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Refer to the graph. An expansion of the economy's production possibilities can, by itself A) never cause inflation. B) never cause price level to fall. C) cause a decrease in real output. D) cause a decrease in employment level. Refer to the graph. An expansion of the economy's production possibilities can, by itself


A) never cause inflation.
B) never cause price level to fall.
C) cause a decrease in real output.
D) cause a decrease in employment level.

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

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Refer to the diagram. Supply-side economists believe that tax rates are typically A) such that an increase in tax rates will increase tax revenues. B) at some level below b. C) at some level above b. D) at d. Refer to the diagram. Supply-side economists believe that tax rates are typically


A) such that an increase in tax rates will increase tax revenues.
B) at some level below b.
C) at some level above b.
D) at d.

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

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Explain what happens in the extended aggregate demand and aggregate supply model when there is a recession.

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A recession occurs when aggregate-demand...

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According to the Laffer Curve, a cut in the tax rate from above the maximum-revenue rate to a rate lower than the maximum-revenue rate will


A) decrease real GDP.
B) increase tax revenues.
C) decrease tax revenues.
D) have no effect on tax revenues.

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

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Refer to the Laffer Curve. A cut in the tax rate from T T _ { 5 } \text { to } T _ { 4 } would A) decrease tax revenues and support the views of supply-side economists. B) increase tax revenues and support the views of supply-side economists. C) increase tax revenues and support the views of mainstream economists. D) decrease tax revenues and support the views of mainstream economists. Refer to the Laffer Curve. A cut in the tax rate from T T5 to T4T _ { 5 } \text { to } T _ { 4 } would


A) decrease tax revenues and support the views of supply-side economists.
B) increase tax revenues and support the views of supply-side economists.
C) increase tax revenues and support the views of mainstream economists.
D) decrease tax revenues and support the views of mainstream economists.

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

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When the rate of inflation is decreasing, this economic condition is called


A) disinflation.
B) depreciation.
C) stagflation.
D) deflation.

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

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Refer to the graph. Assume that the economy is initially at full-employment equilibrium at point A. If there is cost-push in?ation in this economy and the government pursues an expansionary ?scal Policy, then in the long run the A) price level will rise from P _ { 1 } \text { to } P _ { 2 } \text { and real output will be } Q _ { 2 } \text {. } B) price level will rise from P _ { 1 } \text { to } P _ { 3 } \text { and real output will be } Q _ { 1 } \text {. } C) price level will rise from P _ { 1 } \text { to } P _ { 2 } \text { and real output will be } Q _ { 3 } \text {. } D) price level will be P _ { 1 } \text { and real output will be } Q _ { 1 } \text {. } Refer to the graph. Assume that the economy is initially at full-employment equilibrium at point A. If there is cost-push in?ation in this economy and the government pursues an expansionary ?scal Policy, then in the long run the


A) price level will rise from P1 to P2 and real output will be Q2. P _ { 1 } \text { to } P _ { 2 } \text { and real output will be } Q _ { 2 } \text {. }
B) price level will rise from P1 to P3 and real output will be Q1. P _ { 1 } \text { to } P _ { 3 } \text { and real output will be } Q _ { 1 } \text {. }
C) price level will rise from P1 to P2 and real output will be Q3. P _ { 1 } \text { to } P _ { 2 } \text { and real output will be } Q _ { 3 } \text {. }
D) price level will be P1 and real output will be Q1. P _ { 1 } \text { and real output will be } Q _ { 1 } \text {. }

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

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From the perspective of supply-side economists, a cut in tax rates will


A) increase output but will increase the budget deficit.
B) increase unemployment but will reduce the budget deficit.
C) reduce unemployment but will increase the budget deficit.
D) reduce unemployment and also reduce the budget deficit.

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

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If the government adopts a hands-off approach to cost-push inflation in the economy, then in the short run there is likely to be


A) a rise in real output.
B) a fall in unemployment.
C) an inflationary spiral.
D) a recession.

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

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One criticism against supply-side cuts in marginal tax rates is that they fail to


A) decrease disinflation in the economy.
B) decrease demand-pull inflation in the economy.
C) increase aggregate supply more rapidly than aggregate demand.
D) increase aggregate demand more rapidly than aggregate supply.

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

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The long-run aggregate supply curve is vertical


A) because the rate of inflation is steady in the long run.
B) because resource prices eventually rise and fall with product prices.
C) because product prices tend to increase at a faster rate than resource prices.
D) only when the money supply increases at the same rate as real GDP.

E) All of the above
F) None of the above

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Refer to the diagram. Assume both upward and downward price and wage flexibility in the economy. In the extended AD-AS model, A) demand-pull inflation would involve a rightward shift of curve A, followed by a rightward shift of curve C. B) cost-push inflation would involve a leftward shift of curve C, followed by an upward shift of curve B. C) recession would involve a leftward shift of curve A. D) a rightward shift of curve D would be equivalent to an outward shift of the nation's production possibilities curve. Refer to the diagram. Assume both upward and downward price and wage flexibility in the economy. In the extended AD-AS model,


A) demand-pull inflation would involve a rightward shift of curve A, followed by a rightward shift of curve C.
B) cost-push inflation would involve a leftward shift of curve C, followed by an upward shift of curve B.
C) recession would involve a leftward shift of curve A.
D) a rightward shift of curve D would be equivalent to an outward shift of the nation's production possibilities curve.

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

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The adjustment mechanism that brings the economy to its long-run aggregate supply has to do with inflation expectations, whereas the adjustment to the long-run Phillips curve has to do with wage flexibility.

A) True
B) False

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In the long run,


A) attempts to "fine-tune" the economy cause the rate of unemployment to accelerate.
B) there is no inflation-unemployment trade-off.
C) there is an inflation-unemployment trade-off, and the terms of that trade-off have worsened in recent years.
D) there is an inflation-unemployment trade-off, but the terms of that trade-off have improved in recent years.

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

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When the actual rate of inflation exceeds the expected rate


A) the unemployment rate will temporarily rise.
B) firms will experience rising profits and thus increase their employment.
C) the actual rate of inflation will fall.
D) nominal wages will decline.

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

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A) \mathrm { AS } _ { 1 } \text { to the right. } B) A D _ { 1 } \text { to the right. } C) \mathrm { AS } _ { 1 } \text { to the left. } D) \mathrm { AD } _ { 1 } \text { to the left. }


A) AS1 to the right. \mathrm { AS } _ { 1 } \text { to the right. }
B) AD1 to the right. A D _ { 1 } \text { to the right. }
C) AS1 to the left. \mathrm { AS } _ { 1 } \text { to the left. }
D) AD1 to the left. \mathrm { AD } _ { 1 } \text { to the left. }

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

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A) decrease tax revenues and support the views of supply-side economists. B) increase tax revenues and support the views of supply-side economists. C) increase tax revenues and support the views of mainstream economists. D) decrease tax revenues and support the views of mainstream economists.


A) decrease tax revenues and support the views of supply-side economists.
B) increase tax revenues and support the views of supply-side economists.
C) increase tax revenues and support the views of mainstream economists.
D) decrease tax revenues and support the views of mainstream economists.

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

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Refer to the diagram. The long-run aggregate supply curve is A) A. B) B. C) C. D) D. Refer to the diagram. The long-run aggregate supply curve is


A) A.
B) B.
C) C.
D) D.

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

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In the context of the Phillips curve, stagflation can only be understood as a rightward shift of the curve.

A) True
B) False

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In the extended analysis of aggregate supply, the short-run aggregate supply curve is


A) vertical and the long-run aggregate supply curve is horizontal.
B) horizontal and the long-run aggregate supply curve is vertical.
C) upsloping and the long-run aggregate supply curve is vertical.
D) horizontal and the long-run aggregate supply curve is upsloping.

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

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