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According to the simple extended AD-AS model, aggregate demand is a major determinant of the level of output in the long run.

A) True
B) False

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In the last half of the 1990s, the usual short-run trade-off between inflation and unemployment did not arise because


A) the Fed held interest rates constant.
B) the federal government balanced its budget.
C) the U.S. personal savings rate rose.
D) productivity (and thus aggregate supply) grew faster than previously.

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

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In the diagram, A) any rate of inflation is consistent with the natural rate of unemployment in the long run. B) inflation can occur, but disinflation cannot occur. C) unemployment rates exceeding the natural rate are permanent. D) unemployment rates less than the natural rate are permanent. In the diagram,


A) any rate of inflation is consistent with the natural rate of unemployment in the long run.
B) inflation can occur, but disinflation cannot occur.
C) unemployment rates exceeding the natural rate are permanent.
D) unemployment rates less than the natural rate are permanent.

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

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


A) increase initially, but then fall back again.
B) increase.
C) decrease.
D) stay the same.

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

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In the curve, a decline in the tax rate from c to b would A) increase tax revenue. B) decrease tax revenue. C) leave tax revenue about the same as before. D) shift the curve to the left. In the curve, a decline in the tax rate from c to b would


A) increase tax revenue.
B) decrease tax revenue.
C) leave tax revenue about the same as before.
D) shift the curve to the left.

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

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

A) True
B) False

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Refer to the graph. Assume the economy is at the initial position of B _ { 2 } . An increase in aggregate Demand with a corresponding adjustment in in?ation expectations and wages will tend to A) move the economy to point B _ { 3 } B) move the economy to point C _ { 2 } C) move the economy to point C _ { 1 } . D) have no effect in shifting the economy from point B _ { 2 } Refer to the graph. Assume the economy is at the initial position of B2B _ { 2 } . An increase in aggregate Demand with a corresponding adjustment in in?ation expectations and wages will tend to


A) move the economy to point B3B _ { 3 }
B) move the economy to point C2C _ { 2 }
C) move the economy to point C1.C _ { 1 } .
D) have no effect in shifting the economy from point B2B _ { 2 }

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

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Refer to the graphs, where the subscripts on the labels denote years 1 and 2. In year 1 the economy A) is in long-run equilibrium at output Q _ { 1 } . B) is in short-run equilibrium at output Q _ { 1 } , but not in long-run equilibrium. C) cannot be in long-run equilibrium because output changes in period 2. D) is in a recession, based on output Q _ { 1 } being below output Q _ { 2 } Refer to the graphs, where the subscripts on the labels denote years 1 and 2. In year 1 the economy


A) is in long-run equilibrium at output Q1.Q _ { 1 } .
B) is in short-run equilibrium at output Q1Q _ { 1 } , but not in long-run equilibrium.
C) cannot be in long-run equilibrium because output changes in period 2.
D) is in a recession, based on output Q1Q _ { 1 } being below output
Q2Q _ { 2 }

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

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A) P _ { 1 } \text {, and output will be at } Q _ { 1 } \text {. } B) P _ { 3 } \text {, and output will be at } Q _ { 1 } \text {. } C) P _ { 2 } \text {, and output will be at } Q _ { 2 } \text {. } D) P _ { 3 } \text {, and output will be at } Q _ { 3 } \text {. }


A) P1, and output will be at Q1. P _ { 1 } \text {, and output will be at } Q _ { 1 } \text {. }
B) P3, and output will be at Q1. P _ { 3 } \text {, and output will be at } Q _ { 1 } \text {. }
C) P2, and output will be at Q2. P _ { 2 } \text {, and output will be at } Q _ { 2 } \text {. }
D) P3, and output will be at Q3. P _ { 3 } \text {, and output will be at } Q _ { 3 } \text {. }

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

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Refer to the diagram and assume that prices and wages are flexible both upward and downward 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 rightward shift of curve A, followed by a leftward shift of curve C. C) recession would involve a leftward shift of curve A, followed by a rightward shift of curve C. D) recession would involve a rightward shift of curve D, followed by leftward shifts of curves A and C. Refer to the diagram and assume that prices and wages are flexible both upward and downward 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 rightward shift of curve A, followed by a leftward shift of curve C.
C) recession would involve a leftward shift of curve A, followed by a rightward shift of curve C.
D) recession would involve a rightward shift of curve D, followed by leftward shifts of curves A and C.

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

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 Average Tax Rate  Tax Revenue ($B) 20%$250403006025080200\begin{array} { | c | c | } \hline \text { Average Tax Rate } & \text { Tax Revenue } ( \$ B ) \\\hline 20 \% & \$ 250 \\\hline 40 & 300 \\\hline 60 & 250 \\\hline 80 & 200 \\\hline\end{array} Refer to the table. If the current tax rate is 60 percent, supply-side economists would advocate


A) lowering tax rates to 20 percent, or lower if possible.
B) lowering tax rates to 40 percent.
C) keeping tax rates at 60 percent.
D) raising tax rates to 80 percent.

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

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Based on the long-run Phillips Curve, any rate of inflation is compatible in the long run with the natural rate of unemployment.

A) True
B) False

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Refer to the graph. Assume that the economy is initially at equilibrium at point C and that the government has adopted a hands-off policy approach. If demand-pull inflation occurs, then the final Long-run equilibrium point will be point __; while if cost-push inflation occurs (starting at point C) , then the final long-run equilibrium point will be point __. A) A; C B) D; B C) A; A D) D; A Refer to the graph. Assume that the economy is initially at equilibrium at point C and that the government has adopted a hands-off policy approach. If demand-pull inflation occurs, then the final Long-run equilibrium point will be point __; while if cost-push inflation occurs (starting at point C) , then the final long-run equilibrium point will be point __.


A) A; C
B) D; B
C) A; A
D) D; A

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

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Adverse aggregate-supply shocks or stagflation would cause a


A) movement up along a stable Phillips Curve.
B) movement down along a stable Phillips Curve.
C) shift of the Phillips Curve to the left.
D) shift of the Phillips Curve to the right.

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

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The short-run aggregate supply curve illustrates the idea that if the price level falls, firms will experience


A) falling input costs, so they will increase their output level.
B) no change in input costs, so they will not change their output level.
C) falling inputs costs, so they will reduce their output level.
D) no change in input costs, so they will reduce their output level.

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

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Refer to the graph. If the economy is in initial equilibrium at AD A D _ { 1 } \text { and } A S _ { 1 } , then, from a strict supply- Side perspective, a cut in taxes or tax rates would produce an equilibrium price and quantity of A) P _ { 1 } \text { and } Q _ { 1 } \text {. } B) P _ { 2 } \text { and } Q _ { 2 } C) P _ { 3 } \text { and } Q _ { 3 } D) P _ { 4 } \text { and } Q _ { 4 } Refer to the graph. If the economy is in initial equilibrium at AD AD1 and AS1A D _ { 1 } \text { and } A S _ { 1 } , then, from a strict supply- Side perspective, a cut in taxes or tax rates would produce an equilibrium price and quantity of


A) P1 and Q1. P _ { 1 } \text { and } Q _ { 1 } \text {. }
B) P2 and Q2P _ { 2 } \text { and } Q _ { 2 }
C) P3 and Q3P _ { 3 } \text { and } Q _ { 3 }
D) P4 and Q4P _ { 4 } \text { and } Q _ { 4 }

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

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

A) True
B) False

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How do supply-side economists see reducing taxes as a way to improve productivity?

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Supply-side economists believe that lowe...

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Refer to the diagram and assume the economy is initially at point b _ { 1 } \text {. Point } c _ { 1 } represents A) a stable position because reality and expectations are consistent. B) a stable position because full employment and a constant annual in?ation rate are represented. C) an unstable situation because government will undertake contractionary policies. D) an unstable situation because nominal wage rates will increase. Refer to the diagram and assume the economy is initially at point b1. Point c1b _ { 1 } \text {. Point } c _ { 1 } represents


A) a stable position because reality and expectations are consistent.
B) a stable position because full employment and a constant annual in?ation rate are represented.
C) an unstable situation because government will undertake contractionary policies.
D) an unstable situation because nominal wage rates will increase.

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

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If prices and wages are flexible, a decrease in aggregate demand will in the long run cause only a(n)


A) decrease in the price level.
B) increase in the price level.
C) increase in the unemployment rate.
D) decrease in real output.

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

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