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


A) unemployment may actually increase because of the crowding-out effect.
B) tax revenues may increase even though tax rates have been reduced.
C) the inflation rate will increase.
D) the natural rate of unemployment may fall.

E) A) and D)
F) B) and C)

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(Last Word) According to the research of Christina Romer and David Romer, tax increases implemented to reduce an inherited budget deficit


A) reduce real output by the same amount as any other tax increase.
B) reduce real output by more than other tax increases.
C) reduce real output by less than other tax increases.
D) increase real output, contrary to what occurs with other tax increases.

E) None of the above
F) B) and D)

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Refer to the diagram. Assume that the natural rate of unemployment is 5 percent and that the economy is initially operating at point a, where the expected and actual rates of inflation are each 6 Percent. In the long run, the decline in the actual rate of inflation from 6 percent to 4 percent will A) reduce the unemployment rate. B) reduce corporate profits in real terms. C) have no effect on the unemployment rate. D) reduce real domestic output. Refer to the diagram. Assume that the natural rate of unemployment is 5 percent and that the economy is initially operating at point a, where the expected and actual rates of inflation are each 6 Percent. In the long run, the decline in the actual rate of inflation from 6 percent to 4 percent will


A) reduce the unemployment rate.
B) reduce corporate profits in real terms.
C) have no effect on the unemployment rate.
D) reduce real domestic output.

E) All of the above
F) B) and C)

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Which of the following is a true statement?


A) Under normal conditions, there is a short-run trade-off between inflation and unemployment.
B) There is a long-run trade-off between inflation and unemployment.
C) The short-run Phillips Curve is vertical.
D) The long-run Phillips Curve is horizontal.

E) A) and D)
F) B) and C)

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The Phillips Curve suggests an inverse relationship between increases in the price level and the level of employment.

A) True
B) False

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The inflation and unemployment data for the 1970s suggest that the aggregate-supply shocks of that period caused the


A) relationship between the unemployment rate and the rate of inflation to remain stable and predictable and to exhibit a clear trade-off.
B) relationship between the unemployment rate and the rate of inflation to be similar to that found during the 1960s.
C) Phillips Curve to shift to the right.
D) Phillips Curve to shift to the left.

E) A) and D)
F) A) and C)

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Supply-side economists contend that aggregate supply is the relevant policy factor in influencing the price level and real output in an economy.

A) True
B) False

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The short-run Phillips Curve assumes an unchanging


A) actual rate of inflation.
B) expected rate of inflation.
C) unemployment rate.
D) fiscal or monetary policy.

E) C) and D)
F) A) and B)

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Refer to the diagram. Assume the economy is initially at point b1. With a time lag between price and nominal wage adjustments, an increase in aggregate demand will temporarily move the economy From A) b _ { 2 } \text { to } b _ { 1 } B) c _ { 1 } \text { to } b _ { 2 } C) b _ { 1 } \text { to } c _ { 1} D) b _ { 1 } \text { to } b _ { 2 } Refer to the diagram. Assume the economy is initially at point b1. With a time lag between price and nominal wage adjustments, an increase in aggregate demand will temporarily move the economy From


A) b2 to b1b _ { 2 } \text { to } b _ { 1 }
B) c1 to b2c _ { 1 } \text { to } b _ { 2 }
C) b1 to c1b _ { 1 } \text { to } c _ { 1}
D) b1 to b2b _ { 1 } \text { to } b _ { 2 }

E) B) and C)
F) None of the above

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Refer to the graph. A movement from point C to point D on the Laffer Curve represents A) increased tax rates from T _ { 2 } \text { to } T _ { 3 } \text { and increased tax revenues from } R _ { 2 } \text { to } R _ { 3 } \text {. } B) decreased tax rates from T _ { 3 } \text { to } T _ { 2 } \text { and increased tax revenues from } R _ { 2 } \text { to } R _ { 3 } \text {. } C) decreased tax rates from T _ { 3 } \text { to } T _ { 2 } \text { and decreased tax revenues from } R _ { 3 } \text { to } R _ { 2 } D) increased tax rates from T _ { 2 } \text { to } T _ { 3 } \text { and decreased tax revenues from } R _ { 3 } \text { to } R _ { 2 } Refer to the graph. A movement from point C to point D on the Laffer Curve represents


A) increased tax rates from T2 to T3 and increased tax revenues from R2 to R3. T _ { 2 } \text { to } T _ { 3 } \text { and increased tax revenues from } R _ { 2 } \text { to } R _ { 3 } \text {. }
B) decreased tax rates from T3 to T2 and increased tax revenues from R2 to R3. T _ { 3 } \text { to } T _ { 2 } \text { and increased tax revenues from } R _ { 2 } \text { to } R _ { 3 } \text {. }
C) decreased tax rates from T3 to T2 and decreased tax revenues from R3 to R2T _ { 3 } \text { to } T _ { 2 } \text { and decreased tax revenues from } R _ { 3 } \text { to } R _ { 2 }
D) increased tax rates from T2 to T3 and decreased tax revenues from R3 to R2T _ { 2 } \text { to } T _ { 3 } \text { and decreased tax revenues from } R _ { 3 } \text { to } R _ { 2 }

E) A) and D)
F) A) and C)

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The Laffer Curve shows the trade-off between the price level and tax rates.

A) True
B) False

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If cost-push inflation occurs and the government adopts a hands-off policy approach, then, according to the simple extended AD-AS model, in the long run the economy will


A) get back to where it started from.
B) get stuck with high unemployment.
C) experience an inflationary spiral.
D) have a higher price level.

E) A) and B)
F) All of the above

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The natural rate of unemployment


A) can vary over time and defines the location of the long-run aggregate supply curve.
B) is constant over time and defines the location of the long-run aggregate supply curve.
C) varies over time in response to changes in aggregate demand.
D) is inversely related to the price level.

E) A) and B)
F) A) and C)

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The basic problem portrayed by the traditional Phillips Curve is


A) that a level of aggregate demand sufficiently high to result in full employment may also cause inflation.
B) that changes in the composition of total labor demand tend to be deflationary.
C) that unemployment rises at the same time the general price level is rising.
D) the possibility that automation will increase the level of noncyclical unemployment.

E) A) and B)
F) B) and C)

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Explain the basic arguments for supply-side economics.

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Supply-side economists stress that chang...

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


A) the price level changes.
B) the rate of inflation changes.
C) nominal wages and other input prices change.
D) aggregate demand changes.

E) B) and C)
F) B) and D)

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A shift in the Phillips Curve to the left will improve the short-run inflation-unemployment choices available to society.

A) True
B) False

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(Last Word) According to the research of Christina Romer and David Romer,


A) a tax reduction of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.
B) a tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.
C) a tax reduction of 2 to 3 percent raises real GDP by roughly 1 percent.
D) a tax increase of 2 to 3 percent lowers real GDP by roughly 1 percent.

E) A) and D)
F) All of the above

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What is the misery index? Why do economists find it to be a flawed measure?

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The sum of the unemployment rate and the...

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Refer to the diagram and assume the economy is initially at point b1. The long-run relationship between the unemployment rate and the rate of in?ation is represented by A) the line connecting b _ { 1 } \text { and } c _ { 1 } \text {. } B) the line through b _ { 1 } , b _ { 2 } , b _ { 3 } , \text { and } b _ { 4 } C) the line connecting c _ { 1 } \text { and } b _ { 2 } \text {. } D) any line parallel to the horizontal axis. Refer to the diagram and assume the economy is initially at point b1. The long-run relationship between the unemployment rate and the rate of in?ation is represented by


A) the line connecting b1 and c1. b _ { 1 } \text { and } c _ { 1 } \text {. }
B) the line through b1,b2,b3, and b4b _ { 1 } , b _ { 2 } , b _ { 3 } , \text { and } b _ { 4 }
C) the line connecting c1 and b2. c _ { 1 } \text { and } b _ { 2 } \text {. }
D) any line parallel to the horizontal axis.

E) C) and D)
F) A) and B)

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