Question 1

1. If workers fully anticipate price level increases and government uses expansionary policies to lower the unemployment rate below 6 percent, the economy will: A)  move from B1 to C1, at which point macroeconomic policies will cease to be effective. B)  remain at B1. C)  follow the path indicated by B1, B2, B3, and B4. D)  follow the path indicated by B1, C1, B2, C2, B3, etc." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram and assume the economy is initially at point b1. If workers fully anticipate price level increases and government uses expansionary policies to lower the unemployment rate below 6 percent, the economy will:

Accepted Answer

A)   move from B1 to C1, at which point macroeconomic policies will cease to be effective.
B)   remain at B1.
C)   follow the path indicated by B1, B2, B3, and B4.
D)   follow the path indicated by B1, C1, B2, C2, B3, etc.E) All of the above
F) A) and B)

Question 2

If the government attempts to maintain full employment under conditions of cost-push inflation, deflation is likely to occur.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)   the price level is variable.
B)   employment is variable.
C)   real output is variable.
D)   nominal wages and other input prices are variable.E) B) and D)
F) B) and C)

Question 4

3 to point C3 because of an increase in aggregate demand, then: A)  nominal wages will rise, reducing profits and thereby negating the short-run stimulus to production and employment so that the economy moves from C3 to B4. B)  real wages will rise, reducing profits and thereby negating the short-run stimulus to production and employment so that the economy moves from C3 to B3. C)  nominal wages will rise, reducing profits and thereby negating the short-run stimulus to production and employment so that the economy moves from C3 to B3. D)  nominal wages will rise, reducing profits and thereby negating the short-run stimulus to production and employment so that the economy moves from C3 to C2." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above graph. If the economy moves from point B3 to point C3 because of an increase in aggregate demand, then:

Accepted Answer

A)   nominal wages will rise, reducing profits and thereby negating the short-run stimulus to production and employment so that the economy moves from C3 to B4.
B)   real wages will rise, reducing profits and thereby negating the short-run stimulus to production and employment so that the economy moves from C3 to B3.
C)   nominal wages will rise, reducing profits and thereby negating the short-run stimulus to production and employment so that the economy moves from C3 to B3.
D)   nominal wages will rise, reducing profits and thereby negating the short-run stimulus to production and employment so that the economy moves from C3 to C2.E) A) and D)
F) A) and C)

Question 5

Prominent supply-side economist Arthur Laffer has argued that:

Accepted Answer

A)   there is no empirically proven relationship between tax rates and incentives.
B)   large reductions in personal and corporate income taxes will increase aggregate supply much more than aggregate demand.
C)   the only way to eliminate stagflation is to increase taxes to induce a recession severe enough to eliminate inflationary expectations.
D)   large cuts in personal and corporate income taxes will increase aggregate demand more than aggregate supply.E) B) and D)
F) B) and C)

Question 6

In the long-run, any inflation that occurs in the economy is the result of:

Accepted Answer

A)   the reduction in the rate of increase in money supply.
B)   the growth of aggregate supply.
C)   the growth of aggregate demand.
D)   the growth of real GDP.E) C) and D)
F) B) and D)

Question 7

1 shifts to AD2, and wages and prices are flexible, then in the long run the price level will be:  A)  P2, and real output will be Qf. B)  P3, and real output will be Qf. C)  P1, and real output will be Qf. D)  P2, and real output will be Q1." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above graph. Assume that the economy is initially at equilibrium at point A. If there is a recession in the economy such that AD1 shifts to AD2, and wages and prices are flexible, then in the long run the price level will be:

Accepted Answer

A)   P2, and real output will be Qf.
B)   P3, and real output will be Qf.
C)   P1, and real output will be Qf.
D)   P2, and real output will be Q1.E) B) and C)
F) B) and D)

Question 8

In the long run, cost-push inflation results in a simultaneous decrease in the price level and real output.

Accepted Answer

A) True 
 B)False

Question 9

2 and that the economy initially is operating at its full-employment level of output Q f. In the short run, an increase in the price level from P2 to P3 will: A)  change aggregate supply from AS2 to AS3. B)  increase real output from Q1 to Q2. C)  change aggregate supply from AS2 to AS1. D)  increase real output from Q f to Q2." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Q f. In the short run, an increase in the price level from P2 to P3 will:

Accepted Answer

A)   change aggregate supply from AS2 to AS3.
B)   increase real output from Q1 to Q2.
C)   change aggregate supply from AS2 to AS1.
D)   increase real output from Q f to Q2.E) B) and C)
F) B) and D)

Question 10

The Laffer Curve shows the real world tradeoff between the price level and tax rates.

Accepted Answer

A) True 
 B)False

Question 11

Supply-side economists say that:

Accepted Answer

A)   lower tax rates on businesses will shift the aggregate supply curve rightward.
B)   demand creates its own supply.
C)   tariffs should be imposed on imports to shift the Canadian aggregate supply curve rightward.
D)   the federal budget deficit should be eliminated through increases in taxes.E) A) and D)
F) None of the above

Question 12

In the long-run aggregate demand-aggregate supply model:

Accepted Answer

A)   long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply curve.
B)   the long-run aggregate supply curve is horizontal.
C)   the price level is the same regardless of the location of the aggregate demand curve.
D)   long-run equilibrium occurs at the intersection of the aggregate demand curve, the short-run aggregate supply curve, and the long-run aggregate supply curve.E) A) and C)
F) B) and C)

Question 13

The Phillips Curve reveals that with a constant short-run aggregate supply curve, the larger the increase in aggregate demand:

Accepted Answer

A)   the lesser the increase in real output and the higher the rate of inflation.
B)   the greater the increase in real output and the higher the rate of inflation.
C)   the greater the increase in real output and the lower the rate of inflation.
D)   the lesser the increase in real output and the lower the rate of inflation.E) A) and B)
F) None of the above

Question 14

Refer to the graph below. The effects of stagflation, in the short run, are best represented by a shift from: 1 to AD2 given a stable AS1 curve, an increase in the price level from P1 to P2, and a fall in output from Q1 to Q2. B)  AD2 to AD1 given a stable AS1 curve, an increase in the price level from P1 to P2, and a fall in output from Q1 to Q2. C)  AS1 to AS2 given a stable AD1 curve, an increase in the price level from P1 to P2, and a fall in output from Q1 to Q2. D)  AS2 to AS1 given a stable AD1 curve, an increase in the price level from P1 to P2, and a fall in output from Q1 to Q2." class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)   AD1 to AD2 given a stable AS1 curve, an increase in the price level from P1 to P2, and a fall in output from Q1 to Q2.
B)   AD2 to AD1 given a stable AS1 curve, an increase in the price level from P1 to P2, and a fall in output from Q1 to Q2.
C)   AS1 to AS2 given a stable AD1 curve, an increase in the price level from P1 to P2, and a fall in output from Q1 to Q2.
D)   AS2 to AS1 given a stable AD1 curve, an increase in the price level from P1 to P2, and a fall in output from Q1 to Q2.E) B) and C)
F) A) and C)

Question 15

Demand-pull inflation and cost-push inflation are identical concepts because both entail rising nominal wages and rising prices.

Accepted Answer

A) True 
 B)False

Question 16

2 and that the economy initially is operating at its full-employment level of output Qf. In terms of this diagram, the long-run aggregate supply curve: A)  is AS2. B)  is a vertical line extending from Qf upward through e, b, and d. C)  may be either AS1, AS2, or AS3 depending on whether the price level is P1, P2, or P3. D)  is a horizontal line extending from P2 rightward through f, b, and g." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf. In terms of this diagram, the long-run aggregate supply curve:

Accepted Answer

A)   is AS2.
B)   is a vertical line extending from Qf upward through e, b, and d.
C)   may be either AS1, AS2, or AS3 depending on whether the price level is P1, P2, or P3.
D)   is a horizontal line extending from P2 rightward through f, b, and g.E) B) and C)
F) A) and B)

Question 17

Economists often recommend active monetary policy, and perhaps fiscal policy, to counteract the recessions.

Accepted Answer

A) True 
 B)False

Question 18

1 and the initial aggregate supply curve is AS1. Demand-pull inflation in the short run is best shown as: A)  a shift of the aggregate demand curve from AD1 to AD2. B)  a move from d to b to a. C)  a move directly from d to a. D)  a shift of the aggregate supply curve from AS1 to AS2." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. Demand-pull inflation in the short run is best shown as:

Accepted Answer

A)   a shift of the aggregate demand curve from AD1 to AD2.
B)   a move from d to b to a.
C)   a move directly from d to a.
D)   a shift of the aggregate supply curve from AS1 to AS2.E) C) and D)
F) A) and B)

Question 19

Refer to the graph below. Assume that the economy is in initial equilibrium where AS1 intersects AD1. Then a supply shock occurs that shifts AS1 to AS2. If the government counters with an expansionary fiscal policy that shifts AD1 to AD2, then it is most likely that: 1 intersects AD1. Then a supply shock occurs that shifts AS1 to AS2. If the government counters with an expansionary fiscal policy that shifts AD1 to AD2, then it is most likely that:   A)  AD2 will shift to AD1. B)  AS2 will shift to AS1. C)  AS2 will shift to AS3. D)  AS2 will shift to AS3 and AD2 will shift to AD1." class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)   AD2 will shift to AD1.
B)   AS2 will shift to AS1.
C)   AS2 will shift to AS3.
D)   AS2 will shift to AS3 and AD2 will shift to AD1.E) A) and B)
F) A) and C)

Question 20

The Phillips Curve suggests that, if government uses an expansionary fiscal policy to stimulate output and employment:

Accepted Answer

A)   unemployment may actually increase because of the crowding-out effect.
B)   tax revenues may increase even though tax rates have been reduced.
C)   inflation may result.
D)   the natural rate of unemployment may fall.E) All of the above
F) None of the above

Exam 15: Long-Run Macroeconomic Adjustments

If the government attempts to maintain full employment under conditions of cost-push inflation, deflation is likely to occur.

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Refer to the graph below. The effects of stagflation, in the short run, are best represented by a shift from:

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Prominent supply-side economist Arthur Laffer has argued that:

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

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The Phillips Curve suggests that, if government uses an expansionary fiscal policy to stimulate output and employment:

Correct AnswerverifiedShow Answer

-Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. Demand-pull inflation in the short run is best shown as:

Correct AnswerverifiedShow Answer

The Laffer Curve shows the real world tradeoff between the price level and tax rates.

Correct AnswerverifiedShow Answer

In the long run, cost-push inflation results in a simultaneous decrease in the price level and real output.

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-Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Q f. In the short run, an increase in the price level from P2 to P3 will:

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Refer to the graph below. Assume that the economy is in initial equilibrium where AS1 intersects AD1. Then a supply shock occurs that shifts AS1 to AS2. If the government counters with an expansionary fiscal policy that shifts AD1 to AD2, then it is most likely that:

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In the long-run, any inflation that occurs in the economy is the result of:

Correct AnswerverifiedShow Answer

Demand-pull inflation and cost-push inflation are identical concepts because both entail rising nominal wages and rising prices.

Correct AnswerverifiedShow Answer

The Phillips Curve reveals that with a constant short-run aggregate supply curve, the larger the increase in aggregate demand:

Correct AnswerverifiedShow Answer

-Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf. In terms of this diagram, the long-run aggregate supply curve:

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-Refer to the above diagram and assume the economy is initially at point b1. If workers fully anticipate price level increases and government uses expansionary policies to lower the unemployment rate below 6 percent, the economy will:

Correct AnswerverifiedShow Answer

-Refer to the above graph. Assume that the economy is initially at equilibrium at point A. If there is a recession in the economy such that AD1 shifts to AD2, and wages and prices are flexible, then in the long run the price level will be:

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-Refer to the above graph. If the economy moves from point B3 to point C3 because of an increase in aggregate demand, then:

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In the long-run aggregate demand-aggregate supply model:

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Supply-side economists say that:

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Economists often recommend active monetary policy, and perhaps fiscal policy, to counteract the recessions.

Correct AnswerverifiedShow Answer

Correct Answer
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-Refer to the above diagram. The initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁. Demand-pull inflation in the short run is best shown as:

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-Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P₂ and that the economy initially is operating at its full-employment level of output Q _f. In the short run, an increase in the price level from P₂ to P₃ will:

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Refer to the graph below. Assume that the economy is in initial equilibrium where AS₁ intersects AD₁. Then a supply shock occurs that shifts AS₁ to AS₂. If the government counters with an expansionary fiscal policy that shifts AD₁ to AD₂, then it is most likely that:

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-Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P₂ and that the economy initially is operating at its full-employment level of output Q_f. In terms of this diagram, the long-run aggregate supply curve:

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-Refer to the above diagram and assume the economy is initially at point b₁. If workers fully anticipate price level increases and government uses expansionary policies to lower the unemployment rate below 6 percent, the economy will:

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-Refer to the above graph. Assume that the economy is initially at equilibrium at point A. If there is a recession in the economy such that AD₁ shifts to AD₂, and wages and prices are flexible, then in the long run the price level will be:

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-Refer to the above graph. If the economy moves from point B₃ to point C₃ because of an increase in aggregate demand, then:

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