Inflation; long

There is no significant trade-off between unemployment and ____________ in the ____________ run.

Input prices are remaining constant

When an economy moves along its short-run aggregate supply curve, we can assume that

Inflationary

When central banks foster an ongoing expansion of aggregate demand, the effect is:

Lower unemployment

When inflation is higher than expected, firms want to produce more, which leads to:

-The price level rises -Real output rises

Which of the following are short-run effects of demand-pull inflation?

-Aggregate demand intersects both short-run and long-run aggregate supply at the same point -There is not GDP gap

Which of the following descriptions are characteristics of an economy in its long-run equilibrium?

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

Which of the following factors helped to shift the aggregate supply rightward in 1982-1989?

a) 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? a) Government action is always needed to bring the economy to full employment b) There is no significant trade-off between unemployment and inflation in the long run c) Aggregate supply shocks can cause both unemployment and inflation rates to increase d) Typically, there is a short-run trade-off between unemployment and inflation

Wages and inflation expectations are adjusted downwards

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

The underlying rationale for the Phillips Curve is an understanding of the short-run effects of a stable

aggregate supply and a shifting aggregate demand

If the price level increases, the short-run aggregate supply curve suggests that output will increase in the short run, because input prices_____ along with price level.

do not rise

In analyzing aggregate supply, product prices are assumed to be _____ in the short run and _____ in the long run

flexible; also flexible

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

Many economies studies indicate that increases in tax rates tend to _____ tax revenues by a percentage that is _______ the ta rate increases.

increase; less than

Which of the following factors helped to shift aggregate supply rightward in 1982-1989?

increased competition from foreign suppliers; declining monopoly power of OPEC; deregulation of airline and trucking industries

Central banks in many nations engineer ongoing increases in their economies' money supply, which leads to ongoing

inflation

If the Fed expands AD faster than economic growth shifts AS, then the economy will experience

inflation

Modern economies tend to experience ongoing positive _________ rates as a result of the actions of their central banks.

inflation

The extended AD-AS model illustrates that in the long run, the unemployment rate is not inversely correlated with

inflation

Under normal circumstances, the extended AD-AS model predicts that there will be a short-run trade-off between unemployment and

inflation

A nation's misery index is the sum of the ______ and _______.

inflation rate; unemployment rate

If the aggregate demand curve intersects the short-run aggregate supply curve at the full employment level of output, the economy is at its

long-run equilibbrium

If the actual inflation rate is _______ than the expected rate, firms will find their profits shrinking, which causes them to reduce output and thus unemployment rises.

lower

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

marginal tax rate

The short-run equilibrium in the economy

occurs wherever the downsloping aggregate demand curve intersects the upsloping aggregate supply curve; may occur at any level of output

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.

A negative supply shock in the short run causes both ______ and ______ to rise.

unemployment; inflation

When the short-run Phillips curve is shifting down and to the left, it indicates that

wages and inflation expectations are adjusting downwards

-Short-run aggregate supply curve at the full employment level of output -Short-run and long-run aggregate supply curves at the same point

An economy's long-run equilibrium occurs when the aggregate demand (AD) curve intersects the

-Short-run and long-run aggregate supply curves at the same point -Short-run aggregate supply curve at the full employment level of output

An economy's long-run equilibrium occurs when the aggregate demand (AD) curve intersects the:

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

An increase in aggregate demand

1) The short-run AS curve shifts left 2) Output falls, creating a negative GDP gap 3) Demand for labor weakens pulling nominal wages down 4) The short-run AS curve shifts to the right 5) Long-run equilibrium is attained when output is at the full employment level

As a result of a sharp increase in the price of oil and coal, the correct sequence of events would be:

Lower

If the actual inflation rate is ____________ than the expected rate, firms will find their profits shrinking, which causes them to reduce output and thus unemployment rises.

1) AD shifts to the right 2) Output rises above potential GDP 3) Wages increase 4) The short-run AS curve shifts left 5) The price level rises and output falls back

In the extended AD-AS model, the sequence of events in a situation of demand-pull inflation is as follows:

-Decrease in aggregate supply -Decrease in aggregate demand

In the short run, which of the following shifts could cause a recession?

Saving and investing

In the view of supply-side economics, reducing marginal tax rates encourages:

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

Phillips Curve

Inflation; Unemployment

The Phillips Curve shows the inverse correlation between the rates of ____________ and ____________.

Laffer

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

Unemployment; Inflation

The so-called misery index adds together the ____________ and ____________ rates

Supply-side

The theory that stresses the manipulation of aggregate supply to influence inflation and unemployment is known as ____________-____________ economics.

-Stays at the potential GDP level -Is not affected by changes in AD

With vertical long-run aggregate supply (LRAS), the equilibrium output:

Disinflation

____________ means a reduction in the inflation rate from year to year.

The Phillips Curve shows the inverse correlation between the rates of _______ and _________.

inflation; unemployment

When central banks foster an ongoing expansion of aggregate demand, the effect is ________

inflationary

In microeconomics, the short run assumes that input prices are _____ while product prices are _______.

inflexible; flexible

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

shift leftward