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The short-run Phillips Curve intersects the long-run Phillips Curve at the


A) nominal rate of interest.
B) current rate of inflation.
C) real interest rate.
D) natural rate of unemployment.

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

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If the expected rate of inflation rises, then the short-run Phillips Curve will


A) shift to the right.
B) shift to the left.
C) become vertical.
D) become flat.

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

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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. If the actual rate of inflation unexpectedly falls from 6 percent to 4 percent, then the Unemployment rate will A) temporarily fall from 5 percent to 4 percent. B) permanently fall from 5 percent to 4 percent. C) temporarily rise from 5 percent to 7 percent. D) permanently rise from 5 percent to 7 percent. 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. If the actual rate of inflation unexpectedly falls from 6 percent to 4 percent, then the Unemployment rate will


A) temporarily fall from 5 percent to 4 percent.
B) permanently fall from 5 percent to 4 percent.
C) temporarily rise from 5 percent to 7 percent.
D) permanently rise from 5 percent to 7 percent.

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

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The level of potential output and location of the long-run aggregate supply curve are determined by


A) Federal Reserve policy.
B) the price level.
C) the intersection of aggregate demand and short-run aggregate supply.
D) the natural rate of unemployment.

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

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Differentiate between "demand-pull" and "cost-push" inflation in the extended aggregate demand and aggregate supply model.

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Demand-pull inflation occurs when an incr...

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Refer to the diagram. If the tax rate is currently c and the government wants to maximize tax revenue, it should A) leave the tax rate at c. B) increase the tax rate to d. C) reduce the tax rate to b. D) reduce the tax rate to a. Refer to the diagram. If the tax rate is currently c and the government wants to maximize tax revenue, it should


A) leave the tax rate at c.
B) increase the tax rate to d.
C) reduce the tax rate to b.
D) reduce the tax rate to a.

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

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Refer to the graphs, where the subscripts on the labels denote years 1 and 2. From the graphs we can conclude that from year 1 to year 2, A) the economy recovered from a recession. B) the economy experienced economic growth and inflation. C) output grew and the unemployment rate fell. D) the government engaged in expansionary fiscal and monetary policies. Refer to the graphs, where the subscripts on the labels denote years 1 and 2. From the graphs we can conclude that from year 1 to year 2,


A) the economy recovered from a recession.
B) the economy experienced economic growth and inflation.
C) output grew and the unemployment rate fell.
D) the government engaged in expansionary fiscal and monetary policies.

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

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Suppose the full employment level of real output (Q) for a hypothetical economy is $500, the price level (P) initially is 100, and prices and wages are flexible both upward and downward. Refer to the Accompanying short-run aggregate supply schedules. In the long run, an increase in the price level From 100 to 125 will A) increase real output from $500 to $560. B) decrease real output from $500 to $440. C) change the aggregate supply schedule from (a) to (c) and result in an equilibrium level of real output of $560. D) change the aggregate supply schedule from (a) to (b) and result in an equilibrium level of real output of $500. Suppose the full employment level of real output (Q) for a hypothetical economy is $500, the price level (P) initially is 100, and prices and wages are flexible both upward and downward. Refer to the Accompanying short-run aggregate supply schedules. In the long run, an increase in the price level From 100 to 125 will


A) increase real output from $500 to $560.
B) decrease real output from $500 to $440.
C) change the aggregate supply schedule from (a) to (c) and result in an equilibrium level of real output of $560.
D) change the aggregate supply schedule from (a) to (b) and result in an equilibrium level of real output of $500.

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

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A basic criticism of supply-side economics is that


A) empirical research clearly shows that incentives to work and invest vary directly with marginal tax rates.
B) lower taxes will increase aggregate supply much more than they will increase aggregate demand.
C) lower taxes will increase aggregate demand much more than they will increase aggregate supply.
D) higher taxes will reduce incentives to work, invest, and innovate.

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

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One central idea in supply-side economics concerning budget deficits is illustrated by the


A) production possibilities curve.
B) aggregate supply curve.
C) Laffer Curve.
D) Phillips Curve.

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

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An adverse aggregate supply shock


A) automatically shifts the aggregate demand curve rightward.
B) causes the Phillips Curve to shift leftward and downward.
C) can be caused by a boost in the rate of growth of productivity.
D) can cause stagflation.

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

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The implication of the long-run Phillips Curve is that there is no trade-off between inflation and unemployment in the long-run.

A) True
B) False

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Given a Phillips Curve with stable and predictable inflation and unemployment rate trade-offs, it appears that


A) an expansionary fiscal policy can shift the curve to the left.
B) a tight money policy can shift the curve to the right.
C) manipulating aggregate demand through fiscal and monetary policies has the effect of causing a movement along the curve.
D) manipulating aggregate demand through fiscal and monetary policies has the effect of shifting the curve.

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

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Refer to the diagram. The general agreement of most economists is that the U.S. economy today is A) at b. B) at some level below b. C) at some level above b. D) at d. Refer to the diagram. The general agreement of most economists is that the U.S. economy today is


A) at b.
B) at some level below b.
C) at some level above b.
D) at d.

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

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In the accompanying graphs, Q Q _ { P } refers to the economy's potential output level. Graph A is Constructed on the basic assumption that A) the price level is not ?exible. B) nominal wages are unresponsive to price-level changes. C) real output is unresponsive to price-level changes. D) unemployment is unresponsive to price-level changes. In the accompanying graphs, Q QPQ _ { P } refers to the economy's potential output level. Graph A is Constructed on the basic assumption that


A) the price level is not ?exible.
B) nominal wages are unresponsive to price-level changes.
C) real output is unresponsive to price-level changes.
D) unemployment is unresponsive to price-level changes.

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

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Refer to the diagram. If the price level rises above P _ { 1 } because of an increase in aggregate demand, The A) economy will move up along curve B and output will temporarily increase. B) long-run aggregate supply curve C will shift upward. C) short-run aggregate supply curve B will automatically shift to the right. D) economy's output ?rst will decline, then increase, and ?nally return to Q _ { 1 } Refer to the diagram. If the price level rises above P1P _ { 1 } because of an increase in aggregate demand, The


A) economy will move up along curve B and output will temporarily increase.
B) long-run aggregate supply curve C will shift upward.
C) short-run aggregate supply curve B will automatically shift to the right.
D) economy's output ?rst will decline, then increase, and ?nally return to Q1Q _ { 1 }

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

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Suppose the full employment level of real output (Q) for a hypothetical economy is $500, the price level (P) initially is 100, and prices and wages are flexible both upward and downward. Refer to the Accompanying short-run aggregate supply schedules. If the price level unexpectedly declines from 100 to 75, the level of real output in the short run will A) rise from $500 to $560. B) fall from $500 to $440. C) fall from $560 to $500. D) rise from $440 to $500. Suppose the full employment level of real output (Q) for a hypothetical economy is $500, the price level (P) initially is 100, and prices and wages are flexible both upward and downward. Refer to the Accompanying short-run aggregate supply schedules. If the price level unexpectedly declines from 100 to 75, the level of real output in the short run will


A) rise from $500 to $560.
B) fall from $500 to $440.
C) fall from $560 to $500.
D) rise from $440 to $500.

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

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Refer to the diagram. Assume that nominal wages initially are set based on the price level P<sub>2</sub> and that the economy initially is operating at its full-employment level of output Q<sub>f</sub>. In terms of this diagram, the long-run aggregate supply curve A) \mathrm { AS } _ { 2 } B) is a vertical line extending from Q _ { f } upward through e, b, and d. C) may be either A A S _ { 1 } , A S _ { 2 } , \text { or } A S _ { 3 } depending on whether the price level is P _ { 1 } , P _ { 2 } \text {, or } P _ { 3 } D) is a horizontal line extending from P _ { 2 } rightward through f, b, and g. Refer to the diagram. Assume that nominal wages initially are set based on 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


A) AS2\mathrm { AS } _ { 2 }
B) is a vertical line extending from QfQ _ { f } upward through e, b, and d.
C) may be either A AS1,AS2, or AS3A S _ { 1 } , A S _ { 2 } , \text { or } A S _ { 3 } depending on whether the price level is
P1,P2, or P3P _ { 1 } , P _ { 2 } \text {, or } P _ { 3 }
D) is a horizontal line extending from P2P _ { 2 } rightward through f, b, and g.

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

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(Last Word) The Romer and Romer paper, "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," identified the major motivations for most significant Legislated tax changes to be the following, except


A) adjustments made to match changes in government spending.
B) offsetting the monetary policy pursued by the Federal Reserve.
C) addressing an inherited budget deficit.
D) promoting long-run economic growth.

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

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Which action will tend to decrease aggregate supply, according to supply-side economists?


A) a decrease in government spending
B) an increase in the stock of capital
C) a decrease in the money supply
D) an increase in marginal tax rates

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

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