ECON202: Macro CH18

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.

The short run as it relates to macroeconomics is a period in which wages

do not respond to price-level changes.

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.

Does the intention of a tax increase matter?

yes

Are the decreases in real GDP caused by tax increases temporary or permanent?

permanent

If taxes as a percentage of GDP go up by 1 percent, by how much does real GDP typically change?

2 to 3 percent

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

The Laffer Curve suggests that

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

On average, does an increase in taxes raise or lower real GDP?

lower

do not respond to price-level changes.

policy responses

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.

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 b. These policies might at first succeed, but eventually

a. in the short run, as aggregate demand increases, unemployment is reduced. b. 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.

Suppose that for years East Confetti's short-run Phillips Curve was such that each 1 percentage point increase in its unemployment rate was associated with a 4 percentage point decline in its inflation rate. Then, during several recent years, the short-run pattern changed such that its inflation rate rose by 2 percentage points for every 2 percentage point drop in its unemployment rate. Graphically, did East Confetti's Phillips Curve shift upward or did it shift downward?

downward

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

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