Deck 18: Extending the Analysis of Aggregate Supply

Question 1

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:

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

Answer 1

The nation's unemployment rate to be less than the natural rate of unemployment

Question 2

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

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 rise

Answer 2

Stay fixed, therefore firms' revenues and profits will increase

Question 3

In the short run, the price level is assumed to be:

A) Fixed, along with input prices
B) Flexible, but input prices are not
C) Flexible, along with input prices
D) Fixed, but input prices are flexible

Answer 3

Flexible, but input prices are not

Question 4

In the graphs below, Q_P refers to the economy's potential output level. Refer to the graphs above. Graph A is constructed on the basic assumption that:

A) The price level is not flexible
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

Question 5

In the graphs below, Q_P refers to the economy's potential output level. Refer to the graphs above. In Graph A, a decrease in the price level from P₁ to P₃ will lead to:

A) A decrease in profits, an increase in real output, and a decrease in the unemployment rate
B) A decrease in profits, a decrease in real output, and a decrease in the unemployment rate
C) A decrease in profits, a decrease in real output, and an increase in the unemployment rate
D) An increase in profits, an increase in real output, and a decrease in the unemployment rate

Question 6

In the short run, nominal wages and other input prices are assumed to be:

A) Unresponsive to product price-level changes, but in the long run they are assumed to be responsive
B) Unresponsive to product price-level changes, and in the long run they are assumed to be unresponsive also
C) Responsive to product price-level changes, but in the long run they are assumed to be unresponsive
D) Responsive to product price-level changes, and in the long run they are assumed to be responsive also

Question 7

Assume that initially your nominal wage was $16 an hour and the price index was 100. If the price level increases to 105, then your:

A) Real wage has increased to $21
B) Real wage has decreased to $15.24
C) Nominal wage has increased to $21
D) Nominal wage has decreased to $15.24

Question 8

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

Question 9

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:

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

Question 10

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. This change will lead to:

A) A movement from x₁ to x₂ in the short run, and the unemployment rate decreases, followed by a shift from x₂ to y₁ as nominal wages rise in the long run
B) A movement from x₁ to x₃ in the short run, and the unemployment rate decreases, followed by a shift from x₃ to x₁ as output rises in the long run
C) A movement from x₁ to y₁ in the short run, and back to x₁ in the long run
D) No change in the short run, but a shift from x₁ to y₁ in the long run

Question 11

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

Question 12

In the long run, demand-pull inflation leads to:

A) Higher unemployment and higher price level
B) Lower real wages and higher unemployment
C) Lower real output and no change in unemployment
D) Higher price level and no change in real output

Question 13

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

A) Real wages
B) Real output
C) The unemployment rate
D) Nominal wages

Question 14

The short-run aggregate supply curve:

A) Is vertical and the long-run aggregate supply curve is vertical
B) Slopes upward and the long-run aggregate supply curve also slopes upward
C) Slopes upward, but the long-run aggregate supply curve is horizontal
D) Slopes upward, but the long-run aggregate supply curve is vertical

Question 15

Inflation in the short run is most likely to result from a(n):

A) Increase in aggregate demand or aggregate supply
B) Decrease in aggregate demand or aggregate supply
C) Increase in aggregate demand or a decrease in aggregate supply
D) Decrease in aggregate demand or an increase in aggregate supply

Question 16

The short-run aggregate supply curve intersects the long-run aggregate supply curve at:

A) A constant price level
B) The potential level of real output
C) The equilibrium level of aggregate demand
D) The point where real GDP equals nominal GDP

Question 17

In the long run, demand-pull inflation:

A) Starts out with a shift in the AS curve, but no shift of the AD curve
B) Starts out with a rightward shift in the AD curve, followed by a resulting leftward shift of the short-run AS curve
C) Starts out with a leftward shift in the AD curve, followed by a resulting rightward shift of the short-run AS curve
D) Involves a shift of the AD curve only, with no shift of the AS curve

Question 18

The economy enters the long-run once:

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 consequence

Question 19

In the long run, if the price level increases, then nominal wages and other input prices:

A) Also rise, so firms will reduce their output level
B) Also rise, so firms will not change their output level
C) Not change, so firms will not change their output level
D) Decrease, so firms will increase their output level

Question 20

Equilibrium in the long run occurs when:

A) AD intersects the short-run AS, regardless of output level
B) AD intersects the short-run AS, regardless of price level
C) AD intersects the short-run and the long-run AS curves at the same point
D) The short-run AS curve intersects the long-run AS curve

Question 21

Refer to the graph above. Ongoing inflation would occur if the Fed:

A) Increases the money supply causing AD to shift faster than technological progress shifts AS
B) Increases the money supply causing AD to shift slower than technological progress shifts AS
C) Increases the money supply causing AD to shift as fast as technological progress shifts AS
D) Does not increase the money supply while technological progress is shifting AS

Question 22

In the cost-push model of inflation, increases in nominal-wage rates that exceed increases in the productivity of labor:

A) Increase aggregate supply and the price level in the economy
B) Increase aggregate supply and decrease the price level in the economy
C) Decrease aggregate supply and the price level in the economy
D) Decrease aggregate supply and increase the price level in the economy

Question 23

The traditional Phillips Curve showing a tradeoff between inflation and unemployment is based on having a stable:

A) Aggregate demand and a shifting short-run aggregate supply
B) Short-run aggregate supply and a shifting aggregate demand
C) Long-run aggregate supply and a shifting aggregate demand
D) Aggregate demand and a shifting long-run aggregate supply

Question 24

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 25

Refer to the graph above. Suppose that the economy is at an initial equilibrium where the AD₁ and AS₁ curves intersect. Demand-pull inflation in the long run can best be illustrated as a shift of:

A) AS₁ to AS₂, and back again to AS₁
B) AD₁ to AD₂, and back again to AD₁
C) AS₁ to AS₂, consequently making AD₁ shift to AD₂
D) AD₁ to AD₂, consequently making AS₁ shift to AS₂

Question 26

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

A) An increase in real output
B) An inflationary spiral
C) Low unemployment and a loss of real output
D) High unemployment and a loss of real output

Question 27

If cost-push inflation occurs and the government adopts a "hands-off" policy approach, then according to the simple extended AD-AS model, in the long run the economy will:

A) Get back to where it started from
B) Get stuck with high unemployment
C) Experience an inflationary spiral
D) Have a higher price level

Question 28

If the government uses expansionary monetary or fiscal policies to counter the output-effects of cost-push inflation, then the economy is likely to experience:

A) A decline in nominal wages
B) An inflationary spiral
C) A recession
D) Disinflation

Question 29

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:

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

Question 30

Refer to the graph above. 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

Question 31

Refer to the graph above. Economic growth driven by productivity and technology would be illustrated as a shift of:

A) AD₁ to AD₂
B) P₁ to P₂
C) AS₂ to AS₁
D) AS_LR1 to AS_LR2

Question 32

Refer to the graph above. Suppose 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 as a shift of:

A) AS₁ to the right
B) AD₁ to the right
C) AS₁ to the left
D) AD₁ to the left

Question 33

The traditional Phillips Curve shows the:

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 supply

Question 34

Refer to the graph above. Stagflation in the short run is best represented as resulting from a shift of:

A) AD₁ to AD₂ given a stable AS₁ curve
B) AD₂ to AD₁ given a stable AS₁ curve
C) AS₁ to AS₂ given a stable AD₁ curve
D) AS₂ to AS₁ given a stable AD₁ curve

Question 35

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:

A) A rise in real output
B) A fall in unemployment
C) An inflationary spiral
D) A recession

Question 36

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:

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

Question 37

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

Question 38

Refer to the graph above. If Q_f is potential GDP, wages and prices are flexible, then the long-run aggregate supply curve will be:

A) AS₂
B) AS₁
C) A vertical line at Q_f
D) A vertical line at Q₁

Question 39

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

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 40

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

A) A decrease in aggregate demand and a decrease in unemployment that eventually increases nominal wages
B) An increase in aggregate demand and a decrease in unemployment that eventually decreases nominal wages
C) An increase in aggregate demand and an increase in unemployment that eventually decreases nominal wages
D) An increase in aggregate demand and a decrease in unemployment that eventually increases nominal wages

Question 41

Refer to the graph above. Assume the economy is at the initial position of B₂. It is possible for the government to reduce the unemployment rate and move the economy to C₂ if:

A) Expected inflation remains at 4%
B) Expected inflation becomes 8%
C) Actual inflation remains at 4%
D) Actual inflation is at 12%

Question 42

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

Question 43

Which factor contributed to the demise of stagflation during the 1982-1989 period?

A) A lessening of foreign competition
B) The decline of the monopoly power of OPEC
C) An increase in the per-unit cost of production
D) An increase in regulation of airline and trucking industries

Question 44

A rightward shift of the Phillips Curve suggests that:

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

Question 45

Refer to the graphs above. Assume that the economy is initially at equilibrium where AD₂ and AS intersect in Graph 1, and also assume that the economy is initially at point C in Graph 2. A movement from point C to point B in graph 2 would most likely be associated, in graph 1, with a shift of:

A) AD to the right
B) AD to the left
C) AS to the right
D) AS to the left

Question 46

Given a Phillips Curve with stable and predictable inflation and unemployment rate tradeoffs, 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

Question 47

Stagflation's demise during the 1980s resulted in a:

A) Movement along the Phillips Curve toward less unemployment
B) Movement along the Phillips Curve toward more inflation
C) Shift in the Phillips Curve to the left
D) Shift in the Phillips Curve to the right

Question 48

A potential cause of stagflation is:

A) Agricultural surpluses
B) Declining productivity
C) Improving labor productivity
D) A rise in the value of the dollar

Question 49

Refer to the graphs above. Assume that the economy is initially at equilibrium where AD₂ and AS intersect in Graph 1, and also assume that the economy is initially at point C in Graph 2. If the government implements contractionary or restrictive policy, it would make the economy in graph 2 to:

A) Move from point C to point B
B) Move from point C to point A
C) Move from point C to point D
D) Remain at point C

Question 50

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 51

Refer to the graph above. The economy is at point B₂, 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.

Question 52

Refer to the graph above. Assume the economy is at the initial position of B₂. An increase in aggregate demand with no corresponding change in inflation expectations and wage rates will tend to:

A) Temporarily move the economy to point B₃
B) Temporarily move the economy to point C₂
C) Temporarily move the economy to point C₁
D) Have no effect in shifting the economy from point B₂

Question 53

The inflation and unemployment data for the 1970s suggest that the aggregate-supply shocks of that period caused the:

A) Relationship between the unemployment rate and the rate of inflation to remain stable, predictable, and exhibited a clear tradeoff
B) Relationship between the unemployment rate and the rate of inflation to be similar to that found during the 1960 and 1969 period
C) Phillips Curve to shift to the right
D) Phillips Curve to shift to the left

Question 54

Refer to the graph above. Assume the economy is at the initial position of B₂. An increase in aggregate demand with a corresponding adjustment in inflation expectations and wages will tend to:

A) Move the economy to point B₃
B) Move the economy to point C₂
C) Move the economy to point C₁
D) Have no effect in shifting the economy from point B₂

Question 55

Refer to the graph above. What events would tend to temporarily move the economy from point B₂ to C₂?

A) A tight monetary policy
B) A contractionary fiscal policy
C) An easy money policy
D) An increase in aggregate supply

Question 56

If the economy is operating in the intermediate range of the aggregate supply curve, then the greater the rate of growth of aggregate demand the:

A) Greater the resulting increase in the price level, the greater the rate of growth of output, and the greater the unemployment rate
B) Greater the resulting increase in the price level, the lower the rate of growth of output, and the greater the unemployment rate
C) Less the resulting increase in the price level, the lower the rate of growth of output, and the greater the unemployment rate
D) Greater the resulting increase in the price level, the greater the rate of growth of output, and the lower the unemployment rate

Question 57

The misery index is a measure of national economic discomfort that adds together a nation's:

A) Saving and investment
B) Budget deficit and public debt
C) Unemployment rate and inflation rate
D) Level of taxation with the amount of government spending

Question 58

Stagflation can be described as a:

A) Shift right in the aggregate supply curve
B) Shift left in the aggregate supply curve
C) Period of stable prices and high unemployment
D) Period of rising prices and low unemployment

Question 59

Consider the following national data: tax revenues as a percent of GDP: 25 percent; government spending as a percent of GDP: 31 percent; unemployment rate: 9 percent; inflation rate: 6 percent. What is the misery index for this nation?

A) 15 percent
B) 31 percent
C) 34 percent
D) 53 percent

Question 60

Which event probably contributed to the stagflation of the 1970s?

A) Worldwide agricultural surpluses
B) An improvement in productivity of resources
C) An appreciation in the dollar
D) A sharp rise the price of oil

Question 61

A Congressional representative who calls for a decrease in tax rates in order to increase saving, work effort, and economic growth would most likely be advocating:

A) An easy money policy
B) A tight money policy
C) A supply-side fiscal policy
D) A contractionary fiscal policy

Question 62

Supply-side economists contend that the system of taxation in the United States:

A) Creates incentives to save and invest
B) Creates dis-incentives to work
C) Generates maximum tax revenue
D) Reduces the effects of cost-push inflation

Question 63

Based on the Phillips Curve, when the actual rate of inflation is greater than the expected rate, the unemployment rate will:

A) Rise temporarily, but decreases in nominal wages will bring the expected and actual rates of inflation into balance
B) Rise temporarily, but increases in nominal wages will bring the expected and actual rates of inflation into balance
C) Fall temporarily, but increases in nominal wages will bring the expected and actual rates of inflation into balance
D) Fall temporarily, but decreases in nominal wages will bring the actual and expected rates of inflation into balance

Question 64

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

A) Shift to the right
B) Shift to the left
C) Become vertical
D) Become flat

Question 65

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

Question 66

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

A) Disinflation
B) Depreciation
C) Stagflation
D) Deflation

Question 67

In an aggregate demand-aggregate supply framework, fiscal policy that emphasizes cutting taxes as a means of improving incentives to work, save, and invest would be characterized primarily as a:

A) Rightward shift of the aggregate demand curve
B) Leftward shift of the aggregate demand curve
C) Rightward shift of the long-run aggregate supply curve
D) Leftward shift of the long-run aggregate supply curve

Question 68

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

A) Stagflation
B) Deflation
C) Disinflation
D) Constant inflation

Question 69

Supply-side policies can be described in terms of the aggregate demand and aggregate supply model as an attempt to shift:

A) The aggregate demand curve to the right
B) The aggregate supply curve to the right
C) Both the aggregate supply curve and the aggregate demand curve to the right
D) The aggregate supply curve to the right and the aggregate demand curve to the left

Question 70

Refer to the table above. What would be the annual inflation rates in Years 2, 3, and 4, respectively?

A) 10, 9.1, and 8.3 percent
B) 10, 8.3, and 7.7 percent
C) 10, 10, and 10 percent

Question 71

The long-run Phillips Curve is vertical at:

A) Price level of 100
B) The natural rate of unemployment
C) The natural rate of inflation
D) Potential GDP

Question 72

Disinflation can be explained by the Phillips Curve analysis as resulting from a situation where the actual rate of inflation is initially less than the expected rate, causing the unemployment rate to:

A) Rise temporarily, but consequent decreases in nominal wages will eventually bring the actual and expected rates of inflation into balance
B) Rise temporarily, but consequent increases in nominal wages will eventually bring the actual and expected rates of inflation into balance
C) Fall temporarily, but consequent increases in nominal wages will eventually bring the actual and expected rates of inflation into balance
D) Fall temporarily, but consequent decreases in nominal wages will eventually bring the actual and expected rates of inflation into balance

Question 73

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

Question 74

The automatic adjustment mechanism that makes the economy move towards the long-run Phillips Curve is:

A) Expansionary fiscal or monetary policy
B) Inflation expectations and wage adjustments
C) Contractionary fiscal or monetary policy
D) Increases in productivity over time

Question 75

Assume contracts between workers and employers that call for an increase in the wage rate of 5 percent are based on an expected inflation rate of 3 percent. Should inflation actually be 6 percent, then:

A) Nominal wages fall by 5 percent
B) Real wages fall by 6 percent
C) Nominal wages fall by 1 percent
D) Real wages fall by 1 percent

Question 76

Which is a basic proposition of supply-side economics?

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 work

Question 77

The analysis of the short-run and long-run Phillips Curve suggests that an increase in aggregate demand:

A) Influences real output and employment in the long run, but not in the short run
B) Influences real output and employment in the short run, but not in the long run
C) Does not influence the price level in the short run or the long run but only real output and employment
D) Does not influence real output and employment in the short run or the long run but only the price level

Question 78

The short-run Phillips Curve assumes an unchanging:

A) Actual rate of inflation
B) Expected rate of inflation
C) Unemployment rate
D) Fiscal or monetary policy

Question 79

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:

A) $2000
B) $2240
C) $2760
D) $3500

Question 80

In the short run, if the actual rate of inflation is lower than the expected rate, then:

A) Nominal wages will rise, profits will fall, and unemployment will rise
B) Nominal wages will fall, profits will rise, and unemployment will fall
C) Nominal wages will rise, profits will rise, and unemployment will fall
D) Nominal wages will fall, profits will fall, and unemployment will rise