Question 1

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

Accepted Answer

The answer of Explain what happens in the extended aggregate...

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

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 economists.

Question 4

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

Accepted Answer

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.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Refer to the diagram. Assume both upward and downward price and wage ﬂexibility in the economy. In the extended AD-AS model,

Accepted Answer

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.

Question 7

Refer to the Laffer Curve. A cut in the tax rate from T $T _ { 5 } \text { to } T _ { 4 }$ 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 economists.

Question 8

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

Accepted Answer

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.

Question 9

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

Accepted Answer

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.

Question 10

When the actual rate of inﬂation exceeds the expected rate

Accepted Answer

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.

Question 11

Refer to the diagram. Supply-side economists believe that tax rates are typically

Accepted Answer

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.

Question 12

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

Accepted Answer

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

Question 13

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

Accepted Answer

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

Question 14

The long-run aggregate supply curve is vertical

Accepted Answer

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.

Question 15

In the long run,

Accepted Answer

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.

Question 16

Refer to the graph. An expansion of the economy's production possibilities can, by itself

Accepted Answer

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.

Question 17

Refer to the diagram. The long-run aggregate supply curve is

Accepted Answer

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

Question 18

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

Accepted Answer

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 $P _ { 1 } \text { and real output will be } Q _ { 1 } \text {. }$

Question 19

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

Accepted Answer

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

Question 20

Accepted Answer

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)  $\mathrm { AD } _ { 1 } \text { to the left. }$

Exam 18: Extending the Analysis of Aggregate Supply

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

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.

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

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

Refer to the diagram. Assume both upward and downward price and wage ﬂexibility in the economy. In the extended AD-AS model,

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

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

When the actual rate of inﬂation exceeds the expected rate

Refer to the diagram. Supply-side economists believe that tax rates are typically

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

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

The long-run aggregate supply curve is vertical

In the long run,

Refer to the graph. An expansion of the economy's production possibilities can, by itself

Refer to the diagram. The long-run aggregate supply curve is

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

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

Exam 18: Extending the Analysis of Aggregate Supply

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

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.

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

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

Refer to the diagram. Assume both upward and downward price and wage ﬂexibility in the economy. In the extended AD-AS model,

Refer to the Laffer Curve. A cut in the tax rate from T T5 to T4T _ { 5 } \text { to } T _ { 4 }T5​ to T4​ would

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

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

When the actual rate of inﬂation exceeds the expected rate

Refer to the diagram. Supply-side economists believe that tax rates are typically

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

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

The long-run aggregate supply curve is vertical

In the long run,

Refer to the graph. An expansion of the economy's production possibilities can, by itself

Refer to the diagram. The long-run aggregate supply curve is

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

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