Question 1

The long-run aggregate supply curve stays in a fixed position over time.

Accepted Answer

A) True 
 B)False

Question 2

According to the simple extended AD-AS model, cost-push inflation does not last in the long run if the government leaves the economy alone.

Accepted Answer

A) True 
 B)False

Question 3

In the graphs below, QP refers to the economy's potential output level. P refers to the economy's potential output level.   Refer to the graphs above. In Graph A, an increase in the price level from P1 to P2 will cause: A)  The nation's unemployment rate to be greater than the natural rate of unemployment B)  The nation's unemployment rate to be less than the natural rate of unemployment C)  Product prices to decrease D)  Profits to decrease" class="answers-bank-image d-inline" rel="preload" > Refer to the graphs above. In Graph A, an increase in the price level from P1 to P2 will cause:

Accepted Answer

A)   The nation's unemployment rate to be greater than the natural rate of unemployment
B)   The nation's unemployment rate to be less than the natural rate of unemployment
C)   Product prices to decrease
D)   Profits to decreaseE) A) and B)
F) B) and D)

Question 4

Supply-side economists recommend higher marginal tax rates to increase aggregate supply and real output.

Accepted Answer

A) True 
 B)False

Question 5

2, and then aggregate demand increases. In the short run, the economy will: A)  Stay at point B2 and remain there in the long run B)  Move to point C2 and in the long run move on to B3. C)  Move to point B3 and in the long run move on to C2. D)  Move to point B1 and in the long run move back to B2." class="answers-bank-image d-inline" rel="preload" > Refer to the graph above. The economy is at point B2, and then aggregate demand increases. In the short run, the economy will:

Accepted Answer

A)   Stay at point B2 and remain there in the long run
B)   Move to point C2 and in the long run move on to B3.
C)   Move to point B3 and in the long run move on to C2.
D)   Move to point B1 and in the long run move back to B2.E) None of the above
F) A) and C)

Question 6

1 and AS1 curves intersect. If cost-push inflation occurs and the government subsequently implements expansionary policy, then the effect of such policy is to shift: A)  AD1 to AD2, which increases the price level from P1 to P2, and increases real domestic output from Q3 to Q2 B)  AS1 to AS2, which increases the price level from P1 to P2, and decreases real output from Q1 to Q2 C)  AD1 to AD2, which increases the price level from P2 to P3, and increases real output from Q2 to Q1 D)  AS2 to AS3 which increases the price level from P2 to P3, and decreases real output from Q2 to Q3" class="answers-bank-image d-inline" rel="preload" > Refer to the graph above. Suppose that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect. If cost-push inflation occurs and the government subsequently implements expansionary policy, then the effect of such policy is to shift:

Accepted Answer

A)   AD1 to AD2, which increases the price level from P1 to P2, and increases real domestic output from Q3 to Q2
B)   AS1 to AS2, which increases the price level from P1 to P2, and decreases real output from Q1 to Q2
C)   AD1 to AD2, which increases the price level from P2 to P3, and increases real output from Q2 to Q1
D)   AS2 to AS3 which increases the price level from P2 to P3, and decreases real output from Q2 to Q3E) C) and D)
F) B) and D)

Question 7

In the long run, if the price level decreases, then the economy's output level will:

Accepted Answer

A)   Increase initially, but then fall back again
B)   Increase
C)   Decrease
D)   Stay the sameE) A) and B)
F) A) and C)

Question 8

The policy implication of the long-run Phillips Curve is that, while stimulative policies may work to reduce unemployment in the short run, the only effect of such policies in the long run is to raise inflation.

Accepted Answer

A) True 
 B)False

Question 9

Refer to the table above. Calculating the annual inflation rates would indicate that this economy is experiencing:

Accepted Answer

A)   Stagflation
B)   Deflation
C)   Disinflation
D)   Constant inflationE) A) and B)
F) A) and C)

Question 10

The economy enters the long-run once:

Accepted Answer

A)   Nominal wages become equal to real wages
B)   Real wages become equal to nominal wages
C)   Sufficient time has elapsed for wage contracts to expire and nominal wages to adjust to output-price changes
D)   Sufficient time has elapsed for real GDP to increase and unemployment to decrease as a consequenceE) A) and C)
F) None of the above

Question 11

In the short run, if the price level increases, then nominal wages:

Accepted Answer

A)   Stay fixed, therefore firms' revenues and profits will increase
B)   Stay fixed, and the firms' revenues and profits also stay the same
C)   Increase, causing firms' revenues and profits to fall
D)   Decrease, causing firms' revenues and profits to riseE) A) and B)
F) A) and C)

Question 12

1 and AS1 curves intersect. If cost-push inflation occurs and the government adopts a  hands-off  policy approach, then in the long run the price level will be at: A)  P1, and output will be at Q1 B)  P3, and output will be at Q1 C)  P2, and output will be at Q2 D)  P3, and output will be at Q3" class="answers-bank-image d-inline" rel="preload" > Refer to the graph above. Suppose that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect. If cost-push inflation occurs and the government adopts a "hands-off" policy approach, then in the long run the price level will be at:

Accepted Answer

A)   P1, and output will be at Q1
B)   P3, and output will be at Q1
C)   P2, and output will be at Q2
D)   P3, and output will be at Q3E) None of the above
F) A) and C)

Question 13

The traditional Phillips Curve shows the:

Accepted Answer

A)   Direct correlation between the rate of inflation and the unemployment rate
B)   Inverse correlation between the rate of inflation and the rate of unemployment
C)   Direct correlation between the short-run and long-run aggregate supply
D)   Inverse correlation between the short-run and long-run aggregate supplyE) A) and B)
F) A) and C)

Question 14

Assume that a person saves $50,000 and earns 7 percent annual interest. If the marginal tax rate is 36 percent, then the after-tax interest earning will be:

Accepted Answer

A)   $2000
B)   $2240
C)   $2760
D)   $3500E) All of the above
F) A) and D)

Question 15

In the graphs below, QP refers to the economy's potential output level. P refers to the economy's potential output level.   Refer to the graphs above. In Graph B, assume that the economy is initially in equilibrium at point x1 but then there is an increase in the price level from P1 to P2. In the long run, this change will lead to: A)  Lower nominal wages and a shift in the short-run aggregate supply curve from AS1 to AS2 B)  Higher nominal wages and a shift in the short-run aggregate supply curve from AS1 to AS2 C)  Lower nominal wages and a movement from equilibrium point x1 to equilibrium point x2 D)  Higher nominal wages and a movement from equilibrium point x1 to equilibrium point x2" class="answers-bank-image d-inline" rel="preload" > Refer to the graphs above. In Graph B, assume that the economy is initially in equilibrium at point x1 but then there is an increase in the price level from P1 to P2. In the long run, this change will lead to:

Accepted Answer

A)   Lower nominal wages and a shift in the short-run aggregate supply curve from AS1 to AS2
B)   Higher nominal wages and a shift in the short-run aggregate supply curve from AS1 to AS2
C)   Lower nominal wages and a movement from equilibrium point x1 to equilibrium point x2
D)   Higher nominal wages and a movement from equilibrium point x1 to equilibrium point x2E) A) and C)
F) A) and B)

Question 16

Which is a basic proposition of supply-side economics?

Accepted Answer

A)   The Federal Reserve should target the Federal funds rate rather than the money supply
B)   Tax-hikes on business reduce productivity and output and reduce aggregate supply
C)   Low marginal tax rates reduce incentives to work, saving, and investment
D)   Transfer payments increase incentives to workE) B) and D)
F) None of the above

Question 17

2 to T1 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" class="answers-bank-image d-inline" rel="preload" > Refer to the Laffer Curve above. A cut in the tax rate from T2 to T1 would:

Accepted Answer

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

Question 18

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

Accepted Answer

A)   Nominal rate of interest
B)   Current rate of inflation
C)   Real interest rate
D)   Natural rate of unemploymentE) A) and B)
F) A) and C)

Question 19

The Laffer Curve suggests that within a certain range, lower tax rates will increase tax revenues.

Accepted Answer

A) True 
 B)False

Question 20

Demand-pull inflation and cost-push inflation have similar effects on real output in the short run.

Accepted Answer

A) True 
 B)False

Exam 18: Extending the Analysis of Aggregate Supply

The long-run aggregate supply curve stays in a fixed position over time.

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Refer to the Laffer Curve above. A cut in the tax rate from T2 to T1 would:

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Demand-pull inflation and cost-push inflation have similar effects on real output in the short run.

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Which is a basic proposition of supply-side economics?

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In the short run, if the price level increases, then nominal wages:

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Refer to the graph above. The economy is at point B2, and then aggregate demand increases. In the short run, the economy will:

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In the graphs below, QP refers to the economy's potential output level. Refer to the graphs above. In Graph B, assume that the economy is initially in equilibrium at point x1 but then there is an increase in the price level from P1 to P2. In the long run, this change will lead to:

Correct AnswerverifiedShow Answer

According to the simple extended AD-AS model, cost-push inflation does not last in the long run if the government leaves the economy alone.

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

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The economy enters the long-run once:

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Refer to the graph above. Suppose that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect. If cost-push inflation occurs and the government subsequently implements expansionary policy, then the effect of such policy is to shift:

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Assume that a person saves $50,000 and earns 7 percent annual interest. If the marginal tax rate is 36 percent, then the after-tax interest earning will be:

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In the graphs below, QP refers to the economy's potential output level. Refer to the graphs above. In Graph A, an increase in the price level from P1 to P2 will cause:

Correct AnswerverifiedShow Answer

The policy implication of the long-run Phillips Curve is that, while stimulative policies may work to reduce unemployment in the short run, the only effect of such policies in the long run is to raise inflation.

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The Laffer Curve suggests that within a certain range, lower tax rates will increase tax revenues.

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Refer to the table above. Calculating the annual inflation rates would indicate that this economy is experiencing:

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The traditional Phillips Curve shows the:

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Supply-side economists recommend higher marginal tax rates to increase aggregate supply and real output.

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In the long run, if the price level decreases, then the economy's output level will:

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Refer to the graph above. Suppose that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect. If cost-push inflation occurs and the government adopts a "hands-off" policy approach, then in the long run the price level will be at:

Correct AnswerverifiedShow Answer

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Refer to the Laffer Curve above. A cut in the tax rate from T₂ to T₁ would:

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Refer to the graph above. The economy is at point B₂, and then aggregate demand increases. In the short run, the economy will:

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In the graphs below, Q_P refers to the economy's potential output level. Refer to the graphs above. In Graph B, assume that the economy is initially in equilibrium at point x₁ but then there is an increase in the price level from P₁ to P₂. In the long run, this change will lead to:

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Refer to the graph above. Suppose that the economy is at an initial equilibrium where the AD₁ and AS₁ curves intersect. If cost-push inflation occurs and the government subsequently implements expansionary policy, then the effect of such policy is to shift:

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In the graphs below, Q_P refers to the economy's potential output level. Refer to the graphs above. In Graph A, an increase in the price level from P₁ to P₂ will cause:

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Refer to the graph above. Suppose that the economy is at an initial equilibrium where the AD₁ and AS₁ curves intersect. If cost-push inflation occurs and the government adopts a "hands-off" policy approach, then in the long run the price level will be at:

Correct Answer
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