Econ Ch 38. Extending the Analysis of Affregate Suppl

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.

Economists generally agree that the U.S. economy operates at a point on the Laffer Curve where which of the following is true?

An increase in personal tax rates will increase tax revenues.

An economy may travel down its short-run Phillips Curve as a result of which of the following?

Falling inflation and employment

Adverse aggregate supply shocks tend to cause which of the following?

Reduced output and rising prices

Stagflation is a period characterized by which of the following?

Rising unemployment and inflation rates

In the view of supply-side economists, reducing marginal tax rates encourages which of the following?

Saving and investing

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

2 to 3 percent

Which of the following actions could cause a recession?

A decrease in investment spending

Which of the following statements is true when the economy is at equilibrium in the short run?

A negative GDP gap is possible. A positive GDP gap is possible.

When the price level rises because the AD curve shifts rightward, the economy experiences which of the following?

Demand-pull inflation

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.

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

Lower

A higher than expected rate of inflation in the short run leads firms to increase production, resulting in which of the following?

Lower unemployment

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

Permanent

Increases in unemployment and inflation during the 1970s and early 1980s upended the notion of a stable ______.

Phillips Curve

Critics of supply-side economics point to evidence that shows decreases in wage-income tax rates result in which of the following?

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?

Stays at the natural rate of unemployment, even if the inflation rate changes

Demand-pull inflation is the result of which of the following?

The AD curve shifting to the right

Which of the following illustrates an inverse relationship between the rates of inflation and unemployment?

The Phillips Curve

According to economists, the inflation rate is consistent with which of the following in the long run?

The natural employment rate

The short-run aggregate supply curve is based on which of the following assumptions?

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.

When the government takes a hands-off approach to cost-push inflation, it does which of the following?

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

When is equilibrium achieved in the short run?

When the downward-sloping aggregate demand curve intersects the upward-sloping aggregate supply curve

What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve? a. In the short run, __________ plays a dominant role. b. In the long run, __________ plays a larger role in determining the outcome.

a. aggregate demand b. aggregate supply

b. 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.

When an economy's rate of inflation falls, it experiences . ___

disinflation

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

do not respond to price-level changes.

An economy may temporarily slide down along its short-run Phillips Curve if the expected inflation rate is ______.

higher than the actual inflation rate, so firms produce less as a result of weakening aggregate demand

In macroeconomics, the short run assumes that input prices are ______ while output prices are ______.

inflexible; flexible

b. The distinction between the short run and the long run is important in macroeconomics because of the differences in

policy responses.

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.

right; rise

In macroeconomics, input prices are assumed to be inflexible or even fixed in the . ____ ___

short run

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

What is the likely consequence of the government failing to intervene when cost-push inflation arises?

A lingering recession

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 lower price level

Most economists agree that, other things being equal, cuts in tax rates will result in which of the following?

A reduction in tax revenues proportionately smaller than the rate cuts

Higher costs of production result in which of the following?

A rise in the equilibrium price level A shift in the aggregate supply curve to the left

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 3 percentage points for every 1 percentage point drop in its unemployment rate. Graphically, did East Confetti's Phillips Curve shift upward or did it shift downward?

Downward

Suppose that over a 20-year period Buskerville's price level increased from 72 to 146, while its real GDP rose from $1.2 trillion to $2.3 trillion. a. Did economic growth occur in Buskerville? If so, by what average yearly rate in percentage terms? b. Did Buskerville experience inflation? If so, by what average yearly rate in percentage terms? c. Which shifted rightward faster in Buskerville: its long-run aggregate supply curve (ASLR) or its aggregate demand curve (AD)?

YES 4.6 YES 5.1 AD

In the view supply-side economists, cutting marginal tax rates will shift long-run aggregate supply due to ______.

higher investments in capital and technology

An economy will move up along the short-run Phillips Curve when the inflation rate is ______.

higher than expected, causing firms to hire more labor

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

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

marginal tax rate

The full-employment rate that occurs when cyclical unemployment is zero is known as the ______ unemployment rate.

natural

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 slow to emerge

Data plotted on the Phillips Curve demonstrates a correlation between which variables?

Inflation and unemployment

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.

According to one application of the extended AD-AS model, a decrease in aggregate demand causes which of the following?

Recession

How do firms respond when production costs rise as a result of nominal wages being negotiated upward due to inflationary pressure?

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?

They remain fixed.

Which of the following statements are true? Which are false? a. Short-run aggregate supply curves reflect an inverse relationship between the price level and the level of real output. b. The long-run aggregate supply curve assumes that nominal wages are fixed. c. In the long run, an increase in the price level will result in an increase in nominal wages.

a. false b. false c. true

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.

Sudden increases in the cost of resources that shift the short-run aggregate supply curve to the left are known as ______.

aggregate supply shocks

a. The Laffer Curve suggests that

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

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

cost-push inflation

True or false: By themselves, expansions of long-run aggregate supply in the economy are inflationary.

False

What causes short-run increases in the inflation rate to become persistent?

Increases in nominal wages that are negotiated in response to expected increases in inflation rates

According to the Laffer Curve, as tax rates rise from 0% to 100%, tax revenues will do which of the following?

Initially increase but eventually decrease

Which branch of economic theory stresses the importance of aggregate supply in determining inflation and unemployment rates?

Supply-side economics

Which of the following statements are supported by the extended AD-AS model?

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.

What happens to nominal wages in the short run when the price level decreases?

They remain unchanged.

In the long run, rapid increases in aggregate demand causes the economy to do which of the following?

Travel up along a vertical Phillips Curve

d. Does the intention of a tax increase matter?

Yes