Deck 16: Part B: Long-Run Macroeconomic Adjustments

Question 1

In the long run, cost-push inflation results in a simultaneous decrease in the price level and real output.

Answer 1

False

Question 2

Economists often recommend active monetary policy, and perhaps fiscal policy, to counteract the recessions.

Answer 2

True

Question 3

The long-run Phillips Curve is vertical at the natural rate of unemployment.

Answer 3

True

Question 4

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

Question 5

When the economy is experiencing cost-push inflation, an increase in aggregate demand will likely result in less inflation.

Question 6

If the government attempts to maintain full employment under conditions of cost-push inflation, deflation is likely to occur.

Question 7

The short-run aggregate supply curve shifts to the left when nominal wages rise in response to price level increases.

Question 8

Many economists accept the idea of a short-run tradeoff between the unemployment and inflation rates, but they do not think that there is such a tradeoff in the long run.

Question 9

The long-run aggregate supply curve is vertical.

Question 10

In the short run, demand-pull inflation will drive up the price level and increase real output; in the long run, only the price level will rise.

Question 11

Demand-pull inflation and cost-push inflation are identical concepts because both entail rising nominal wages and rising prices.

Question 12

The Phillips Curve suggests an inverse relationship between increases in the price level and the level of employment.

Question 13

An ongoing economic growth causes continuous leftward shifts of the aggregate supply which, by themselves, would tend to cause an ongoing deflation.

Question 14

An upward shift of the Phillips Curve is consistent with the occurrence of stagflation.

Question 15

More inflation is likely to result when the government enacts policies to maintain full employment when there is cost-push inflation.

Question 16

In the long-run firms respond to the lower profits by reducing their nominal wage increases.

Question 17

Most economists reject the idea of a long-run tradeoff between unemployment and inflation.

Question 18

A shift in the Phillips Curve to the left will improve the "inflation-unemployment" choices available to society.

Question 19

The characteristics of the long-run Phillips Curve suggest that the economy is generally stable at its natural rate of unemployment.

Question 20

The long-run Phillips Curve is essentially a horizontal line at the economy's natural rate of unemployment.

Question 21

If there is sufficient time for wage contracts to expire and nominal wage adjustments to occur, then the:

A)economy is operating in the short run.
B)economy has entered the long run.
C)unemployment rate will increase.
D)inflation rate will decrease.

Question 22

The economy enters the long run once:

A)nominal wages become real wages.
B)real wages become nominal wages.
C)input prices start to change from being inflexible to fully flexible.
D)sufficient time has elapsed for real GDP to increase and unemployment to decrease.

Question 23

With demand-pull inflation in the long-run AD-AS model, there is:

A)a decrease in aggregate demand that eventually increases nominal wages and causes a decrease in the short-run aggregate supply curve.
B)an increase in aggregate demand that eventually increases nominal wages and causes an increase in the short-run aggregate supply curve.
C)an increase in aggregate demand that eventually increases nominal wages and causes a decrease in the short-run aggregate supply curve.
D)an increase in aggregate demand that eventually increases nominal wages and causes a decrease in the short-run aggregate supply curve.

Question 24

The long-run aggregate supply curve:

A)is downward sloping.
B)is vertical.
C)is horizontal.
D)is upward sloping.

Question 25

Long-run equilibrium occurs where:

A)real output is greater than potential output.
B)the vertical long-run aggregate supply curve, and short-run aggregate supply curve intersect.
C)the aggregate demand curve, and short-run aggregate supply curve intersect
D)the aggregate demand curve, vertical long-run aggregate supply curve, and short-run aggregate supply curve all intersect.

Question 26

In the long-run aggregate demand-aggregate supply model:

A)long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply curve.
B)the long-run aggregate supply curve is horizontal.
C)the price level is the same regardless of the location of the aggregate demand curve.
D)long-run equilibrium occurs at the intersection of the aggregate demand curve, the short-run aggregate supply curve, and the long-run aggregate supply curve.

Question 27

The short-run aggregate supply curve is upward-sloping because:

A)higher prices discourage the producers to expand output.
B)higher price levels create incentives to expand output when resource prices remain constant.
C)lower prices encourage the producers to expand output.
D)higher price levels create an expectation among producers of still higher price levels.

Question 28

Refer to the above diagram.Assume that nominal wages initially are set on the basis of the price level P₂ and that the economy initially is operating at its full-employment level of output Q_f.In terms of this diagram, the long-run aggregate supply curve:

A)is AS₂.
B)is a vertical line extending from Q_f upward through e, b, and d.
C)may be either AS₁, AS₂, or AS₃ depending on whether the price level is P₁, P₂, or P₃.
D)is a horizontal line extending from P₂ rightward through f, b, and g.

Question 29

The Laffer Curve suggests that lower tax rates will decrease saving and increase consumption.

Question 30

The long-run aggregate supply curve is vertical:

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

Question 31

Other things equal, an increase in the price level will:

A)shift the short run aggregate supply curve to the right.
B)shift the aggregate demand curve to the right.
C)cause a movement up along a short-run aggregate supply curve.
D)cause a movement down a short run aggregate supply curve.

Question 32

The Laffer Curve shows the real world tradeoff between the price level and tax rates.

Question 33

The short run in macroeconomics is a period in which nominal wages:

A)remain fixed as the price level stays constant.
B)change as the price level stays constant.
C)remain fixed as the price level changes.
D)change as the price level changes.

Question 34

The Laffer Curve underlies the contention that lower tax rates need not reduce tax revenues.

Question 35

Refer to the diagram given below. Assume that nominal wages are initially set on the basis of the price level P₂ and that the economy is initially operating at the full-employment level of output Q_f.In the short run, an increase in the price level from P₂ to P₃ will:

A)shift the aggregate supply curve from AS₂ to AS₃.
B)increase the real output from Q₁ to Q₂.
C)shift the aggregate supply curve from AS₂ to AS₁.
D)increase the real output from Q_f to Q₂.

Question 36

In terms of aggregate supply, the difference between the long run and the short run is that in the long run:

A)the price level is variable.
B)employment is variable.
C)real output is variable.
D)nominal wages and other input prices are variable.

Question 37

Other things equal, a decrease in the price level will:

A)shift the short run aggregate supply curve to the left.
B)shift the aggregate demand curve to the left.
C)cause a movement up a short-run aggregate supply curve.
D)cause a movement down a short run aggregate supply curve.

Question 38

In terms of aggregate supply, the short run is a period in which:

A)the price level is constant.
B)employment is constant.
C)real GDP is constant.
D)nominal wages and other input prices are constant.

Question 39

The equilibrium price level and level of real output occur where:

A)real output is at its highest possible level.
B)exports equal imports.
C)price is at its lowest level.
D)the aggregate demand and supply curves intersect.

Question 40

In the short run, demand-pull inflation increases:

A)real wages, but in the long run only nominal wages.
B)nominal wages, but in the long run only real wages.
C)real output and the price level, but in the long-run only real output.
D)real output and the price level, but in the long-run only the price level.

Question 41

Refer to the graph below.Assume that the economy is in initial equilibrium where AS₁ intersects AD₁.Then a supply shock occurs that shifts AS₁ to AS₂.If the government counters with an expansionary fiscal policy that shifts AD₁ to AD₂, then it is most likely that:

A)AD₂ will shift to AD₁.
B)AS₂ will shift to AS₁.
C)AS₂ will shift to AS₃.
D)AS₂ will shift to AS₃ and AD₂ will shift to AD₁.

Question 42

One policy dilemma posed by cost-push inflation is that:

A)an increase in aggregate demand will increase inflation and the unemployment rate simultaneously.
B)tax rates can be reduced without lowering tax revenues.
C)the reduction of aggregate demand to restrain inflation will cause a further reduction in the real GDP.
D)the adjustment of aggregate demand can neither increase real GDP nor reduce inflation.

Question 43

The initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁.In the long run, the aggregate supply curve is vertical in the diagram because:

A)nominal wages and other input prices are assumed to be fixed.
B)real output level Q_f is the potential level of output.
C)price level increases produce perfectly offsetting changes in nominal wages and other input prices.
D)higher than expected rates of actual inflation reduce real output only temporarily.

Question 44

What will occur in the short run if there is cost-push inflation and if the government adopts a hands-off approach to it?

A)an increase in long-run aggregate supply
B)a decrease in long-run aggregate supply
C)low unemployment and a loss of real output
D)high unemployment and a loss of real output

Question 45

Refer to the above diagram.The initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁.If government offsets the decline in real output resulting from short-run cost-push inflation by increasing aggregate demand from AD₁ to AD₂:

A)real output will rise above Q_f.
B)the price level will rise from P₁ to P₂.
C)it is possible that aggregate supply will shift rightward from AS₂ because nominal wage demands will rise.
D)the price level will rise from P₂ to P₃.

Question 46

If prices and wages are flexible, a recession arising from a decrease in aggregate demand will:

A)decrease the price level.
B)increase the price level.
C)increase the interest rate.
D)increase net exports.

Question 47

Cost-push inflation results directly from a(n):

A)decrease in per unit production costs that shift the short-run aggregate supply curve to the right.
B)increase in per unit production costs that shift the short-run aggregate supply curve to the left
C)increase in government spending.
D)decrease in government regulation.

Question 48

Refer to the above diagram.The initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁.Demand-pull inflation in the short run is best shown as:

A)a shift of the aggregate demand curve from AD₁ to AD₂.
B)a move from d to b to a.
C)a move directly from d to a.
D)a shift of the aggregate supply curve from AS₁ to AS₂.

Question 49

Refer to the above diagram.The initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁.Cost-push inflation in the short run is best represented as a:

A)leftward shift of the aggregate supply curve from AS₁ to AS₂.
B)rightward shift of the aggregate demand curve from AD₁ to AD₂.
C)move from d to b to a.
D)move from d directly to a.

Question 50

Refer to the above graph.Given that the economy is at an initial equilibrium where the AD₁ and AS₁ curves intersect, demand-pull inflation in the short run can best be represented by a shift from:

A)AS₁ to AS₃.
B)AD₁ to AD₂.
C)AS₁ to AS₂.
D)AD₂ to AD₁.

Question 51

If government fiscal policy is used to restrain cost-push inflation, we can expect:

A)the unemployment rate to rise.
B)the unemployment rate to fall.
C)the aggregate demand curve to shift rightward.
D)tax-rate declines and increases in government spending.

Question 52

In the long run, demand-pull inflation:

A)increases unemployment.
B)decreases nominal wages.
C)decreases real output.
D)increases the price level.

Question 53

Demand-pull inflation in the short run increases the price level and:

A)real wages.
B)real output.
C)unemployment.
D)nominal wages.

Question 54

Refer to the above diagram.The initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁.In the long run, demand-pull inflation is best shown as:

A)a shift of aggregate demand from AD₁ to AD₂ followed by a shift of aggregate supply from AS₁ to AS₂.
B)a move from d to b to a.
C)a shift of aggregate supply from AS₁ to AS₂ followed by a shift of aggregate demand from AD₁ to AD₂.
D)a move from a to d.

Question 55

Refer to the above graph.Assume that the economy is at equilibrium at AD₁ and AS₁ and then is hit with both demand-pull and cost-push inflation.If this occurs, then, in the short run:

A)AD₁ will shift to AD₂, AS₂ will shift to AS₃, the price level will be at P₂, and output will be at Q₂.
B)AS₁ will shift to AS₃, AD₂ will shift to AD₁, the price level will be at P₃, and output will be at Q₃.
C)AD₁ will shift to AD₂, AS₁ will shift to AS₂, the price level will be at P₂, and output will be at Q₂.
D)AD₁ will shift to AD₂, AS₁ will shift to AS₂, the price level will be at P₃, and output will be at Q₁.

Question 56

If government uses its stabilization policies to maintain full employment under conditions of cost-push inflation:

A)a deflationary spiral is likely to occur.
B)an inflationary spiral is likely to occur.
C)stagflation is likely to occur.
D)the Phillips Curve is likely to shift inward.

Question 57

An increase in inflation is likely to occur when government:

A)counters cost-push inflation with a stimulative fiscal policy or monetary policy.
B)adopts a hands-off approach to cost-push inflation.
C)increases aggregate supply by lowering nominal wages.
D)increases aggregate demand by raising nominal wages.

Question 58

Refer to the diagram below.The initial aggregate demand curve is AD₁ and the initial aggregate supply curve is AS₁.Assuming no change in aggregate demand, the long-run response to a recession caused by cost-push inflation is best depicted as a:

A)move from a to d along the long-run aggregate supply curve.
B)rightward shift of the aggregate supply curve from AS₂ to AS₁.
C)move from a to c to d.
D)leftward shift of the aggregate supply curve from AS₁ to AS₂.

Question 59

In the long-run, the attempt to correct slow economic growth or the unemployment caused by cost-push inflation by implementing an expansionary fiscal policy will most likely produce:

A)disinflation.
B)a recession.
C)a price level surprise.
D)inflation

Question 60

Assuming prices and wages are flexible, a recession will decrease the price level, which:

A)raises nominal wages, and which eventually decreases the short-run aggregate supply curve, thus decreasing real output to its original level.
B)raises nominal wages, and which eventually increases the short-run aggregate supply curve, thus increasing real output to its original level.
C)reduces nominal wages, and which eventually decreases the short-run aggregate supply curve, thus decreasing real output to its original level.
D)reduces nominal wages, and which eventually increases the short-run aggregate supply curve, thus increasing real output to its original level.

Question 61

The Phillips Curve suggests a tradeoff between:

A)price level stability and income equality.
B)the level of unemployment and price level stability.
C)unemployment and income equality.
D)economic growth and full employment.

Question 62

Adverse aggregate supply shocks would result in:

A)a lower rate of inflation and a higher rate of unemployment.
B)a higher rate of inflation and a lower rate of unemployment.
C)a lower rate of inflation and a lower rate of unemployment.
D)a higher rate of inflation and a higher rate of unemployment.

Question 63

Refer to the above diagram for a specific economy.Which of the following best describes the relationship shown by this curve?

A)The demand for labor is large when the rate of inflation is small.
B)When the rate of unemployment is high, the rate of inflation is high.
C)The rate of inflation and the rate of unemployment are inversely related.
D)The rate of inflation and the rate of unemployment are directly related.

Question 64

Refer to the above diagram for a specific economy.The curve on this graph is known as a:

A)Laffer Curve.
B)Phillips Curve.
C)labor demand curve.
D)production possibilities curve.

Question 65

Aggregate supply shocks will:

A)move the economy along the Phillips Curve toward less unemployment.
B)move the economy along the Phillips Curve toward less inflation.
C)shift the Phillips Curve to the left.
D)shift the Phillips Curve to the right.

Question 66

Refer to the above diagram for a specific economy.An increase in aggregate demand will:

A)shift this curve to the right.
B)shift this curve to the left.
C)move this economy southeast along the curve.
D)move this economy northwest along the curve.

Question 67

Economic growth driven by supply factors causes:

A)continuous leftward shifts of aggregate supply.
B)a rightward shift of an economy's long-run aggregate supply.
C)one time shift in aggregate supply.
D)no shift in aggregate supply.

Question 68

A rightward shift of the Phillips Curve suggests that:

A)a higher rate of unemployment is associated with each inflation rate.
B)a lower rate of unemployment is associated with each inflation rate.
C)the aggregate supply curve has shifted to the right.
D)the aggregate demand curve has shifted to the left.

Question 69

The basic problem portrayed by the Phillips Curve is:

A)that a level of aggregate demand sufficiently high to result in full employment may also cause inflation.
B)that changes in the composition of total labor demand tend to be deflationary.
C)that unemployment rises at the same time the general price level is rising.
D)the possibility that automation will increase the level of noncyclical unemployment.

Question 70

Refer to the above diagram for a specific economy.Stagflation will:

A)shift this curve outward.
B)shift this curve inward.
C)move this economy southeast along the curve.
D)move this economy northwest along the curve.

Question 71

The Phillips Curve is based on the idea that with a constant short-run aggregate supply curve, a greater increase in aggregate demand is associated with a:

A)smaller increase in price level.
B)smaller increase in nominal wage rates.
C)greater increase in the unemployment rate.
D)greater increase in the rate of inflation.

Question 72

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.

Question 73

Although the increase in long-run aggregate supply (other things equal), would expand real GDP and lower the price level, the declines in the price level has not been part of Canada's growth experience.This is because:

A)the Bank of Canada has taken no action to change the nation's money supply.
B)the Bank of Canada has increased the money supply much less than the increase in aggregate supply.
C)the increase in the money supply by Bank of Canada has matched the increase in aggregate supply.
D)the Bank of Canada usually engineers inflationary rightward shifts of the aggregate demand curve that are faster than the deflationary rightward shifts of the aggregate supply curve.

Question 74

In the long-run, any inflation that occurs in the economy is the result of:

A)the reduction in the rate of increase in money supply.
B)the growth of aggregate supply.
C)the growth of aggregate demand.
D)the growth of real GDP.

Question 75

An "adverse aggregate supply shock" could result from:

A)a sharp rise in productivity.
B)a rapid rise in oil prices.
C)a decline in wages.
D)an appreciation of the dollar.

Question 76

Refer to the above diagram for a specific economy.The shape of this curve suggests that:

A)the price level rises at a diminishing rate as the level of aggregate demand increases.
B)full employment and price stability are compatible goals only when aggregate demand is falling.
C)each successive unit of decline in the unemployment rate is accompanied by a smaller increase in the rate of inflation.
D)each successive unit of decline in the unemployment rate is accompanied by a larger increase in the rate of inflation.

Question 77

A major adverse aggregate supply shock:

A)automatically shifts the aggregate demand curve rightward.
B)causes the Phillips Curve to shift outward.
C)can be caused by rising productivity.
D)can be caused by falling wages.

Question 78

The Phillips Curve suggests that, if government uses an expansionary fiscal policy to stimulate output and employment:

A)unemployment may actually increase because of the crowding-out effect.
B)tax revenues may increase even though tax rates have been reduced.
C)inflation may result.
D)the natural rate of unemployment may fall.

Question 79

The Phillips Curve reveals that with a constant short-run aggregate supply curve, the larger the increase in aggregate demand:

A)the lesser the increase in real output and the higher the rate of inflation.
B)the greater the increase in real output and the higher the rate of inflation.
C)the greater the increase in real output and the lower the rate of inflation.
D)the lesser the increase in real output and the lower the rate of inflation.

Question 80

Refer to the above diagram for a specific economy.Which of the following best describes a decision by policymakers which moves this economy from point b to point a?

A)Policymakers have instituted an expansionary money policy and/or a budgetary deficit, thereby accepting more unemployment to reduce the rate of inflation.
B)Policymakers have instituted a tight money policy and/or a budgetary surplus, thereby accepting a higher rate of inflation to reduce unemployment.
C)Policymakers have instituted an expansionary money and/or a budgetary deficit, thereby accepting a higher rate of inflation to reduce unemployment.
D)Policymakers have instituted a tight money policy and/or a budgetary surplus, thereby accepting more unemployment to reduce the rate of inflation.