Chapter 6

6.1.1 An increasing price level will cause Select one: a. a shift in the aggregate demand curve. b. a reduction in the overall quantity of goods and services demanded. c. the purchasing power of households to increase. d. the cost of borrowing money to decrease.

b. An increasing price level will cause a movement along the downward-sloping aggregate demand curve. This movement will be a reduction in the overall quantity of goods and services demanded.

6.2.1 The short-run aggregate supply (SRAS) curve is based on the premise that because all prices will change at the same rate, businesses can alter their production to take advantage of profit opportunities. Select one: True False

False The SRAS curve is based on the premise that all prices will not adjust at the same rate. Remember that the curve slopes upward to reflect the positive relationship between the price level and output in the short run. When businesses see prices begin to increase, they increase production and total revenue while some prices of input goods and wages remain constant in the short run.

6.2.2 The classical view of economics states that because all prices adjust immediately, firms can increase production and profit in the short run. Select one: True False

False The classical view of economics states the because of the immediate adjustment of all prices, firms cannot profit in the short run. Recall that profit = revenue − costs. When both revenue and costs increase at the same rate, profit is unchanged.

6.3.3 When an economy is operating above full employment, we expect prices to adjust upwards. Select one: True False

True An economy cannot consistently operate above full employment. The short-run aggregate supply curve begins to shift inward, while the aggregate quantity demanded decreases. The adjustment of these two forces raises the aggregate price level. Prices continue to rise until the economy reaches equilibrium.

6.1.1 Keynes's circular flow model illustrates the flow real variables while holding nominal variables constant. Select one: True False

True The circular flow model explains the flow of goods and services (real variables) and holds prices (nominal variables) constant.

6.1.2 An increase in the price level will increase the demand for money. Select one: True False

True When the price level increases, people will demand more money to buy the same basket of goods and services.

6.3.2 Which of the following events will most likely cause an inward shift of the short-run aggregate supply curve? Select one: a. Government increases spending. b. The economy experiences a supply shock. c. The Fed tightens the money supply. d. Government increases taxes.

b. A supply shock raises the prices of inputs, and the costs of production rise. Firms produce less at every price level, and the short-run aggregate supply curve shifts inward.

6.3.2 What is the most likely short-run result of an inward shift of the aggregate demand curve? Select one: a. A lower level of full employment b. A lower equilibrium price and output c. A higher equilibrium price and output d. A higher level of full employment

b. This graph shows how an inward shift of the aggregate demand curve causes a lower short-run equilibrium price and output.

6.3.2 Which of the following events will most likely cause an outward shift in the aggregate demand curve? Select one: a. The Fed tightens the money supply. b. Disposable income decreases. c. The government increases spending. d. The price of inputs increases.

c. Government can stimulate aggregate demand by increasing its spending. Increased spending will cause the aggregate demand curve to shift outward.

6.3.1 Which of the following will shift the classical aggregate supply curve outward? Select one: a. An increase in the money supply b. A depletion of natural resources c. A decrease in the aggregate price level d. Improvements in technology

d. The full-employment level of output depends on the economy's technological capabilities and resource endowments. Any improvement in technology, land, labor, or capital will shift the aggregate supply curve outward and increase the full-employment level of output.

6.2.3 Which of the following will occur if the natural rate of unemployment falls? Select one: a. The long-run aggregate supply curve becomes horizontal. b. The long-run aggregate supply curve shifts to the right. Correct c. The long-run aggregate supply curve is not affected by changes in the natural rate of unemployment. d. The long-run aggregate supply curve shifts to the left

b. When the natural rate of unemployment falls, the economy is able to efficiently operate at a higher level of full employment. The long-run aggregate supply curve will shift to the right.

6.1.2 From the microeconomic perspective, the income effect occurs when Select one: a. tax cuts provide more disposable income. b. tax increases provide less disposable income. c. rising prices decrease consumer wealth and demand. d. increased production leads to an increase in an economy's level of income.

c. The income effect deals with purchasing power. As the price of a good or service increases, people are willing and able to buy less of it. Thus, the quantity demanded of that good or service decreases.

6.1.3 Changes in the price level affect Select one: a. consumption, investment, and government spending. b. consumption and investment. c. consumption, investment, and foreign spending. d. investment, government spending, and foreign spending.

c. When the price level increases, consumption, investment, and foreign spending decrease. The opposite occurs when the price level decreases. Changes in the price level are represented by movements along the aggregate demand curve.

6.3.3 A kink in the short-run aggregate supply curve reflects the fact that Select one: a. wages tend not to rise rapidly, because employers are reluctant to increase their workers' wages. b. some companies tend not to raise their prices, even when they see other companies doing so. c. businesses hire more workers when the economy is growing. d. wages rise when the economy operates beyond full employment but tend not to fall when the economy's resources are underemployed.

d. Above the level of full-employment output, the short-run aggregate supply curve is upward sloping, reflecting the fact that wages and prices rise when the economy operates beyond the speed limit. When the economy operates below the speed limit, however, prices and wages may not adjust downward. As a result, the short-run aggregate supply curve is flatter below the full-employment output level and steeper beyond it.

6.2.3 The vertical long-run aggregate supply curve indicates that Select one: a. when prices rise overall output rises. b. when prices fall overall output falls. c. when prices rise overall output falls. d. prices do not affect overall output.

d. Because all prices have completed their adjustments in the long run, there is no relationship between the price level and output. The long-run aggregate supply curve is a vertical line that intersects output at the economy's level of full employment.

6.1.1 Businesses cut back spending when the price level rises, because the resulting increased demand for money drives the interest rate upward. Select one: True False

True When prices rise, more money is needed to purchase the same basket of goods and services. The increasing demand for money drives the cost of borrowing money---the interest rate---upward. Businesses find investments to be less profitable when interest rates rise, so they cut back spending. Because households and foreigners also cut back spending, an increase in the price level causes a downward movement along the aggregate demand curve.

6.4.1 Expected inflation is Select one: a. how much people expect the aggregate price level to change. b. always greater than the actual inflation rate. c. always equals to the actual inflation rate. d. always less than the actual inflation rate.

a. Expected inflation is the inflation rate that people predict for the future based on current economic conditions.

6.3.3 In the long run, what happens to the levels of prices and output as a result of an outward shift in the short-run aggregate supply curve? Select one: a. Prices rise, and output returns to the full-employment level. b. Prices rise, and output rises to the full-employment level. c. Prices fall, and output falls below the full-employment level. d. Prices fall, and output returns to the full-employment level.

a. In the long run, the economy cannot produce above or below the full-employment level, because prices adjust until output rises or falls to the appropriate level. If the short-run aggregate supply increases, the economy will be able to temporarily operate beyond the speed limit. Over time, however, pressure on prices and wages will cause firms to cut back production until output returns to the full-employment level.

6.3.4 Over time, the long-run aggregate supply curve can shift outward as a result of Select one: a. increases in productivity. b. decreases in productivity. c. increases in output. d. decreases in output.

a. Increases in productivity increase the full-employment level of output, moving the long-run aggregate supply curve to the right, because they allow the economy to produce a higher level of output at every price level.

6.2.1 When a factor, other than the price level, that affects the aggregate quantity supplied changes, we would expect the short-run aggregate supply curve to Select one: a. shift inward or outward. b. become vertical. c. become horizontal. d. be unaffected.

a. When graphing the short-run aggregate supply curve, we plot the aggregate price level on the y-axis and output on the x-axis. So when a factor not represented on the graph changes, the curve will shift either inward or outward.

6.2.3 Unemployment _______________ when real GDP declines. Select one: a. rises b. falls c. is unaffected d. may either rise or fall

a. When the economy operates below full employment, resources are not efficiently allocated. Prices begin to fall at the same time that unemployment begins to rise, and a recessionary environment is created.

6.3.4 Suppose a supply shock causes an inward shift of the short-run aggregate supply curve. In the short run, Select one: a. prices and output fall. b. prices rise, and output falls. c. prices fall, and output rises. d. prices and output rise.

b. An inward shift of the short-run aggregate supply curve will cause a short-run price increase and output decrease.

6.2.2 The belief that the economy adjusts immediately to its long-run equilibrium is consistent with the Select one: a. Keynesian view. b. classical view. c. Marxist view. d. monetarist view.

b. Classical economists believe that prices and wages will adjust immediately, and the economy reaches its long-run equilibrium without short-run adjustments.

6.3.3 What happens when the economy is operating beyond the full-employment level of output? Select one: a. Prices and wages begin to fall, causing firms to increase production until the full-employment level of output is reached. b. Prices and wages begin to rise, causing firms to cut back on production until the full-employment level of output is reached. c. Prices and wages begin to fall, causing firms to cut back on production until the full-employment level of output is reached. d. Prices and wages begin to rise, causing firms to increase production until the full-employment level of output is reached.

b. In the short run, the economy can operate beyond full employment. Eventually, however, prices and wages begin to rise, because there are not enough workers to produce the higher level of output. The increases force employers to cut back on production, until the full-employment level of output is reached.

6.4.2 Policymakers can expand aggregate demand and lower unemployment, but the cost is Select one: a. a permanent decrease in inflation. b. a temporary increase in inflation. c. a permanent increase in productivity. d. a temporary decrease in productivity.

b. In the short run, there is a trade-off between inflation and unemployment. When aggregate demand increases, productivity temporarily increases and reduces unemployment. This trade-off is illustrated by the Phillips curve.

6.4.2 Suppose the government increases its spending. The aggregate demand curve will shift __________, unemployment will __________, and prices will __________. Select one: a. inward; increase; decrease b. outward; decrease; increase c. inward; decrease; increase d. outward; increase; increase

b. Increasing government spending will increase aggregate demand and shift the AD curve outward. This outward shift causes prices and output to rise. If the economy is producing a higher level of output, more people are working, and the unemployment rate decreases. In the meantime, the short-run trade-off that is illustrated by the Phillips curve dictates that prices must rise when the unemployment rate falls.

6.1.2 When the U.S. price level rises, we expect foreigners to Select one: a. buy more U.S. goods and services. b. buy less U.S. goods and services. c. buy the same amount of U.S. goods and services. d. buy no U.S. goods and services.

b. Net exports are an important component of aggregate expenditures. When domestic price levels rise, foreign spending and demand for domestic products will fall. As a result, real GDP, or income, will also decrease.

6.1.1 The aggregate demand (AD) curve graphically illustrates the inverse relationship between Select one: a. government spending and the tax rate. b. aggregate expenditures and the price level. c. investment spending and the interest rate. d. real GDP and income.

b. The AD curve illustrates the combined spending plans of all players in the economy (households, businesses, and foreigners) as a function of the aggregate price level.

6.1.2 The aggregate demand curve slopes downward because Select one: a. a decrease in the aggregate price level reduces the quantity of goods and services demanded. b. an increase in the aggregate price level reduces the quantity of goods and services demanded. c. a decrease in the aggregate price level does not affect the quantity of goods and services demanded. d. an increase in the aggregate price level increases the quantity of goods and services demanded.

b. The aggregate demand curve illustrates the inverse relationship between the aggregate price level and the quantity of goods and services demanded. When the price level rises, the quantity demanded decreases; when the price level drops, the quantity demanded increases.

6.2.2 Which of the following is not a reason why wages might be sticky? Select one: a. Collective bargaining locks in a wage less than inflation. b. Employees work more when wages rise. c. The government pays a minimum wage. d. Employers pay efficiency wages.

b. The concept of sticky wages implies that wages are slow to adjust when prices begin to rise, and production costs are kept relatively low. If employees were to work more when wages rose, labor costs would increase immediately rather than remain constant in the short run. Empirical evidence, however, shows that employees tend to work less when wages rise.

6.2.3 Which of the following statements regarding output in the long run is correct? Select one: a. Output depends on the money supply. b. Output is determined by the quantity and productivity of resources. c. Output is determined by the level of interest rates. d. Output depends on the price level.

b. The long-run aggregate supply curve is a vertical line intersecting output at full employment. At this point, all resources are fully employed, and the economy is operating at its most efficient level. Changes in an economy's resource pool (land, labor, or capital) or its technology can affect output in the long run.

6.3.4 What happens in the short run to prices and output if the price of oil rises temporarily? Select one: a. Both prices and employment rise. b. Both prices and employment fall. c. Prices rise, and output falls below the short-run equilibrium level. d. Prices fall, and output falls below the short-run equilibrium level.

c. A supply shock causes the short-run aggregate supply curve to shift to the left, causing a temporary period of unemployment. In the long run, the economy will return to the full-employment level of output as prices and expectations adjust.

6.3.4 Which of the following could cause aggregate demand to decrease? Select one: a. The government reduces taxes. b. Foreigners decide they want to buy more domestic goods at every price. c. Consumers decide to increase their savings. d. The Federal Reserve increases the money supply.

c. An increase in savings represents a decrease in consumption, one of the components of aggregate demand. When savings increases, aggregate demand decreases.

6.3.4 What is the effect of technological progress on prices and output? Select one: a. The long-run aggregate supply curve shifts outward, but the short-run aggregate supply curve remains unchanged. b. The short-run aggregate supply curve shifts outward, but the long-run aggregate supply curve remains unchanged. c. Both the long-run and the short-run aggregate supply curves shift outward. d. There is no effect.

c. An increase in technology means the economy can produce more than it could before. The short-run aggregate supply curve will continue to shift to the right until it intersects the aggregate demand curve at the new full-employment level of output as seen in the graph below.

6.3.3 Which of the following will occur when the economy operates above full employment? Select one: a. Consumers' quantity demanded will decrease. b. The short-run aggregate supply curve will shift inward. c. Prices will adjust upward. d. None of the above will occur.

c. As manufacturers hire more workers and buy more raw materials, shortages are created, causing workers and owners of raw materials to charge more, and therefore prices will rise.

6.3.1 The classical view of economics describes how Select one: a. increases in the wage rate cause unemployment. b. sticky prices create profit opportunities for firms in the short run. c. prices and wages adjust immediately to clear markets. Correct d. changes in technology or resource endowments can shift the economy's level of full employment.

c. Classical economists believe that market-clearing adjustments of prices and wages are immediate.

6.3.4 An increase in an economy's resource pool will Select one: a. shift the short-run aggregate supply curve inward. b. cause a movement along the long-run aggregate supply curve. c. will shift both the long-run and short-run aggregate supply curves outward. d. will shift the long-run aggregate supply curve inward.

c. Increasing the resource pool increases the supply of goods and services at every price. Remember that when the long-run supply curve shifts, the short-run supply curve shifts also. A shift in the long-run aggregate supply curve indicates a higher level of full employment.

6.2.1 When prices increase in the short run, Select one: a. total revenue decreases. b. aggregate demand will increase. c. firms will increase production. d. profit opportunities are lost.

c. Prices of input goods, including wages (the price of labor), may stick to lower levels. Firms take advantage of higher product prices by increasing production and therefore increasing profits.

6.2.2 According to Keynes, sticky wages cause the short-run aggregate supply curve to be Select one: a. downward sloping. b. vertical. c. upward sloping. d. horizontal.

c. Sticky wages, as well as sticky prices, create profit opportunities for firms. As the price level rises and wages and other prices are sticky, or remain unchanged, firms will increase their production. When the price level decreases, firms will cut back production. This relationship between the price level and quantity produced gives us an upward-sloping short-run aggregate supply curve.

6.4.2 Which of the following is not a result of an outward shift of the aggregate demand curve? Select one: a. Higher output b. Higher aggregate price level c. Higher unemployment d. Higher short-run quantity supplied

c. The Phillips curve explains why unemployment decreases when the price level, or inflation, rises in the short run. Rising demand and prices increase output and employment. Therefore, unemployment decreases in the short run.

6.1.3 Government spending depends on Select one: a. the price level. b. income. c. policymakers. d. all of the above.

c. The level of government spending is determined by policymakers. Through policy changes, the government can shift the aggregate demand curve.

6.2.1 Suppose that, as a producer, your production costs have increased at the same rate as your revenue. You can conclude that Select one: a. your profit will increase. b. your profit will decrease. c. your profit will remain unchanged. d. predicting the effects on your profit is impossible.

c. The short-run aggregate demand curve is based on the premise that all prices will not adjust at the same rate or time, leaving room for profit opportunities when prices increase. If production costs change at the same rate as revenue, there is no room for profit.

6.4.1 The supply shocks of the 1970s Select one: a. further proved the existence of the Phillips curve. b. propelled the economy into a period of expansion. c. led to both high inflation and unemployment. Correct d. shifted the Phillips curve downward.

c. The supply shocks of the 1970s led the economy into a period of stagflation characterized by rising prices and decreasing output. This decreasing output led to high unemployment. During the 1970s as the economy experienced both high inflation and unemployment, the Phillips curve shifted upward as people adjusted to the high inflation.

6.2.1 The short-run aggregate supply curve slopes upward because of Select one: a. confusion, labor unions, and sticky prices. b. sticky wages, sticky prices, and labor unions. c. confusion, sticky wages, and sticky prices. d. sticky wages and sticky prices.

c. These three occurrences cause the short-run aggregate supply curve to slope upward. In the short run, as prices rise, firms increase their production; as prices fall, firms decrease their production.

6.1.3 Which of the following would not shift the aggregate demand curve? Select one: a. Changes in monetary policy b. Changes in fiscal policy c. Changes in the price level d. Changes in the spending plans of households

c. When a factor other than the price level changes, the aggregate demand curve shifts inward or outward. The aggregate demand curve measures the quantity of goods and services demanded as a function of the aggregate price level. A change in the price level will only cause a movement along the aggregate demand curve.

6.4.1 Which of the following is most likely to occur in an economy that is operating below its level of full employment? Select one: a. Competition for scarce resources will ensue. b. Unemployment will be low. c. Inflation will be low. Correct d. Production costs will begin to rise.

c. When an economy operates below its speed limit, it does not use all of its resources. Unemployment will be high, because people are out of work. Unused resources will lower production costs and inflation, illustrating the short-run trade-off between unemployment and inflation.

6.3.2 When the price level is above the equilibrium price, Select one: a. there is short-run excess demand. b. consumers, businesses, and foreigners increase their quantity demanded. c. businesses recognize increasing profits. d. all of the above.

c. When prices rise relative to costs of production, firms increase production to take advantage of the profit opportunities in the short run. For this reason, the short-run aggregate supply curve slopes upward.

6.1.2 When prices rise, Select one: a. real GDP increases. b. foreign demand increases. c. the demand for money increases. d. investment spending increases.

c. When prices rise, people will demand more money to do the same amount of shopping to compensate for their loss of purchasing power.

6.1.2 The aggregate demand curve measures Select one: a. the real value of nominal variables. b. aggregate expenditures as a function of the price level. c. the aggregate price level across the economy and real GDP, or income. d. all of the above.

d. All of the above are true. The aggregate demand curve measures real GDP (a real variable) as a function of the price level (a nominal variable). Aggregate expenditures (the spending plans of consumers, businesses, and foreigners) change inversely to the changes in the price level, giving the aggregate demand curve a downward slope.

6.3.1 Classical economists argue that inflationary and recessionary gaps Select one: a. are alleviated by policy intervention such as changes in the money supply. b. are essential to sustained economic growth. c. never occur. d. are eliminated by automatic adjustments of internal mechanisms in the economy.

d. Classical economists believe that shifts in either the demand or supply curve result in immediate and automatic adjustments of the aggregate price level.

6.1.1 Which of the following is a component of GDP? Select one: a. Consumption b. Investment c. Government spending d. All of the above are components of GDP.

d. Consumption, investment, government spending, and the spending of foreigners (in an open economy) are components of gross domestic product.

6.4.2 Suppose the government decides to cut taxes. The aggregate demand curve will shift __________, unemployment will __________, and prices will __________. Select one: a. outward; increase; decrease b. inward; decrease; decrease c. inward; decrease; increase d. outward; decrease; increase

d. Cutting taxes increases consumers disposable income. As their demand increases, the aggregate demand curve will shift outward, causing the short-run equilibrium to occur at higher output and price levels. The Phillips curve illustrates the short-run trade-off between inflation and unemployment. So when prices increase, unemployment will decrease.

6.2.3 Suppose an economy experiences a surge in immigration. Which of the following is the most likely result? Select one: a. The long-run aggregate supply curve will shift to the left. b. The long-run aggregate supply curve and the short-run aggregate supply curve will shift to the left. c. The long-run aggregate supply curve will shift to the right. d. The long-run aggregate supply curve and the short-run aggregate supply curve will shift to the right.

d. If an economy's technology or resource pool improves, the long-run aggregate supply curve will shift to the right to indicate a higher level of full employment. Remember that when the long-run aggregate supply curve shifts, the short-run aggregate supply curve will shift with it. A surge in immigration allows an economy to employ more workers, thereby increasing the labor pool, and the long-run aggregate supply curve and the short-run aggregate supply curve will shift to the right.

6.2.2 Keynes's sticky wage theory holds that Select one: a. wages will not immediately adjust to lower levels, and firms are able to profit from increased production. b. wages will immediately adjust to lower levels, and firms do not adjust their output levels. c. wages will immediately adjust to higher levels, and firms decrease their production and profits. d. wages will not immediately adjust to higher levels, and firms are able to profit from increased production.

d. If wages remain lower than the new market equilibrium, firms' labor costs remain the same, or sticky, while the costs of their products rise. Able to profit from these sticky wages, firms increase their production in the short run.

6.4.2 In the short run, the unemployment rate depends on Select one: a. monetary policy. b. the level of aggregate demand. c. the rate of inflation. d. all of the above. C

d. In the short run, the unemployment rate depends on monetary policy, aggregate demand, and the rate of inflation. Monetary policy affects the aggregate price level, and will alter the trade-off between inflation and unemployment. Fiscal policy can shift the level of aggregate demand, which in turn affects output and price levels. Finally, the rate of inflation and the unemployment rate move in opposite directions in the short run, which is illustrated by the Phillips curve.

6.1.1 Which of the following equations accurately represents the macroeconomic equilibrium in an open economy? Select one: a. Y = C + I + G b. Y = C + I + G − T c. Y = a + C + I + G d. Y = C + I + G + NX

d. Macroeconomic equilibrium exists when (Y) real GDP, or income, equals the sum of the spending plans of the players in the economy (C + I + G + NX).

6.1.1 Which of the following statements regarding the aggregate demand (AD) curve is correct? Select one: a. The AD curve illustrates the quantity of goods and services that households want to buy at every price. b. The AD curve shows the direct relationship between the demand of households and the aggregate price level. c. The AD curve has a positive slope. d. The AD curve represents the inverse relationship between the expenditures of households, businesses, government, and foreigners and the aggregate price level.

d. The aggregate demand curve illustrates the inverse relationship between aggregate expenditures and the aggregate price level. As the aggregate price level rises, households, businesses, government, and foreigners will demand less quantity. The opposite is true when the price level decreases.

6.1.2 he microeconomic demand curve Select one: a. shows how the substitution effect causes a decrease in quantity demanded as a result of increasing prices. b. shows how the income effect causes a decrease in quantity demanded as a result of increasing prices. c. measures the effect of nominal variables on other nominal variables. d. All of the above are correct.

d. The microeconomic demand curve shows how both the substitution and income effects cause a decrease in the quantity demanded as a result of increasing prices. The microeconomic demand curve also measures the effect of nominal variables on other nominal variables and assumes that the aggregate price level is constant.

6.3.2 Which of the following events most likely caused the aggregate demand curve to shift inward? Select one: a. The government increased spending. b. Consumers demanded more goods and services at every price level. c. The price of inputs increased. d. A tax increase reduced consumers' disposable income.

d. When the government increases taxes, disposable income decreases. Consumers have less to spend on goods and services, and the aggregate demand curve shifts inward.

6.2.2 The short-run aggregate supply (SRAS) curve slopes upward, because Select one: a. there is an inverse relationship between prices and output. b. firms cut back on production in the short run when prices increase. c. when prices rise, the quantity demanded decreases. d. confusion, sticky wages, and sticky prices provide businesses with profit opportunities in the short run.

d. When the prices of goods and services increase, the prices of inputs, such as labor, will remain relatively lower in the short run. Firms then increase production in the short run. Profits are earned when revenues rise at a faster rate than costs. The direct relationship between prices and output give the SRAS curve its upward slope.

6.3.3 Adaptive expectation formation means that Select one: a. people base their expectations of the future on what has occurred in the past. b. people base their expectations of the future on new information. c. people base their expectations of the future on prices. d. people base their expectations of the future on output.

a. Adaptive expectations are based on what has occurred in the past. If inflation was 10% last year and people hold adaptive expectations, they will assume that inflation will be 10% this year. If expectations are adaptive, it may take the economy a long time to reach long-run equilibrium.

6.3.4 In the short run, what is the effect of an outward shift in the aggregate demand curve? Select one: a. Prices and output rise. b. Prices rise, but output remains constant. c. Prices and output fall. d. Prices fall, but output increases.

a. Both output and prices rise, because demand is higher at every price level.

6.4.1 The Phillips curve illustrates Select one: a. the short-run tradeoff between inflation and unemployment. Correct b. the positive relationship between the aggregate price level and output in the short run. c. the relationship between tax rates and tax revenue. d. the inverse relationship between investment and the interest rate.

a. Economist A. W. Phillips observed the short-run inverse relationship between inflation and unemployment and created the downward-sloping Phillips curve.

6.4.2 The vertical Phillips curve implies that expansionary monetary policy can raise the rate of inflation. Select one: True False

False A vertical Phillips curve indicates just the opposite. According to classical economics, money is neutral in the long run and cannot affect real variables. The Phillips curve is vertical because output (a real variable) is not affected by changes in the money supply (a nominal variable).

6.3.3 Adaptive expectations will speed up the adjustment process that takes place when an economy operates above or below full employment. Select one: True False

False Adaptive expectations actually slow down the process. Thinking adaptively about the economy means looking backward and examining past economic behavior. Conclusions will be made relatively slowly, and the adjustment process will be slow.

6.2.3 Increasing prices will cause the short-run aggregate supply curve and the long-run aggregate supply curve to shift to the left. Select one: True False

False Changes in prices will cause a movement along the short-run aggregate supply curve, while the long-run aggregate supply curve is unaffected. Remember that there is no relationship between output and prices in the long run, and the long-run aggregate supply curve is vertical.

6.2.3 In the long run, the aggregate supply curve slopes upward, but in the short run the aggregate supply curve is vertical. Select one: True False

False In the short run, the aggregate supply curve slopes upward. According to Keynes, producers are able to profit from confusion about price changes, sticky wages, and sticky prices. As prices increase, production decreases; as prices decrease, production increases. In the long run, the aggregate supply is vertical. In the long run, there is no relationship between the price level and output.

6.4.1 In the long run, inflation and unemployment are closely related. Select one: True False

False Only in the short run are inflation and unemployment closely related. Remember that the Phillips curve (the short-run tradeoff between inflation and unemployment) is vertical in the long run. Output is independent of nominal variables.

6.4.1 A downward movement along the Phillips curve will cause an inward shift in the aggregate demand curve. Select one: True False

True A downward movement along the Phillips curve indicates lower inflation with higher unemployment. If unemployment is high, production and income decrease. Consumers alter their spending patterns and reduce demand because of lower income. The aggregate demand curve will shift inward.

6.3.1 Improvements in technology or resource endowments will shift the classical supply curve outward. Select one: True False

True According to the classical view, automatic adjustments of prices keep the economy at full employment. Therefore, the classical supply curve is vertical and represents the level of output that is possible if all resources are efficiently employed. Improvements in technology or resource endowments create opportunities for the economy to produce a higher level of full-employment output, and the classical supply curve will shift outward.

6.1.3 Government policy can shift the aggregate demand curve either inward or outward. Select one: True False

True The government is a part of the aggregate expenditures equation:Y = C + I + G + NX. If the government decides to increase its spending, the aggregate demand curve will shift outward. If the government decides to increase taxes, disposable income would decrease, and the aggregate demand curve will shift inward.

6.2.1 There are no profit opportunities in the long run. Select one: True False

True The long run is a period of time long enough for all prices to adjust. Because of this reason, firms are unable to profit from fixed, or "sticky" prices.

6.2.2 The minimum wage law can prevent immediate wage increases and allows firms to profit from lower labor costs and high revenue. Select one: True False

True The minimum wage law mandates the lowest wage employees can pay for labor. As the price level rises across the economy, it will take time for lawmakers to adjust the nominal wage to keep up with rising prices. In the meantime, firms will increase production and profits.

6.4.2 The Phillips curve's downward slope depends on rational expectations. Select one: True False

False The Phillips curve depends on adaptive expectations. If expectations in an economy were rational, the adjustments would be immediate and would not generate a trade-off. Because expectations are adaptive, there is a trade-off between inflation and unemployment.

6.4.1 An economy that operates faster than its natural level of full employment will experience high unemployment and unused resources. Select one: True False

False When an economy drives faster than the speed limit, there is a low rate of unemployment and increasing competition for scarce resources. Because of this competition, inflation increases, giving us the short-run trade-off between unemployment and inflation known as the Phillips curve.

6.2.1 In the short run, there is a positive relationship between the aggregate price level and the quantity of goods and services supplied. Select one: True False

True The short-run aggregate supply curve slopes upward to graphically illustrate the profit opportunities that exist in the short run. As the price level rises, sticky wages, sticky prices, and confusion cause the level of output to increase. When two variables move in the same direction, they are said to have a positive relationship.

6.3.2 Rising production costs will shift the short-run aggregate supply curve inward. Select one: True False

True When the costs of production rise, firms decide to produce less at every price. The short-run aggregate supply curve shifts inward.