Macroeconomics Chapter 38

Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those changes were caused by only one curve shifting, then those changes are best explained as the result of:

the AD curve shifting left.

Refer to the graph. Critics of supply-side economics would argue that tax rates are currently between: (Laffer Curve)

0 and b and that a decrease in tax rates will decrease tax revenues.

Real GDP is below the full-employment level and prices have risen recently. Is this demand-pull or cost-push inflation?

Cost-push inflation

Real GDP is above the full-employment level and prices have risen recently. Is this demand-pull or cost-push inflation?

Demand-pull inflation

Determining the economy's location on the Laffer Curve is so important in assessing tax policy because

Determining the optimum tax rate will produce maximum tax revenues.

As distinct from reductions in the price level, reductions in the rate of inflation are referred to as

Disinflation

Suppose the government misjudges the natural rate of unemployment to be much lower than it actually is, and thus undertakes expansionary fiscal and monetary policies to lower it. a. These policies might at first succeed because multiple choice 1in the short run, this action will decrease aggregate demand and unemployment.in the short run, as aggregate demand increases, unemployment is reduced.in the long run, as aggregate demand increases, unemployment is reduced.in the long run, as aggregate demand decreases, unemployment is reduced.

In the short run aggregate demand increases, unemployment is reduced.

Suppose that firms were expecting inflation to be 3 percent, but it actually turned out to be 7 percent. Other things equal, firm profits will be:

Larger than expected

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

The rate of inflation and the rate of unemployment are inversely related.

The traditional Phillips Curve suggests a trade-off between

The traditional Phillips Curve suggests a trade-off between

Which of the following is a true statement? Phillips Curve

There is NO long run trade off between inflation and unemployment

Supply-side policies can be described in terms of the aggregate demand and aggregate supply model as an attempt to shift

aggregate supply curve to the right

Consider the following national data: tax revenues as a percentage of GDP: 25 percent; government spending as a percentage of GDP: 31 percent; unemployment rate: 9 percent; inflation rate: 6 percent. What is the misery index for this nation?

15%

Suppose that firms are expecting 6 percent inflation while workers are expecting 9 percent inflation. How much of a pay raise will workers demand if their goal is to maintain the purchasing power of their incomes?

9 percent

Why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less, earn less, and pay less income tax under the same circumstance?

After a tax cut, some people work more because the opportunity cost of leisure has risen.

Which of the following is a tenet of supply-side economics?

High marginal tax rates discourage work, saving, and investment.

Suppose that AD and AS intersect at an output level that is higher than the full-employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be __________.

Higher than it is now

Aggregate supply shocks can cause __________ inflation rates that are accompanied by _________ unemployment rates.

Higher; higher

In terms of aggregate supply, the difference between the long run and the short run is that in the long run,

Nominal wages and other input prices are fully responsive to price-level changes.

Which of the following is a true statement? Phillips Curve

Under normal conditions, there is a short-run trade-off between inflation and unemployment.

Refer to the graphs. Growth of production capacity is shown by

both the shift from AB to CD and the shift from X to Y.

These policies might at first succeed, but eventually multiple choice 2in the long run, as aggregate demand increases, the aggregate supply curve will shift right, reducing unemployment and returning the economy to full employment.in the long run, as aggregate demand increases and unemployment is reduced, workers will demand higher wages, the aggregate supply curve will shift left, and the economy will return to the natural rate of unemployment.in the short run, this action will decrease aggregate demand, lower unemployment, and return the economy to full employment.in the short run, as aggregate demand increases and unemployment is reduced, workers will demand higher wages, the aggregate demand curve will shift left, and the economy will return to the natural rate of unemployment.

In the long run as aggregate demand increases and unemployment is reduced workers will demand higher wages the aggregate supply curve will shift left, and the economy will return to the natural rate of unemployment.

The Laffer Curve suggests that

at some tax rate between 0 and 100 percent, tax revenues are maximized.

Critics of supply-side economics

contend that the relationship between tax rates and economic incentives is small and of uncertain direction.

Refer to the graph. If tax rates are between b and d, then supply-side economists are of the opinion that a(n): (Laffer Curve)

decrease in tax rates will increase tax revenues.

Refer to the graph. A movement from point C to point D on the Laffer Curve represents

decreased tax rates from T3 to T2 and decreased tax revenues from R3 to R2.

The graph describes the notion that as tax rates rise from zero percent, tax revenues will: (Laffer Curve)

increase at first, but then decline eventually as tax rates continue rising.

Other things equal, the short-run aggregate supply curve shifts positions when:

input prices change....need to find from HW (but it's the shift of AS curve, not along the line).

Refer to the diagram. The initial aggregate demand curve is AD1, and the initial aggregate supply curve is AS1. In the long run, the aggregate supply curve is vertical in the diagram because

price level increases produce perfectly offsetting changes in nominal wages and other input prices.